Whether Tesla Can be Triumphant or Just the Opposite?
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Tesla has made a name for itself by proving doubters wrong, but in 2018 the company faced many challenges. Stemming from Elon Musk’s erratic behavior to the company’s financial health, all the way to not making enough cars, this might be the point of no return for Tesla. Whether it can survive all of these hardships will be the deciding factor to whether Tesla can be triumphant or just the opposite.
Some of the incidents that have gotten Tesla to its current point are as follows: In February, Tesla paid RedLock $3,000 to find vulnerabilities in their own products and services that could be exploited by hackers. A spokesperson for Tesla said, “The impact seems to be limited to internally-used engineering test cars only, and our initial investigation found no indication that customer privacy or vehicle safety or security was compromised in any way (Matousek, 2018).
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A Model S recall occurred in March and was the largest recall in its history. It involved power-steering systems in 123,000 Model S sedans. Tesla announced that it was a rare occurrence and was most likely to happen in colder areas where a specific kind of salt was used to lessen the amount of ice and snow on the road.
Debt concerns are another obstacle Tesla has to tackle. Its credit rating has dropped from B2 to B3 because of concerns about the company’s ability to hit its production targets for its Model 3. Which in turn hurt Tesla’s stock price and has renewed concerns about Tesla’s cash burn rate with the doubters (short sellers) continuing to increase their stakes.
In June the company laid off around 9% of its employees. Musk said that the layoffs were aimed at salaried employees and not people who worked on the production lines. Some of the employees said that they were surprised by the layoffs while Musk said they were necessary for Tesla to keep running (Matousek, 2018).
Furthermore, the company burns through more than $7,430 every minute, according to data compiled by Bloomberg. Free cash flow, which is money a company generates after capital expenditures are taken into account, has been negative for six consecutive quarters and exploded to more than $1 billion when Tesla reported earnings on May 2nd.
One of the reasons that Tesla could be losing money is that they over-employ. In 2010, they had just 899 employees, now they have nearly 40,000. This is straining their financials in a big way. It has boosted its manpower faster than its revenue has increased in three of the last four years. Other companies like General Motors and Ford each bring in about 2.5 times as much revenue per employee than Tesla does (Hull, 2018).
In 2017, Tesla ended the year with $3.4 billion cash on hand and $9.4 billion in outstanding debt, which goes to show how poor Musk’s borrowing process seems to be (Hull, 2018). According to Bruce Clark of Moody’s Investors Service, Tesla will need an additional $2 billion in the form of equity and convertible notes in order to cover the 2018 cash burn and $1.3 billion of existing convertible debt that comes due in 2019.
Musk knew what it would take to become profitable, he sent an all-employee email on April 17th that said, “A fair criticism leveled at Tesla by outside critics is that you’re not a real company unless you generate profit, meaning simply that revenue exceeds cost. It didn’t make sense to do that until reaching economies of scale, but now we are there. Going forward, we will be far more rigorous about expenditures. I have asked the Tesla finance team to comb through every expense worldwide, no matter how small, and cut everything that doesn’t have a strong value justification (Hull, 2018).” Last month, Musk, once again surprised everyone, when Tesla reported only their third quarterly profit since going public in 2010, with net income of $311.5 million, or $1.75/share. The stock rose 12% on the news.