Wall Street Journal
Tesla Bonds Reach New Low, Stock Falls Further After Downgrade, Accident
Tesla is still highly valued by stock investors
By Sam Goldfarb and Tim Higgins
March 28, 2018
Heavy selling of Tesla Inc. TSLA +4.00% shares and bonds persisted Wednesday, posing a new challenge to the electric-car maker that has relied on the faith of investors to meet pressing cash needs.
The company’s shares fell $21.40, or 7.7%, to $257.78, extending a weekslong decline that deepened Tuesday amid broad weakness among technology stocks, increased scrutiny of the company’s semiautonomous driving system, and a credit-rating downgrade from Moody’s Investors Service.
Tesla’s 5.3% unsecured bonds that mature in 2025, issued last August when the company’s stock price was near its height, touched a low of 86 cents on the dollar—translating to a 7.8% yield—before ticking up to 88 cents, according to MarketAxess.
The concerns about Tesla’s value come as investors take a harsher look at some other companies that helped drive stock indexes to records earlier this year, including tech giants Facebook Inc. and Google parent Alphabet Inc. GOOGL +1.48%.
The situation is especially noteworthy, because Tesla’s near-term financial viability depends on its access to the capital markets. The company, investing heavily to bring out its mass-market Model 3 sedan, burned through on average about $1 billion in cash each quarter last year, and analysts expect a similar pace this year until production kicks into a higher gear and generates new revenue.
Tesla’s $1.8 billion unsecured bond issuance last August was part of a wide-ranging search for cash that has also involved repeated equity raises and sales of convertible bonds and asset-backed securities. Unlike most corporate-bond offerings, which are marketed based on credit metrics such as free cash flow and debt-to-earnings ratios, Tesla’s bonds originally met strong demand from investors in part because of the company’s eye-popping stock valuation, which suggested it could always raise cash from other sources.
Tesla’s latest run as a stock-market darling has only recently met turbulence. Its shares soared 46% last year, pushing its market value above that of Ford Motor Co. and General Motors Co. —profitable auto makers with more than 100 years of experience and far more sales.
Investors endorsed Chief Executive Elon Musk’s vision that Tesla will be at the vanguard of a world with all-electric cars that drive themselves.
That vision, however, is now being tested. On Tuesday, Waymo, the self-driving unit of Alphabet, said it would buy as many as 20,000 all-electric SUVs from Jaguar Land Rover to deploy as part of a robot taxi fleet. The deal is a direct threat to a Tesla self-driving technology unit that already has been racked with turnover.
Also on Tuesday, the National Transportation Safety Board opened a second investigation into a Tesla crash, this one a fatal incident last week near Mountain View, Calif. The agency said it is unsure if Tesla’s semiautonomous system was in operation during the crash. Tesla, while touting the record of its Autopilot system, said it hadn’t been able to access the vehicle’s computer logs to understand what happened.
The Waymo announcement and NTSB investigation both help “reinforce our view that [Tesla] is behind the curve in autonomous driving,” undercutting the bullish case for its stock, Brian Johnson, a longtime automotive-industry analyst for Barclays, wrote in a note to investors on Tuesday.
Adding to Tesla’s woes, Moody’s on Tuesday lowered its ratings on the company by one notch to B3. It cited Tesla’s “large negative free-cash flow,” looming debt maturities and “significant shortfall” in the production of its Model 3 car.
Investors should get better insight into Tesla’s operations next week, when the company is expected to release first-quarter production numbers. Mr. Musk has targeted making 2,500 Model 3s a week by the end of this month on the way toward making 5,000 a week by the end of June, a goal he has twice postponed.
Tesla will continue burning cash until it maintains the 5,000-a-week pace for an entire quarter, UBS analyst Colin Langan has calculated.
Mr. Musk has long defied skeptics with his ability to create enthusiasm for an electric-car brand. “Tesla is absurdly overvalued if based on the past, but that’s irrelevant,” he wrote on Twitter last April when the auto maker overtook Ford in market value. “A stock price represents risk-adjusted future cash flows.”
Many investors remain optimistic about Tesla’s prospects. Despite recent declines, Tesla’s 5.3% bonds still trade comfortably above levels that would suggest investors are concerned about an imminent liquidity crisis. Its shares traded recently at roughly 3.6 times its sales from the last four quarters, compared with a price-to-sales ratio of 0.3 for Ford, according to FactSet.
This week’s selloff “doesn’t make us question the long-term thesis of the company,” said Tasha Keeney, an analyst at Ark Investment Management, a New York-based investment firm focused on disruptive technologies that has been adding Tesla shares to funds in recent days.
Ark’s projection is that falling lithium ion battery costs will make electric vehicles cheaper than gasoline-powered cars by the early 2020s—enough, Ms. Keeney said, to cause Tesla’s stock to double over the next five years.