Tesla Inc Stock Could Get Hammered on Restructuring Efforts

Bret Kenwell

Updated Thu, May 17, 2018, 11:39 PM

However, to reach that goal, Tesla has had to scrap a lot of its automation processes and rely more on the “underrated” human, in the words of Musk. That left Tesla hiring about 400 people per week for several weeks. While this may help the company achieve its production targets, it surely won’t help its bottom line or its automotive gross margins.

In the most recent quarter, Tesla saw its cash fall from ~$3.4 billion to ~$2.7 billion in just three months, while debt rose from ~$10.3 billion to ~$10.8 billion. According to Tesla’s 10-Q, which came about five days after its earnings release, it was noted that roughly one-third of its cash is held overseas and that Tesla had pledged its Fremont production facility to creditors.

There’s also an exodus of talent. Less than a month ago, Jim Keller, who was leading the Autopilot program, left the company for Intel Corporation (NASDAQ:INTC). Doug Field, the senior VP of engineering, is now taking a leave of absence, while Matthew Schwall, director of field performance engineering, just left for Waymo over at Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). In February, two financial execs left as well.

That just scratches the surfaces of its high profile departures over the past year, although Schwall could be part of the restructuring. It also includes two high-level leaders for Tesla’s energy unit.

Tesla Restructuring

Those are just some of the recent facts on Tesla. Before attacking me on them, though, consider that there is no bias in the above assessment. All of this information is readily available through publicly gathered information. If it sounds bearish, those are just the facts speaking — but there’s still some light at the end of the tunnel. It will simply come down to how well management executes. Part that execution is behind the Tesla restructuring.

Overall, we don’t have a ton of details on what Tesla plans to do. On the company’s quarterly conference call a few a weeks ago, Musk mentioned that a Tesla restructuring was coming, in part to help its goal of being profitable in the third and fourth quarters. But he didn’t say how that would happen.

We’re starting to get an idea now. The automaker is “flattening management” and cutting down on the number of suppliers it uses. Part of that management shakeup is being done to improve communication and operational efficiencies.

Other Bullish Catalysts to Note

From a bullish standpoint, a few things need to happen in the next three to six months. First, Tesla has to hit 5,000 Model 3 units per week by the end of Q2. Profitability on these cars will not be very good this quarter, because of how many workers Tesla is hiring and as it works out the inefficiencies. Therefore, in Q3, we need to see an improvement in gross margins on the vehicles while maintaining and/or improving the weekly rate of production.

In other words, we need to see that Q2 is the bottoming period for the automaker and that the Tesla restructuring is working.

Stabilizing and improving its U.S. operations will go a long way to improving sentiment. But should it do so, it will also give Tesla the chance to expand in China. The country recently relaxed its laws around manufacturing plants, allowing automakers to own 100% of their own venture in the country. This gives Tesla a chance to fully own its operations in China, something other automakers were never able to do. On the flip side though, that leaves Tesla solely responsible for the financial and executional risks that come with it.

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The bottom line is simple: Tesla needs to improve a lot — and in a hurry. If it can, it will ease its financial burdens and give it flexibility as it enters 2019.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.