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Tesla – The Next Enron?

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As the Austrian economists have long pointed out, one of the things that commonly happens during periods of credit expansion is that the easy money leads to malinvestment. Which is usually revealed later on when the credit is removed and the excesses are exposed.

Of which there is growing evidence that Tesla may turn out to fit this profile. To the degree that some analysts are suggesting it might even be the next Enron.

Certainly one of the challenges in today’s financial markets (and perhaps this has always been the case) is not just in analyzing the numbers. But also in evaluating the integrity of the numbers. Because remember that the Enron numbers looked great. Except that they were never real.

And now as Tesla approaches a key financial event where its $920 million dollar bond payment is coming due, not only is there uncertainty as to how CEO Elon Musk is going to make that payment, but also increasing concerns around his actions and the veracity of the financial data the company provides.

In an interview with Tesla analyst Dave Kranzler of Investment Research Dynamics, Kranzler pointed out how not only did Musk break the law in sending his “420 secured” tweet, but that “Tesla’s Q3 GAAP “Net Income” numbers are highly misleading, if not outright fraudulent”.

Aside from concerns about the quality of the financial statements, Mark Tepper, president and CEO of Strategic Wealth Partners mentions how “there are stories of people not getting their vehicles, and then not getting their refunds for months.” While another concern being echoed among Tesla bears is in regards to the company’s growing reputation for being unable to deliver on the promises Musk makes.

“He hasn’t hit on any target or deliverable with any sort of reliability for years now. Why should I believe him now? Remember in 2016 when he said they’d be profitable and didn’t need any more money? Or when they said that in 2017? He’ll probably be saying the same thing at the bankruptcy hearing.”

-Harris Kupperman of Praetorian Capital

In addition to the red flags surrounding management is the latest news that January sales are down significantly, as the tax incentives have begun phasing out.

(chart courtesy of @teslashcarts)

Which makes it even more interesting to see what will happen in the next few days as the bond payment comes due. Especially with Musk creating a new round of suspense on Wednesday with a tweet that “some Tesla news” will be delivered on Thursday.

So if Musk is going to convince investors that the company is on solid footing, under good management, and that the data is accurate, he has some work to do. Because simply based on the events of the past year, as well as growing skepticism in the investment community, the possibility that Tesla will be exposed as an Enron is becoming a more real view in the marketplace.

To date the company has been able to navigate these issues. Yet especially if the Fed were to ever remove the unprecedented amount of credit it has injected into the system over the past decade, if the concerns regarding Tesla are indeed accurate, it may well in time rival Enron as one of the biggest financial scandals in history.

 

-Chris Marcus

 

February 27, 2019

 

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