In this segment from the Market Foolery podcast, host Chris Hill and David Kretzmann of Motley Fool Rule Breakers and Supernova discuss the news out of Tesla (NASDAQ: TSLA). They open with the basic numbers from its first-quarter report, which were bad, admittedly -- but still better than expected. Its cars may have a "ludicrous speed" option, but that's not a feature CEO Elon Musk can activate in his factories, and the ramp up of production is still behind schedule.
Of course, the Fools talk about the company's need to raise capital, and its CEO's view of when it will get to profitability. But the more interesting story is how the conference call went into the tank after Musk got tired of the dry questions from analysts.
A full transcript follows the video.
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This video was recorded on May 3, 2018.
Chris Hill: We have to start, though, with Tesla for a couple of reasons. We'll get to the conference call in a second, because right now, on CNBC's website, the top five trending stories in tech news are all about Tesla's conference call.
David Kretzmann: I think something happened there.
Hill: [laughs] Yeah. We'll get to the conference call in a second. Let's start with the actual quarter. The first quarter results, Tesla lost a record amount of money in the first quarter, and yet somehow, that was still better than expected. When you looked at the quarter, what stood out to you besides their historic loss?
Kretzmann: I think the story with Tesla continues to be scaling production of the Model 3. They produced a little under 10,000 Model 3 vehicles this quarter. They produced about 25,000 Model S and Model X vehicles, but they're still well behind the pace where they wanted to be with Model 3 production. I think by the end of last year, they wanted to be producing somewhere in the neighborhood of 5,000 vehicles a week. Right now, they just peaked out at about 2,300 vehicles per week. They're trying to revamp automation within the factories, revamp the whole manufacturing process to get that number up to 5,000 vehicles a week. I think by July is when they're targeting. And then, they're even talking about different ideas to get it up to 10,000 vehicles a week down the road. But, the theme here with Elon Musk continues to be over-promising, under-delivering, and hopefully there's intersection of those two things. But for now, I think all eyes continue to be on the Model 3.
Hill: Musk staunchly says, "There's no way we're going to raise money this year. We don't need to raise money." When you look at their business right now, do you think they're going to raise money this year?
Kretzmann: They're saying that they'll be profitable in the third and fourth quarter this year. So, next quarter will continue to be unprofitable, but they're saying they will bounce back to profitability. And not just non-GAAP profitability or adjusted profitability, but GAAP profitability.
I wouldn't necessarily bet on that. If you look at the state of the company now, it's hard for me to see them making it the rest of the year without needing to raise capital somehow. They have $2.7 billion in cash on the balance sheet. Their net debt position is over $8 billion. And their cash burn right now is $4.4 billion. So, at the rate they're burning cash right now, they won't make it another year without raising more cash. Unless there's a dramatic improvement by the third quarter this year, they're going to have to issue equity or debt, one of those two. Given how the conference call went, I'm not sure if they'll necessarily get very favorable terms with the cash they're probably going to need to raise later this year.
Hill: And I think the conference call, as much as anything, is the reason that shares of Tesla are down today. Again, yes, they lost all this money, but it was actually better than expected. But the conference call just went off the rails, because you had analysts who were asking questions that didn't strike me as overly pointed or overly personal, and they were asking about things like, are they going to need to raise capital, in terms of production for the Model 3, which is really the most important thing from a business standpoint that has to happen for Tesla, is to get these cars out of the factory and into the hands of the people who have actually made reservations for them.
And at some point, Musk literally said, "You guys are killing me. These questions are so boring, they're so dry, I'm going to take questions from YouTube." And he essentially shut down the analysts and said, "I'm just going to take questions from Tesla owners on YouTube." And, I don't know, I just thought, maybe you should consider, stop doing conference calls, because there's no requirement that they do conference calls, or that the CEO be the one on the call. I don't know. When you saw this unfolding, what went through your mind?
Kretzmann: Given the state of Tesla's financials, like I said, unless they have a dramatic improvement in their cash situation, there's no way around it, they're going to need to raise money. So, you don't want to get on the bad side of Wall Street, because you need them to finance the company's growth at this point. And, yeah, it might be best for Elon Musk to stick to Twitter and avoid the conference calls. A Wall Street analyst asked where the company will be in terms of capital requirement as they scale up Model 3 production, and a direct quote from Elon Musk, he said, "Excuse me, next, next, boring butthead questions are not cool. Next." It's like, that's an important question that's really underlying the thesis for Tesla here.
