Tesla’s share price increased by $4.00 and by approximately 1% on Tuesday July 10, 2018, after the company announced that it had entered into a memo of understanding with the Shanghai government to build a factory to produce 500,000 autos per year in China by the 2022 or 2023. The timing of the announcement was suspect for three reasons:
- There was no material information in the announcement. Tesla did not provide details about how much the factory would cost or how it was going to raise the capital to pay for the factory.
- Tesla’s share price had been under pressure for all of last week and had declined by 17% from its high for the week that it made after it announced that it had made its goal of producing 5,000 autos per week by June 30th. See my June 6th article “Unscalable Manufacturing Process Revelation causes Tesla’s share sell-off”.
- Tesla’s sales have recently dropped and it accounted for only 14,000 of the 500,000 electric cars which were purchased in China in 2017.
What is very disconcerting is that Tesla’s founder and CEO Elon Musk has been increasingly fanatical about Tesla’s share price throughout June and July of 2018. From my 40 plus years of experience a CEO’s becoming obsessed with a company’s share price is a bad omen. It generally means that the CEO is not paying attention to the business and that the shares are headed to a 52-week low instead of a high. Below are the recent two instances of Mr. Musk’s fanaticism:
- Prior to Tesla’s making its production goal of 5,000 autos he called out a Goldman Sachs analyst who had been negative about the company. See June 27, 2018, Bloomberg article “Musk Says ‘Rude Awakening’ Awaits Bearish Goldman Sachs Analyst”.
- Musk attacked Linette Lopez, a reporter for Business Insider who broke the story about the company ceasing its testing of the brakes for the cars that it produced. See July 6, 2018, Newsweek “Elon Musk Attacks Media for ‘Relentlessly Negative’ Tesla Coverage”.
The reason why Mr. Musk is sensitive about the share price is because Tesla has generated negative operating and free cash flow for it last four consecutive fiscal years. It has also generated negative free cash flow for its last four consecutive quarters. The probability is high that the company will soon have to sell shares to raise capital. Mr. Musk needs Tesla’s share price to be as high as possible to minimize dilution. It’s because part of his compensation is based on share price performance. The simple conclusion is that Tesla’s China announcement and its timing was to prop up Tesla’s shares.