Elon Musk Might Have Some Explaining to Do

Elon Musk is a visionary. His Tesla brand has been the hottest thing in the automotive industry, and we’re just a few months removed from him launching a convertible into space with two Falcon rocket boosters that returned to Earth and landed themselves.

As a forward thinker and futurist, he’s planning a mission to Mars and warning Americans about the dangers of the advent of artificial intelligence. After viewing this next report, however, it seems someone should be warning Mr Musk about the problems in his own company.

The warning, however, doesn’t come from industry experts or the government, but from a hedge fund manager who’s carefully studied Tesla and has made the dire prediction that the company will crash in the next 3 – 6 months.

John Thompson is the Chief Investment Officer of Vilas Capital Management and is one of the few hedge fun managers who routinely outperforms the market. Here’s an exerpt from his brutal assessment of the Tesla organization:

“I think Tesla is going to crash in the next 3-6 months. . .

. . . partially due to their incompetence in making and delivering the Model 3, partially due to falling demand for the Model S and X, partially due to the extreme valuation, partially due to their horrendous finances that will imminently require a huge capital raise, partially due to a likely downgrade of their credit rating by Moody’s from B- to CCC (default likely) which should scare their parts suppliers into requiring cash on delivery (a death knell), partially due to the market’s recent falling appetite for risk, and partially due to our suspicions of fraudulent accounting activities, evidenced by 85 SEC letters/investigations and two top finance people leaving in the last month. . .

Tesla, without any doubt, is on the verge of bankruptcy.

The company cannot survive the next twelve months without access to capital from Wall Street Banks or private investors.

We estimate that Tesla will need roughly $8 billion in the next 18 months to fund operating losses, capital expenditures, debts coming due, and working capital needs.”

In fact, he floated the increasingly likely scenario that Tesla’s creditors could demand that all outstanding invoices be paid before delivering any more supplies. This would mean the end of the company:

“If Tesla’s suppliers simply asked for their past invoices to be paid and to be paid in cash at the time of their next parts delivery, a likely outcome the worse Tesla’s balance sheet gets, it is clear that Tesla would need to file for protection from creditors. Further, the banks lending Tesla money cannot ignore the balance sheet. They have strict rules that regulators enforce about lending to companies with increasingly negative working capital.”

Thompson goes on to detail how the SEC has opened 85 different investigations into Tesla over the past 5 years. 85! In very colorful prose he then goes on to detail what this means for a country struggling financially:

“When a company is under formal investigation, it is difficult, if not impossible, to raise capital from public markets as these investigations must be made public, which generally craters the equity and debt values.

Therefore, Tesla investors better hope there are a number of Greater Fools in China or elsewhere to keep the company solvent.

At some point, the music stops and there aren’t any open chairs.

No matter how good a social investment makes you feel as it is going up, extreme anger will result if most or all of your money is permanently lost, especially when it is due to false and misleading statements by senior company officers.

This is when the [Department of Justice] steps in and escorts untruthful managements to their new living quarters.

. . . As a reality check, Tesla is worth twice as much as Ford* yet Ford made 6 million cars last year at a $7.6 billion profit while Tesla made 100,000 cars at a $2 billion loss.

Further, Ford has $12 billion in cash held for “a rainy day” while Tesla will likely run out of money in the next 3 months.

. . . I have never seen anything so absurd in my career.”

The kicker to all of this is that just recently the shareholders approved a pay package for Musk that is nothing short of bizarre!

The plan would pay him $50 billion over the next 10 years — or roughly $5 billion / year! If you were to add up the salaries of every single CEO in the S&P 500, it would not equal $5 billion per year — and their companies are solvent!

We certainly wish Mr. Musk and all the Tesla investors the best, but this is going to be a story to watch over the next few months!

H/T Sovereign Man