Tesla Is Facing a Crucible

(Bloomberg) -- Jim Chanos, the short seller famous for betting against Enron, has said he thinks Tesla Inc.’s stock is “worthless.” Chanos got some new evidence this week that may support his short sales against Elon Musk’s car company. A string of executives have headed for the exits, including a surprising number from the company’s finance team, as Tesla is dogged by questions about whether it can meet its production targets.

The chief financial officer left abruptly last year in a curious turn of events, where he was replaced by his predecessor: Deepak Ahuja served as Tesla’s CFO from 2008 to 2015 and then took over the job again in March 2017, according to his LinkedIn. Then late last year, one of Tesla’s audit committee members, Steve Jurvetson, went on leave from the board (following accusations of misconduct, which he has denied). The vice president of business development and director of battery technology both left in the past year. Jon McNeill, one of Tesla’s most senior executives, went to take the chief operating officer job at Lyft Inc. last month. Eric Branderiz, Tesla’s chief accounting officer, departed last week. And Bloomberg reported this week that Susan Repo, the corporate treasurer and vice president of finance, is out.

The press has rightly been focused on trying to figure out how badly Tesla will miss its production targets for the all-important Model 3 electric sedan. After all, actually building cars is pretty important to Tesla’s business.

Bloomberg built a Tesla Model 3 Tracker. The data show Tesla is producing approximately 737 cars a week. In July, Tesla predicted that it would produce 5,000 Model 3s a week by the end of 2017. Oops.

Tesla has steadily rolled back its production targets and still looks like it will be behind schedule. According to Bloomberg’s analysis, Tesla Model 3 output has actually slowed from February when it was producing something like 936 Model 3s a week. My colleague Dana Hull reported that Tesla temporarily suspended production in late February, potentially explaining the slowdown.

CNBC reported Wednesday that many of the vehicles coming off Tesla’s assembly line required more work. One employee estimated that “40 percent of the parts made or received at its Fremont factor require work,” the article said. Some investors surely found Tesla’s response to the article to be laughable. The company’s statement reads, “In what world is the pursuit of perfection looked down on? Not one we want to live in.”

Ah yes, a story about how Tesla is producing cars in an inefficient fashion is really about a company with high standards.

On Thursday, the Wall Street Journal declared it “Tesla’s Make-Or-Break Moment.” That article rightly points out that Tesla had $3.4 billion of cash at the end of 2017 and that last year it burned $1 billion a quarter. Do the math, and Tesla either needs to generate more revenue or raise more money soon.

The Journal’s story observes that Tesla has a so-called Z-Score (a measure of a company’s financial security) of 1.26. “Any company with a score below 1.8 is considered distressed by many investors. A score of 1.0 or lower suggests bankruptcy is likely within two years,” Tim Higgins and Susan Pulliam write.

The financial markets have given Tesla a long leash, but the evidence against the viability of its business continues to mount. About 23 percent of publicly traded Tesla stock is being used to bet against the automaker. That’s a lot of short sellers.

Of course, Chanos has been warning against Tesla since at least October 2016. “The whole thing is just sort of this mélange of publicly traded and privately traded science projects gone awry. So we’ll see how it works out,” he said at the time. Despite his years-long bets against the company, the stock has been climbing. The Tesla Hype Train keeps going.

But I have to end this piece with a necessary caveat. Despite cash flow concerns, Musk’s companies have generally worked out for investors. Peter Thiel issued what has become a sort of Silicon Valley koan: “Never bet against Elon.”

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To contact the author of this story: Eric Newcomer in San Francisco at enewcomer@bloomberg.net.

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