The next six months could prove to be critical for Tesla and CEO Elon Musk, whose company has yet to turn a profit in its 15-year history.
A review of Tesla’s financial reports and other documents by News 4 Investigates shows the company has had a bumpy road so far.
For example, Tesla continues to hemorrhage cash – $717.5 million this past quarter – and its solar panel business at the Riverbend plant in Buffalo is lagging in the residential market.
In addition, Tesla recently laid off 9 percent of its workers, ended a partnership with Home Depot that removed its branded kiosks from hundreds of stores and has cut advertising spending on its solar products. Instead, Tesla will only sell solar products exclusively from its stores and website.
Tesla also has yet to confirm if its solar roof product is safe or as durable as traditional shingled roofs.
“We plan to ramp production more toward the end of 2018 and are working hard to simplify the production and installation process before deploying significant capital into factory automation,” a Tesla spokesperson said Thursday in a prepared statement.
More recently, Musk put himself in the crosshairs of the U.S. Securities and Exchange Commission after tweeting last week that he has secured financial backing to take the company private. Such a move would mean less transparency for Tesla, which would no longer be required to publish financial data.
Analysts interviewed for this story said that these problems could soon spell trouble for Tesla.
“You’d feel for a 15-year-old company, maybe they’d be a little further along toward profit,” said Steven Elwell, vice president of Level Financial Advisors in Amherst.
“But it does feel like we’re all kind of clenching our teeth a little bit.”
Tesla’s financial health matters to Western New York. That’s because the state spent $750 million of taxpayer money to build and equip the SolarCity plant at Riverbend, the crown jewel of Gov. Andrew Cuomo’s Buffalo Billion initiative. Thousands of new jobs in Buffalo and New York state are on the line if the Riverbend facility that Tesla now owns continues to struggle.
State officials declined interview requests. In a prepared statement, a spokeswoman for Empire State Development said that Tesla is “in compliance” with its employment milestones.
Tesla is required to employ 1,460 workers in Buffalo by April 2020. After 10 years, the company must employ 5,000 workers in the state. Missing those milestones would result in penalties to the state of $41.2 million each year.
Kathleen Nesper, a professor at the University at Buffalo School of Management and a certified public accountant, said Tesla’s solar business seemed like an afterthought to Musk and other Tesla executives during last month’s 90-minute quarterly earnings call. Only a few minutes were dedicated to the Buffalo plant.
“The one thing I was waiting to hear about was Tesla Energy and the silence was deafening,” Nesper said.
“They are committing to ramping up production in the Buffalo area. However, as we have seen them miss marks in the past, it’s questionable as to whether or not that will take place.”
A Tesla spokesperson said Thursday that the company is “working hard to make beneficial use of the State’s investment, and we continue to meet our hiring goals in line with our agreements with the State and Buffalo.”
As for its gloomy financial picture, Musk said during the quarterly call that he was “highly confident” that Tesla would turn a profit this year.
As a result, investors are closely watching the production of the Model 3 car, not solar panels.
Focus on Tesla cars
Musk recently reported that the company met its milestone of producing 5,000 cars a week, some of which are being made in a massive tent at its facility in Fremont, Calif. He expects to make more than 7,000 cars per week by the end of the year, a volume needed to pave the path to sustained profitability.
But Nesper, who is a former accountant for General Motors, said the company does not have a proven track record of producing cars at this pace.
“So that means a lot of direct laboring efficiency improvements need to take place,” she said.
“He identified that he would like to make certain aspects of their production simpler, such as the paint system and general assembly. From my experience in the auto industry, that doesn’t come about in a matter of weeks, it takes time to make those changes.”
Elwell, vice president of Level Financial Advisors in Amherst, said many investors might have already bailed on Tesla if Musk, who has been compared to a real-life “Iron Man”, were not the face of the company.
“We’ve got to get going here, we’re running out of time,” Elwell said.
“And some investors are going to lose patience. If Wall Street as a whole loses patience, that’s a problem.”
As a result, the company’s future seems to be riding on the production of vehicles, chiefly the Model 3, considered to be the Tesla car that reaches the mass market with a more affordable price. Most of the questions during the quarterly call focused on the electric vehicle and meeting the demand.
The same could not be said for Tesla’s solar business.
Musk, who sounded exhausted during the quarterly call, barely discussed the Buffalo SolarCity plant he calls Gigafactory 2.
Some analysists thought it was a head scratcher when Tesla purchased SolarCity in November 2016 for $2.6 billion.
In fact, shareholders showed their disapproval by filing a class-action lawsuit charging that Tesla’s board breached its fiduciary duties.
“SolarCity is the vast majority of Tesla’s debt and the fact that the automotive business, if that would succeed, does not necessarily mean that the Tesla Energy (SolarCity) would succeed,” Nesper said.
Since Tesla purchased SolarCity, the rate of solar production has slowed drastically.
Consider that before the sale, SolarCity deployed 253 megawatts of solar energy, a high mark in the fourth quarter of 2015.
Since Tesla bought the company, the deployment has fallen sharply, with the low-point being in the first quarter of this year at 76 megawatts. Imported solar panel tariffs imposed by the Trump Administration could further erode the industry, analysts said.
This past quarter, however, Tesla reported an uptick of 11 percent in solar energy generation systems, but the megawatts produced remains a third of the largest output when SolarCity was at the helm. Tesla has installed only a few hundred solar roofs.
“Tesla really has kind of put the brakes a little bit on SolarCity while they wait to figure out their production issues with the Model 3,” Elwell said.
“So they’re hoping that if they can get their production issues fixed with the Model 3, they become profitable relatively quickly and then will have the capital they need to further invest in the SolarCity plant.”
The Wall Street Journal reported Thursday that Tesla and Panasonic, who manufactures solar cells and modules at the Riverbend facility, restructured their agreement. Panasonic no longer sells its panels exclusively to Tesla, another sign that the demand for Tesla’s solar products has fallen short.
A Tesla spokesperson said the company is gaining valuable feedback from customers and is working to simplify the production and installation process before investing “significant capital into factory automation.”
“We are steadily ramping Solar Roof production at Gigafactory 2 in Buffalo and are also continuing to iterate on the product design and production process, learning from our early factory production and field installations,” the Tesla spokesperson said.
As a publicly traded company, Tesla is accountable to shareholders and must report its financial status to the SEC on a quarterly basis.
But Musk caught investors, and his own board, by surprise when he tweeted that he is considering taking Tesla private. The announcement caught the attention of the SEC, which is now investigating whether Musk violated federal rules.
As a result, on Aug. 14, the board of directors formed a special committee to consider the move, but Musk has not provided a formal proposal.
Elwell said Tesla going private does not solve any of their production problems or provide them with new capital that might help them buy more time. How such a move might impact the Buffalo plant is uncertain, but there would be even less transparency about the project, he said.
“They’re no longer subject to earnings calls or releasing their earnings or having to discuss whether they’re going to be profitable this month or next month or next quarter,” he said.
“It makes them more private. So, from his perspective, I would be willing to bet that’s a pretty serious advantage to not have Wall Street constantly bugging him about when a company’s going to be profitable.”
Whatever happens, both Elwell and Nesper said investors are expecting Tesla to match its rhetoric with results by turning a profit.
“If they don’t then the Wall Street and investors are going to hopefully become more skeptical,” Nesper said.