Opinion | Tesla’s Biggest Problem Isn’t Elon Musk

By William D. Cohan

The company can survive its chief executive’s strange behavior. But it cannot escape $11 billion in debt.

By William D. Cohan

Mr. Cohan is a former investment banker and the author of four books about Wall Street.

CreditCreditSelman Design

Is it too late for Tesla?

What may have started as an ill-advised bit of summer whimsy — Elon Musk’s tweet on Aug. 7 suggesting that, as Tesla’s chief executive officer and its largest shareholder, he was going to take the company private and had the “funding secured” to do so — has turned into a full-blown crisis.

There’s the unwanted scrutiny: Thanks to Mr. Musk’s tweet, Tesla is the target of a criminal investigation by the Justice Department and a civil investigation by the Securities and Exchange Commission. There’s the missed opportunity: a Saudi investment fund that had been eyeing Tesla has invested $1 billion in a rival. There’s the brain drain: the sudden departures of Tesla’s chief accounting officer and its head of human resources. There’s the loss of investor confidence: Tesla’s stock price is down 25 percent since August.

And then there is Tesla’s biggest and most acute problem: its precarious finances. Mr. Musk promises investors that Tesla is going to start making more cars and profits any day now, but that’s wishful thinking. Tesla is not generating enough cash to pay back the mountain of debt that is coming due soon. Once stalwart investors are losing faith in Mr. Musk and his company, and Wall Street is turning on him. Tesla could soon become a case study of what can happen when an iconoclastic Silicon Valley entrepreneur, seduced by his own wonderfulness, thinks the rules of the marketplace do not apply to him.

Tesla’s finances are fragile. It has around $11 billion in long-term debt and no profits. “That is not a sustainable business model,” Jim Collins, a longtime auto industry research analyst, wrote in Forbes in April. “Not even close.”

From January to June of this year, Tesla generated revenues of $7.4 billion, but it had an operating loss of $1.7 billion, burning through its cash on hand. It has $2.2 billion left, most of which will be needed to cover operating losses. Romit Shah, a research analyst at Nomura Instinet and once one of Tesla’s biggest boosters, reversed course last week, calling the company “no longer investable.”

About $1.7 billion of the company’s long-term “convertible” debt is due in the next 14 months, meaning that the debt holders have the option of being repaid either in stock, at a specified price, or in cash. One chunk of the convertible debt, $230 million, is due in November. The conversion price is around $560 per share. If Tesla’s stock is not trading at more than $560 per share by then, the holders of those notes will most likely want cash. That puts enormous pressure on Tesla and its leader to get the stock price up quickly — it’s trading around $300 per share these days.

Not surprisingly, bond investors have become increasingly skittish about Tesla. In March, the bond-rating company Moody’s moved Tesla’s corporate debt rating lower on its noninvestment grade, or “junk,” scale.

In its explanation of the downgrade, Moody’s acknowledged that the market continues to admire Tesla’s cars: Advance purchase reservations and deposits for them “remain high.” But that hasn’t been enough to solve Tesla’s fundamental financial reality: It isn’t producing cars fast enough to meet demand, its operations are running at a loss, and it has huge debts coming due. The resulting pressure on the company’s cash balance cannot simply be wished away.

This is a harsh lesson that other Silicon Valley “visionaries” have already learned. Amazon’s Jeff Bezos, Alphabet’s founders Larry Page and Sergey Brin and, more recently, Facebook’s Mark Zuckerberg have all weathered personal criticism and skepticism about their companies’ business models by mostly delivering what Wall Street always wants: steady and ever-increasing profits. (Evan Spiegel, the co-founder and chief executive of Snap, and Jack Dorsey, the co-founder and chief executive of Twitter, might take note.) Mr. Musk is, indeed, a legendary entrepreneur. But $11 billion of debt and negative cash flow is a reality that vision alone cannot overcome.

Wall Street is a confidence game. When confidence in a company, or an entrepreneur, is high, it seems as if nothing can go wrong and there’s no limit to the capital that investors will throw around. Wall Street fell in love with Tesla and, so far, there has always been plenty of money for Mr. Musk and his electric car company, then for his space company and then for his tunnel-boring company. He was even able to push through Tesla’s $2 billion acquisition of SolarCity, even though many shareholders were wary of buying a debt-laden company owned by Mr. Musk and his cousins.

To be sure, Tesla is no Theranos; its products are real. The company still has a market value of about $50 billion.

So Tesla’s best option to solve its short-term liquidity problems is to issue more shares of its wildly overpriced stock. There is already speculation that Tesla will have no choice but to raise new equity — one analyst put the need at $2.5 billion — but only at a significant discount to the current trading price. Selling stock, even at a discount, will require Mr. Musk to find investors willing to buy into his dreams. If that fails, and Tesla can’t repay its debt, Mr. Musk way well lose his company to his creditors.

Mr. Musk has always found people willing to take a chance on him. But Wall Street’s confidence can prove ephemeral, and Mr. Musk’s personal antics are testing the limits of investor infatuation. He is on the verge of becoming a cautionary tale about a Silicon Valley genius felled by hubris.

William D. Cohan (@WilliamCohan) is a special correspondent for Vanity Fair and the author, most recently, of “Why Wall Street Matters.”

A version of this article appears in print on , on Page A27 of the New York edition with the headline: Tesla’s Big Problem Isn’t Elon Musk. Order Reprints | Today’s Paper | Subscribe