Elon Musk

“Tesla Is Having Difficulties Paying Their Bills”: Is Wall Street Ready to Punish Elon Musk for His Shenanigans?

One influential investor is now using the V-word: Valeant.
Elon Musk and Wall Street
Elon Musk at SXSW in March.By Suzanne Cordeiro/REX/Shutterstock.

You’ve got to hand it to Elon Musk. The multi-billionaire knows how to get media attention, albeit in a Michael Avenatti kind of way. Whether tweeting that he had “secured” funding to take Tesla private at $420 a share, being sued by the Securities and Exchange Commission when he said funding didn’t materialize, mocking the agency after it agreed to settle allegations of securities fraud against him (but before a judge has approved the deal), or smoking a spliff on an Internet radio show, the guy is a bona fide hornets’ nest for shareholders.

In an age when we are all on input overload, as my colleague Nick Bilton has noted, Musk’s ability to cut through the piles of gibberish with his own version of it has probably been quite effective at bringing attention to Tesla, his $40 billion cutting-edge electric-car manufacturer; Space X, his rocket-ship company; and to the Boring Company, his business that is building an underground tunnel in California. (Good luck to James Murdoch, a board member who is rumored to be ascending to chairman, to curb this behavior.)

But is Wall Street getting sick of his shtick? Just as there seems to be widespread agreement in the canyons of finance that, all things considered, it would be better if the 47-year-old Musk stopped acting like an impetuous teenager and more like a corporate C.E.O., there is still widespread disagreement about which direction Tesla is going. Is it headed into bankruptcy, soon to be owned by stiffed creditors, or is it on its way to being the next Amazon-lite? That seems to be the burning question at the moment among Wall Street analysts.

Some, like Maynard Um, at Macquarie Research, started his coverage of Tesla on Tuesday with an “outperform” rating and a price target for the stock of $430 per share, a coy $10 per share higher than the marijuana-inspired price at which Musk said he was going take the company private in August. Um wrote that Tesla is a “disruptive technology growth company” in the “equally disruptive markets of electric cars, energy storage, and energy generation.” He predicted Tesla would reach “profitability” in the second half of 2018, a point that definitely remains to be seen, given that Tesla had an operating loss of $1.7 billion in the first six months of the year. Tesla’s stock price is around $250 these days, so Um, and any investors who take his advice to buy the stock, could be in for a long wait until $430.

Then there is Berenberg Bank, which in the great tradition of Henry Blodget and Amazon from once upon a time, has a $500 price target on Tesla. The market, the small 428-year-old German investment bank observed, “underestimates the full extent of Tesla’s technological advantage . . . which manifests in the entire electronic architecture of the vehicle as well as the battery-management system.”

Perhaps, instead, the market is actually focused on Tesla’s production problems, its ongoing operating losses, its looming debt payments—$1.8 billion of Tesla’s some $11 billion in debt is coming due in the next 13 months—and its dwindling cash balances. Fahmi Quadir, the founder of the tiny Safkhet Capital, is famous for making an early call that Valeant Pharmaceuticals would have its day of reckoning. Hedge-fund manager Bill Ackman equally famously lost more than $4 billion betting the opposite would be true. In July, Quadir started betting that Tesla’s stock price would fall.

Quadir told Bloomberg yesterday that Tesla was “between a rock and a hard place” because it needs more capital—some say as much as $2 billion more before long—and it will likely be forced to raise new capital in either the equity markets, likely at a discounted price, or in the debt markets, which is already choking on Tesla debt. If Musk goes the debt route, he will likely have to pay up for it. The company’s $1.8 billion senior notes, issued at an interest rate of 5.3 percent last year, now yield 8.65 percent, meaning Musk will likely have pay investors at least 8.65 percent, and probably more, to convince them to buy a new issue of Tesla debt. “It’s becoming more and more apparent that Tesla is having difficulties paying their bills,” Quadir said. “I saw a lot of the same with Valeant.”


Another indicator of trouble is the increasing cost to investors who want to insure the risk that Tesla will default on its debt. The premium required—up front—to insure $10 million of Tesla’s bonds in case they default sometime in the next five years is now $2 million. Two months ago that cost was below $1.3 million. In other words, the market is telling investors that the risk of a debt default at Tesla is increasing, and if you want to do something about it, whether you own the Tesla bonds or not, it’ll cost you $700,000 more today to make that bet than it would have cost two months ago. Part of what the debt market worries about with Tesla are three looming convertible-debt payments that are coming due in the next 13 months. If the Tesla stock were trading higher than the current price, the debt holders would convert the debt into equity and the problem would disappear. But, for instance, the $920 million convertible-debt maturity due in March will have to be repaid using some of Tesla’s around $2 billion in cash—about half of what it had a year ago—unless the Tesla stock is trading at $360 per share, and that seems increasingly unlikely.

If Musk is concerned in the least about any of this, he’s not letting on. Last week, in an e-mail to employees, he said Tesla was “very close to achieving profitability and proving the naysayers wrong.” He’s been tweeting lately about Tesla’s Model 3 having the “lowest probability of injury” of any vehicle ever tested, whatever that means, and he’s been retweeting the news that the Model 3 is the top-selling American-made car in the country. On Sunday, he was also trumpeting the latest successful launch, and landing, of one of his Space X rockets, from an Air Force base in California.