Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

How is Musk Paying for the Tesla Semi?

The old Elon Musk magic is still working, even though Tesla Motors (NASDAQ: TSLA) has no truck factory, and only a prototype at least three large companies have placed orders for its electric semi-tractor.

Walmart (NYSE: WMT), the Canadian supermarket operator Loblaw, and the trucking company J.B Hunt Transport Services all placed orders for the semi, less than 48 hours after Musk rolled out the electric big rig. Loblaw is planning to order 25 electric semis and Walmart wants to put 15 on the road, Tech Crunch reported. J.B. Hunt has ordered an undetermined number.

These orders are truly amazing because there’s indication Musk has a factory or production line for building the big-rigs. His only U.S. car factory in Freemont, California, cannot even handle the production of his Model 3 Sedan.

Where is the Tesla Semi Being Built?

The obvious question here is where are the electric semis being built at? Are they being assembled at the Giga Factory in Storey County, Nevada, in Freemont, California, at SpaceX’s facility in Hawthorne, California, at the Solar City factory in Buffalo, New York, or under contract somewhere? If there is a Tesla electric semi-production line why hasn’t Musk shown it to reporters?

A strong possibility is that the semis are being built under contract somewhere, and Musk does not want to admit he is dependent on somebody else. Perhaps by PACCAR (NYSE: PCAR) which owns Peterbilt, DAF, Leyland Trucks Limited, and Kenworth. Or maybe by Cummins (NYSE: CMI) which is planning its own electric truck. Cummins actually unveiled its electric semi before Tesla did to far less fanfare.

The Tesla Semi is a Pretty Impressive Piece of Technology

Despite these concerns, the Tesla Semi is a pretty impressive piece of technology.

Tesla’s website claims it will accelerate from 0 to 60 miles per hour in less than 20 seconds and run up a 5% grade at 65 miles per hour. It will also have a range of 300 to 500 miles on a charge of electricity.

There’s also a million-mile warranty which indicates Musk thinks the Semi will last for several years. This might be possible because an electric will have fewer moving parts, so there will be less chance of breakdowns.

The Semi also looks great and has a cab interior that looks like the bridge of the Star Ship Enterprise – Captain Picard’s Enterprise that is. Tesla’s propagandists are also claiming that its energy costs will be half those of diesel, which is sure to attract trucking industry attention.

Musk also plans full integration with a company’s IT infrastructure and semi-autonomous driving capabilities. That means the semi will drive itself much of the time, while the driver relaxes and plays video games, reads, or watches TV in the cab.

Yes the Electric Semi will Kill Jobs

There is a dark side to this, the electric-powered semi will supposedly less maintenance. That means less work for diesel mechanics and the disappearance of yet another high-paying working class job. There would be less work for mechanics; because an electric engine has fewer moving parts, that means less stuff that can break or fail.

Other jobs that might disappear are all those related to diesel fuel delivery – such as tanker truck drivers that haul the fuel to truck stops. Also gone would be cashiers and others that might work at the truck stop. They might lose their jobs because the Tesla semi will make far fewer stops. Another possibility is that fewer truck drivers will be required, so even more jobs killed.

Where is the Money Coming From?

Another good question to ask is: does Tesla have the money to build the electric semi? The financial report’s answer is no, no, and no.

Tesla reported a loss of $1.407 billion for 3rd quarter 2017. That number was almost double the $766.13 million loss Tesla reported in June 2017. One has to wonder where the money for the electric semi is coming from because it is not from Tesla Motors.

Tesla reported a “free cash flow” of -$1.545 billion on September 30, 2017. That was down from $1.36 billion in June 2017, and $176.04 million in September 2016. The company also lost -$1.02 billion in cash from operations on September 30, 2017. That figure was over three times the -$294.54 million loss reported in June 2017.

Tesla Borrowed the Money to Finance the Semi

Tesla is burning cash like crazy and there seems to be no end in sight. The financial numbers also tell us where Musk got the money to finance the semi project from, he borrowed it.

Tesla reported generating $5.502 billion in cash from financing on September 30, 2017. That means Musk has borrowed $5.502 billion he cannot pay back. The cash from financing increased by around $2.5 billion during third quarter 2017, it was $3.079 billion in June 2017.

Note: this deal is not a bad one for Tesla’s lenders if Musk cannot pay them back. They might get the Tesla Semi technology and simply sell it to another company with cash such as Ford (NYSE: F), Daimler, or PACCAR.

Tesla’s Mountain of Debt Good for Musk’s Creditors, bad for Stock Holders

Another possibility; is that another automaker such as Ford is financing Tesla. That way if it collapses, that company gets Tesla’s tech, its factories, and its brands perhaps for pennies on the dollar.

Such an arrangement is pretty shrewd; because Tesla reported $28.11 billion in assets on September 30, 2017. The value of those assets more than doubled over the course of the past year; the company reported $12.59 billion in assets in September 2016.

That means Tesla’s creditors could more than double their investment by simply selling off the company’s assets. This means Musk is going to be able to borrow; and stay in operation without making money, for a long time to come. In fact, it is highly likely that the lenders will raise his line of credit, good deal for them, bad for Tesla shareholders.

What is even more interesting is that Tesla does have some cash it reported, $3.530 billion in cash and short-term investments on September 30, 2017. The problem is all that money will probably be used to service debt at some point in the near future.

How the Semi can save Tesla from Itself 

It looks as if Musk has managed to turn the traditional auto industry model on its head. Historically, for the past 100 years, automakers made by their money by financing the vehicles, that is they figured out how to transfer the debt and risk to the car buyer.

The buyer goes along with that arrangement because he or she will usually get a far better vehicle than the one he or she could purchase with cash. The buyer or leaser gets to drive a new SUV; with all the latest features, rather than a rusty old econobox with an AM radio. A company like Ford gets vast amounts of float from all those car payments.

This business model is very lucrative; it’s why Ford had $38.08 billion in cash and short-term investments on September 30, 2017. It also reported $6.183 billion in cash from financing and $17.69 billion in cash from operations on the same day. Note: this kind of cash is why I think somebody else in the auto industry is bankrolling Musk.

Sorry Tesla Stockholders the Semi will not Help You

The danger at Tesla is that there is no float from its operations. That might be what Musk is trying to correct with the semi; he hopes that the lease payments fleet operators will pay will generate the float necessary to save his company.

The problem with that strategy is that Musk will need to sell thousands; or tens of thousands, of semis to produce enough float to save his company. To do that the truck will have to work and deliver on all of the company’s claims.

The Semi might save Musk from himself, but it will not help Tesla stockholders. Even if the Semi exceeds Musk’s claims, it will not generate enough money to justify the $308.50 Tesla stock price reported on November 20, 2017. No matter what happens with the Semi, most of today’s Tesla shareholders will never make any money from their “investment.”