Here we go again.
Tesla Inc. (NasdaqGS: TSLA)'s been on an undeniable tear. Its stock is up 40% in the past three months.
Billionaire Elon Musk, the hawker and P. T. Barnum of tech (also known as Tesla's founder and CEO), is on a tear himself.
On Sunday, Musk tweeted Tesla had produced 7,000 cars in seven days.
He says Tesla's officially met its 5,000 a week run rate on the new Model 3 sedans he's been promising for a few quarters now.
That's great. I mean, it's a great feat... kind of like a circus act you can't believe you're seeing.
Me, I'm not buying the Big Top act. Something's up... and I don't like it.
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Musk Is Quite Literally Staging a Circus Here
To hit the production targets he'd promised in three short weeks, Musk put up a "circus tent" in the parking lot next to the Tesla factory, staffed it with innumerable laborers (he's not telling how many), and cracked his whip.
Bravo, I say.
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But wait a minute: 7,000 cars in seven days? From a factory and a tent factory? With how many laborers? With what skills? Without the precision robotics everyone expects the computer car is put together by?
More importantly - critically, even: How can they keep up that level of production and maintain quality control?
It's one thing to knock out cars; it's another thing altogether to flawlessly assemble high volumes of high-tech, high-precision electric cars stuffed with intricate computerized components.
What happens if there are problems with the newly manufactured cars? Who's going to stand by Elon Musk then?
The problem for Musk and Co. is cash flow. Tesla must produce at least 5,000 Model 3 cars a week to - theoretically - avoid having to raise cash.
There's just too much that has to go right for this to make sense...
There Are Too Many "Ifs" and "Maybes" at This Point
If it can't maintain that run rate and boost it to 6,000 a week by the end of August, according to several analysts, a coming cash crunch could humble Musk and frighten investors.
If there's a breakdown on the production line, if manufacturing flaws start surfacing, the air is going to come out of Tesla like moviegoers exiting a crowded theater when someone yells "Fire!"
Tesla has $9.4 billion in long-term debt. It's got more than $3 billion maturing between 2018 and 2021. And they need at least $3 billion to $4 billion in positive cash flow to fund capital expenditures over the next 12 months, and that's after knocking $400 million off capex plans.
If capital isn't spent on producing another Gigafactory, building out a real automobile-manufacturing plant and equipment, and spending money on other productive assets that need to be fully built to generate cash to keep growing the company's manufacturing capacity, the ride comes to a screeching halt.
Maybe investors will pony up cash for bonds, maybe equity investors will accept being diluted again. Maybe the guy in the top hat will pull it all off. Maybe.
What's more, while all this is going on, every other car manufacturer worth its salt is going to be coming out with its own electric vehicles. All of them.
Maybe none of them will sell. Maybe none of them will be nice-looking. Maybe none of them will have the features Tesla vehicles are noted for.
Or maybe there will be some new super-hot competition for Tesla.
Tesla has pre-sold (as in, taken down payments in cash) something like 420,000 Model 3s. That's why it has to ramp up production. So it doesn't start losing those pre-orders to new competition.
Oh, but it will. And what will happen to its cash flow then?
On Sunday, Musk wrote to Tesla staffers that Tesla had achieved its goals. He said, "I think we just became a real car company."
Tesla is a car company, for sure - with all the issues car companies face.
And that means its stock will face the same issues all equities face if it doen't meet analysts' metrics, earnings estimates, profit margins (supposed to be 25%), cash flow, and profitability, to name a few.
The bottom line: The way forward for Elon Musk's Tesla is far from clear, and I think that makes this stock a good bet for shorting, be that short selling or with puts.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
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Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.