Institutional Investors Dump Tesla Amid Cash Burn and Cost Controls

May 19, 2019
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For a while, it almost seemed as though Tesla (NASDAQ:TSLA) may have learnt its lesson. Its bruising encounter with the SEC along with a history of volatility for both its CEO Elon Musk as well as the company itself resulted in a prolonged period late last year where the company actually got its head down and did what it was supposed to do, namely remove production bottlenecks, build cars and sell them. This resulted in Tesla confounding many finance industry naysayers and short sellers with Citron famously throwing in the towel (as we covered here) suggesting that it thought the company could even be admitted to the S&P 500 as early as April 2019!

Fast forward 6 months and it’s a very different state of affairs. Following strong denials that a cash raise would be needed, Tesla suffered a stunning quarterly reversal from Q4 to Q1, falling back into a staggering loss with a cash burn of over $700 million for the quarter. Guess what? We had a cash raise with the market responding strongly and demand high, Tesla raised an additional $2.7 billion for its war chest with a mixed shelf offering of bonds and convertible notes. Additional tweets by Elon have resulted in additional SEC action and Musk now agreeing to have all tweets related to Tesla vetted by a lawyer prior to them going out to attempt to ensure that the market isn’t caught unawares again by production numbers or sales expectations.

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Unfortunately though, the hits just keep on coming and the latest news this week came about following the cash raise and several months of confused car pricing policy changes.

Institutions Dump Tesla Stock

Up until now, Tesla has had the benefit of having major institutional backing in its stock. The likes of T Rowe Price (NASDAQ:TROW) and Fidelity have stuck with the company historically, holding stock and contributing to cash raises but the sands seem to be shifting. T Rowe dumped over 80% of its stock holding in Tesla in Q1 this year latest filings with the SEC reveal with its number of shares slashed from almost 9 million down to 1.7 million, meaning its over $2 billion holding in Tesla which acted as a stabilising influence has now mostly disappeared, even as it continues to invest in the autonomous driving scene putting more money into GM’s (NYSE:GM) Cruise unit.

This comes hot on the heels of Fidelity, which used to be Tesla’s largest institutional investor continuing to wind down its position over much of 2018 and into 2019. Put it all together and it’s clear that the investment industry has had enough and the reputation of Tesla as an investment grade company is on the line.

While many people may wonder why I’m making a big deal of this, it’s important to note that having the faith of significant holders of your stock is an important factor for any company. It’s not necessarily the end of the world if holders decide their interests or beliefs in the future of the company don’t align with those of the management team anymore, change is always happening but in these situations you want to be pulling in additional institutional investors who DO believe in your company and its future.

Institutional investors act as a stabilising influence on stock prices and tend to reduce levels of volatility where retail investors will buy or dump stock on the latest piece of news, institutions tend to invest for a long term view. Positions of this size can’t just be entered into or exited on a whim and takes weeks, months or longer to build up or unwind so that the market isn’t spooked one way or the other to the detriment of the investor. As such, these positions take considerable research and justification to engage in and generally mean that unless there is a major change in thought process, the position will be broadly maintained.

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What this means is that the portion of the free float which is held by these investors results in a lack of price movement given that a major holder is not going to buy huge amounts more or dump it all in a short period of time.

Retail investors with tens or even hundreds of thousands of dollars’ worth of stock however are a different matter. Reacting to every piece of news as a traditional long only stock holder is a quick way to lose large amounts of cash but certainly the average retail investor will take a less considered approach to their investing compared to an institution and as such, these holdings tend to churn more and result in more price movement. As such, institutional investors are highly desired by publicly traded companies.

Hardcore Cost Controls in Effect

On the other side of things, it would appear that Elon Musk has finally realised that the ongoing cash burn rate is unsustainable over a prolonged period. An internal email this week from Elon stating that every single line item that exits the company’s bank account needs to be reviewed by the company’s finance team for approval and that at the current burn rate the firm would be bust inside 10 months shows the scale of the problem facing Tesla.

Controlling costs is an important factor for any business but it’s also important to note that this kind of extreme vetting can also lead to a hit on productivity as everyone is focussed on justifying their spend rather than doing their jobs but at this stage, I don’t see that the company has any choice. Elon is right, costs need to be controlled. It’s unfortunate however that it has taken so long and come across as a knee jerk reaction rather than a considered approach to come about. Tesla has been changing its car pricing structure a lot in recent months as it looks to meet both its objectives of providing mass market electric vehicles at an attractive price, earn some sort of margin on the cars it sells and reduce its reliance on traditional showrooms and dealerships with all the costs those entail.

Evidently, the previous efforts were not enough and despite upsetting owners who had paid huge amounts more for their cars prior to various price cuts and messing around with residuals, cars are still not going to be regarded as appreciating assets despite the Musk pivot to “robo-taxis” as the future of the company.

Put it all together and we’re left with a company which seems to struggle to put together any kind of strategic plan or vision for the future that it can execute with any realistic possibility. Tesla is a large company now and it’s not inconceivable that if it were to fail, it would be bailed out in some form but the trajectory as things stand now is definitely on a negative one. With Tesla stock now trading at levels it last saw over 2 years ago in January 2017, the S&P 500 has returned over 25% in that time. Fingers crossed the company can get a grip and find the right path but in the absence of that, the path ahead looks tricky to navigate. This combined with the possibility that we are now late in the economic cycle with economic headwinds approaching may spell further bad news for Tesla in the future.

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