Tesla Doubles Down, But Is This a Bluff?

Next week the entire Investing Daily team of analysts is headed to Las Vegas for our Wealth Society Investing Summit 2016 to discuss the current state of the financial markets with dozens of our subscribers. The social highlight of the event will be a presentation by ID’s Editorial Director Bob Frick on how poker can help you become a better investor, followed by some friendly hands of Texas hold ‘em at a nearby casino to test his theories.

I suppose that’s why I have gambling on my mind, and how a recent pronouncement by Tesla CEO Elon Musk reminded me that sometimes you can win by bluffing with a weak hand.  During a discussion of Tesla’s quarterly earnings report last Wednesday, Musk surprised the audience of analysts by announcing the electric car manufacturer has cut by two years—from 2020 to 2018—its goal of making 500,000 cars.

Since the current price of a stock is the present value of expected future earnings, a car sold two years from now is worth more today than one sold in four years.

And with Tesla stock currently trading at 60 times next year’s (2017) earnings, pushing twice as many car sales up to 2018 makes that year’s multiple a little easier to stomach. Musk claims that he already has buyers ready to take delivery of all those vehicles, based on the number of pre-sale (and fully refundable) deposits Tesla has collected to hold reservations.

Of course, that assumes the new production goal can be met, which is a gamble, and maybe a bluff. The problem for many Tesla followers is this isn’t the first time Musk has made a big promise only to recant later. A few years ago Musk extolled the virtues of the supercharger network that is necessary to power his electric cars, but his claims of generating more solar energy than the vehicles would consume fell woefully short.

Thus far Musk’s string of broken promises has been largely ignored, his poor predictions overshadowed by excitement generated by the allure of an automobile that is fun to drive, lovely to look at and emits no carbon. But that spell appears to be nearing its end, with Tesla shares losing 20% of their value over the past four weeks as the company struggles to ramp up production fast enough to justify its valuation.   

Meanwhile, the walls appear to be closing in on Tesla, so accelerating production may be the only way to forestall potential rivals from squeezing the company out of the market if it waits too long to grab market share. Diminishing sales of the iPhone in China may force Apple to expedite its smart car project, and Google is tantalizingly close to perfecting its self-driving car.

To further muddy the waters, Tesla also announced this week that two high level executives – its VP of Production and VP of Manufacturing – will soon leave the company. Perhaps they are being thrown under the bus for production snafus delaying Tesla’s long awaited Model X now due for delivery late next year, or they may have pushed back too hard on moving up the production cycle and are being replaced by more agreeable toadies. 

This would all be amusing if Musk wasn’t playing with other people’s money. Unlike Sean Parker, who is funding groundbreaking cancer research with $250 million of his own cash to achieve a greater good, Musk is using the capital markets to finance his lofty ambitions. If Musk wins, then he stands to become an extraordinarily wealthy person, but if he fails he can walk away from the table with his the rest of his personal fortune intact.

If nothing else, Musk has proven to be an effective pitchman for his portfolio of innovative products. In addition to Tesla, Musk is also CEO of rocket company SpaceX, which he has said will successfully launch a spacecraft to Mars, also by 2018. Whether you believe him or not, nobody can accuse Musk of being ambiguous or modest in his promises.

The problem for Musk is that bluffing can work occasionally, but eventually the other players at the table get wise and call your bluffs, making you pay. He is quickly burning through not only his shareholder’s capital, but his own credibility, which was built upon his reputation for making the impossible a reality. The year 2018 isn’t that far off so we will soon know if Musk really has aces in the hole, or is hoping to fill an inside straight.