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Elon Musk lost $30 billion in just over 2 days as the market realized Tesla may not be a tech giant, but a struggling car company
October 20, 2023 at 3:56 AM GMT+8
When Tesla unveiled its results for its third quarter, analysts and the financial press mostly focused on how far the numbers fell short of the already negative forecasts. The pre-Halloween report indeed uncorked one of the year’s most ghoulish surprises, given that few enterprises in the annals of financial markets have inspired the kind of unbridled optimism with which Wall Street has showered the EV giant.
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Tesla’s numbers have more in common with slogging automotive peers than tech’s shooting stars
Tesla’s new numbers, and Musk’s new “squelch the optimism” narrative, suggest that Tesla isn’t so special at all, and should in fact be grouped alongside its metal-bending rivals. By loading never-before-seen innovations into a metal frame, Musk has long promised to achieve the profitability not of a heavy manufacturer, but of an Apple or Oracle. Although Musk has scored a fantastic coup by becoming the rare producer to earn good money on EVs, the evidence of the last few days shows that Tesla is chiefly a carmaker. And its future will most likely track that of its relatively low-margin competitors.
The best evidence: Tesla is now only modestly profitable, and getting less so. That’s the conclusion from analyzing how much free cash flow it’s generating from its ever-growing asset base required to make more Teslas: plants, machinery, inventories, and sundry other balance-sheet staples. Cash flow what’s left over after paying all expenses, not accrued but paid currently, required to produce the product, then subtracting the capital expenditures necessary to both keep the plants fully updated and invest for future expansion. Put simply, free cash flow over time is what goes into the pockets of investors, either in dividends, buybacks, or the fuel for stock appreciation. And the more gobs of FCF a company can generate from adding dollops of capital, the more it will enrich its shareholders.
Tesla’s got a problem here, in that the “cash flow from operations” it generates from revenues less expenses keeps dropping, and its capex keeps rapidly rising. The upshot is that Tesla clinches less and less free cash flow while adding more and more factories and other assets. (For this analysis, I’ve adjusted FCF by subtracting the after-tax contribution of the sales of regulatory credits, a non-operating category that Musk acknowledges will decline from here and not prove a major contributor in the future.)
In 2021, Tesla registered average FCF per quarter of $1.22 billion, at an annualized rate of $4.88 billion, on assets of $57 billion, which yields a “cash” return on assets of 8.5%. The next year, FCF jumped to $1.35 billion per quarter, or $5.4 billion a year, but assets rose sharply to $73 billion, lowering our ROA slightly to 7.3%.
The situation deteriorated in 2023…
How do those numbers compare to the tech superstars whose profitability Musk promises to reach, or at least approach? For Apple, Microsoft, and Oracle, respectively, ROA over the past four quarters was 28%, 15%, and 17%, all multiples of Tesla’s performance.
On the other hand, Ford posted a free-cash-flow-to-assets ratio of 2.0%, and Volkswagen did 2.6%, both right in Tesla’s neighborhood. Even Musk doesn’t seem to totally disagree that Tesla’s looking more and more like his peers, given his newfound “the world is tough” rhetoric on the call. Tesla could well continue on as a highly successful car company, but it’s becoming increasingly clear that being a champ in a rough, brutally competitive sphere of heavy manufacturing may be the best that the Tesla believers can hope for.
[This article has been updated with the market sell-off in response to Tesla’s earnings report, and the hit to CEO Elon Musk’s net worth.]
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