Tesla (NASDAQ:TSLA) is one of the most divisive companies on the market. It seems to have only fanatical supporters pitted against foaming-at-the-mouth shorties. For good measure, I’m in the latter camp. But I’m willing to give up my short position if Tesla raises a decent chunk of capital.
The reason I’m short is pretty much because Elon Musk told Axios late last year Tesla came “within single-digit weeks” of death. I sort of get that this is perhaps a dramatization by this charismatic CEO. However, it was probably not entirely untrue. There are some signs the company is strapped for cash like the recent store closing plan.
That’s all fine with me. I don’t expect Tesla to build out a completely new car brand and manufacturing operation while generating positive cash flow. Equity markets are there for a reason. They are specifically useful to raise enormous amounts of cash if your operations require them. But if you are close to going under, raise equity already. You are not going to get a better deal if you’ve backed your company completely in a corner. Not raising money appears entirely irrational and has introduced immense amounts of risks for no reason… As long as Tesla doesn’t do a big raise, I’m short.
In a previous article, I’ve talked about the numbers (3 Key Things On The Tesla Numbers), and this time around, I wanted to highlight some of the “soft” indicators that don’t feel good to me.
Continuous insider selling
I looked at the insider buying/selling, and there’s just an overwhelming amount of selling. The only person that is buying once in a while is Elon Musk. Props for that. It is almost disheartening how Musk is trying to put on a brave face painting the tape with a nice buy here and there, and his board members and execs are just selling stock as fast as they get it; sometimes, selling pitiful amounts of stock even. I’ve rarely seen an insider selling dynamic like this:
I couldn’t make the entire table visible at once, but this is board compensation over the past few years. It doesn’t matter too much who is who; it is about the general picture. There are 11 people. I think that’s a lot. Elon Musk is not taking board compensation, which is great! Props there. I don’t like he put his brother on the board obviously. What I really don’t like is how much these board members get paid. Mostly in stock options. Over the past 5 years, it adds up to like $1 million per board member. That’s with Elon not taking any board comp. That is a lot of money to be on a board.
Source: Morningstar data
Executive profiles and comp
If we look at the make-up and compensation of executives, I have some gripes as well. The CEO, CFO, CTO, and CAO are all between mid-30s to mid-40s (Elon himself), and Kirkhorn and Taneja have been at their post for a year or less. I think it is fair to characterize them as an inexperienced team.
Source: Morningstar data
CEO Elon Musk is not taking a lot of salary. Again, props to him. However, he is the potential beneficiary of a 10-year performance award plan that incentivizes him to “go big or go home”. Targets are really lofty. Tesla needs to hit revenue and EBITDA targets far out of reach. Again, I respect that to some degree. So many execs are just raking in the dough while hitting easy comps. That’s not the case here. Musk can significantly increase his fortune, but it requires great success. One could argue if Tesla hits these milestones, shareholders will be more than happy to grant Musk up to another 12% of all shares. I think they would be happy to be diluted in order to see those gains. However, this scheme incentivizes Musk to “bet the company”. Coincidentally, that aligns with my view Musk, or Tesla, is taking irrational risks by not raising equity.
Finally, this less-than-optimal compensation scheme grants vesting eligibility when Musk is CEO or executive chairman AND chief product officer. Musk already gave up the chair in a settlement with the SEC. If for some reason Musk can’t be CEO anymore, he would lose all of his potential enormous compensation package. That’s not motivating.
On Glassdoor, you can read employee reviews of the company’s they work at. Both former employees and current employees. From time to time, I do so for companies I invest in to get a feel for how things are on the inside. It’s a soft signal like insider selling, but occasionally, you find a very interesting nugget of information. You can find the Tesla Reviews here.
I’ve cherrypicked two recent negative reviews for you, because these kinds of things that make me uneasy about the company.
Location: Phoenix, AZ
Decisions that roll downhill from management are often laughably inept yet there is zero discourse between the people who actually work (technicians, equipment installers, warehouse employees) and the people above them. The energy division has been forcibly and continually eroded since 2017. In AZ, one of the best solar markets in the US, the energy presence is now down to a handful of people statewide who are processing warranty claims and maintaining what is left of the existing fleet of solar. Things are not good behind the curtain.
Title: Maintenance Technician
Location: Fremont, CA
This is by far the worst company i have worked maintenance for, Their maintenance program is a complete joke. We don’t have the proper tools to do our job, we don’t have the proper hazmat to do the proper inspections, and no one is held responsible. Corners are cut and eventually someone is going to get hurt. Their engineering team is extremely under-experience and it shows. Millions of dollars thrown away everyday on equipment that has to be decommissioned and on top of all that, NO ONE IS SAFE FROM LAYOFFS! AVOID THIS PLACE NO MATTER HOW MUCH MONEY THEY THROW AT YOU
Just peruse the reviews yourself. These are bad but not the worst thing you will read. They are certainly not exceptional. Here are some of the Glassdoor stats. Note the surprisingly high CEO approval and the “Business Outlook” which is trending downwards.
April 4 Court date
Next week, Elon Musk and the SEC face off in a New York courtroom to determine whether he is in contempt of court. Legal experts’ estimates range from saying that a contempt finding could lead to:
– fine in excess of $20 million
– further Twitter restrictions
– removal from the board or as CEO
The first option would be hands down the best outcome, but it isn’t great, of course. Tesla doesn’t seem to be rolling in the money.
A Twitter restriction seems great, because “problem solved” right? At least Musk can’t get himself in any more trouble. But Tesla spends very little money on marketing. By constantly being in the news, Musk keeps the spotlights on himself and Tesla. That keeps the headlines going, and ultimately, headlines sell cars. No headlines, no cars.
I don’t think the penalty would ever be removal from the board in isolation. This can happen, but in combination with other measures, I’d guess. Removal as CEO would be disastrous because Elon Musk is THE face of Tesla. Even as a short, this seems somewhat egregious. Second, it would invalidate most of the compensation package even if he is demoted to COO (or nothing of Tesla) or something.
In summary, there are a lot of soft reasons to be careful around Tesla: insider selling, board compensation, executive compensation, and the Business Outlook is trending down based on employee reviews. I’m primarily short because the company refuses to raise equity. If Elon raises tomorrow, I’ll reconsider, but until then, I think the risks far outweigh the potential rewards here.
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Disclosure: I am/we are short TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.