There is one aspect of this that I do think is kind of interesting or worth praising. I do like the fact that they brought in a retail investor from YouTube, a writer who covers Tesla on Seeking Alpha and YouTube. I like that they brought a retail investor onto the conference call to ask questions. That's something you don't typically see in the U.S. In other countries like Australia, we have Motley Fool analysts who will actually participate on the conference calls and have that presence, and it's not just limited to the investment banks. So, I do like that aspect of it.
But, really, putting the middle finger toward Wall Street and then going to the questions from this retail investor on YouTube, which, we're talking about autonomous vehicles down the road, talking about the Supercharger network, questions that are really more outside of the central investing thesis and the issues that Tesla is going through. And it sounds like Musk would rather talk about those things. But when you need Wall Street on your side, this wasn't Elon Musk's greatest performance. I think that could bite the company in six months or so, if they need to raise more money.
Hill: And I understand and appreciate the comments that he made regarding short-term traders vs. long-term investors. I totally understand that, I applaud that, I appreciate that. That being said, he didn't just stop there. Again, the questions that were being asked actually went to -- whether they went to short-term trading or not -- they went to the short-term financial situation of the company, which you talked about.
Yesterday, I taped an interview with Becky Quick from CNBC. This weekend is the Berkshire Hathaway annual meeting. She's going to be going out to be one of the moderators for the marathon Q&A session that Buffett and Charlie Munger do that goes for five or six hours. That interview is going to be on Motley Fool Money tomorrow. I'll just give you one snippet of that interview, because one of the things I said to her was, I can't imagine anyone else doing what Buffett and Munger are doing and having people care. Even people who love Amazon, Facebook and Disney, if Jeff Bezos, Mark Zuckerberg or Bob Iger said, "At our annual meeting, I'm going to sit up on a stage for five hours and I'm going to take any question you want." I don't think people would care, particularly.
And she said, "You know what? I'm going to disagree with you." Because, Buffett and Munger, it's unscripted. They'll take any question. It's basically like, "Ask us anything you want." A lot of the questions are about the business of Berkshire Hathaway. Some of them are just like, "What book would you recommend," that kind of thing, they're more personal in nature. I don't think Elon Musk would last 10 minutes in that type of setting. That was one of the things that went through my mind. At one end of the spectrum, in terms of public company CEOs, we have Warren Buffett, who once a year says, "Bring it on! Ask me anything you want, and I'll answer it." And, again, Musk should really consider just taking a page out of Buffett's book, in terms of the quarterly approach, because Buffett doesn't do quarterly conference calls. He just does once a year. So, if part of Musk's thinking is, "No, I want to encourage long-term thinking," then maybe just ditch these calls altogether, because this was not good.
Kretzmann: Yeah. I just don't see what you accomplish by having this attitude on a conference call. If you're notably hating the process of talking to Wall Street and answering key questions that any sensible analyst would be asking at this point, then, yeah, it's probably better to either take Musk off the calls or just avoid the calls altogether and control the narrative through Twitter or other means.
I do think, the one thing that Tesla continues to have going for it, you have to remember, this is a company that's not spending a dime on marketing. So, if they can produce the vehicles, people are going to buy them. Even if there are some people who reserved a Model 3 over a year ago and canceled their reservation, there's probably still well over 200,000 reservations. It's probably still closer to that original 400,000 mark. People want these cars. Tesla's issue is not creating interest for the product. It's actually now manufacturing and delivering the product.
And I suppose an optimist might look at what Elon Musk did on this call, and maybe he is so confident that the company doesn't need to raise money this year -- which is something he has reiterated over the past several months -- maybe he's so confident that they will actually hit those production targets this summer, and they will be dramatically reducing their cash burn.
So, that isn't impossible. But, given the track record of Tesla and Musk, I don't think it's a given that they will hit 5,000 or 10,000 vehicles a week by the summer. If they do, then potentially, the financial situation is OK. But this doesn't give them a whole lot of flexibility when it comes to raising money from Wall Street.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon and Walt Disney. David Kretzmann owns shares of Amazon, Berkshire Hathaway (B shares), Facebook, Tesla, Twitter, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Berkshire Hathaway (B shares), Facebook, Tesla, Twitter, and Walt Disney. The Motley Fool has a disclosure policy.