In the startup world, when a company is fresh and new and modestly funded, it will typically spend a few years under the radar, trying to develop a viable product or service. When it’s time to take that business to market, the startup exits “stealth” mode and reveals what it’s been up to.
Stealth mode can obviously be a stressful time, but it can also be a pleasant episode in which the startup has that most desirable of commodities: time. More importantly, that time is free of external judgments. Hope literally springs eternal, and no battles are being fought.
The money eventually runs out and stealth mode is no longer practical. The business has to stand on its own.
There are periods, however, when a retreat to stealth mode might be warranted. Tesla now finds itself in one of those periods.
The company is coming off a tortured 2018 — CEO Elon Musk struggled to launch the Model 3, failed to take Tesla private, and was punished by the SEC. There was more, but those were the biggies. On the plus side, the second half of last year saw two consecutive quarters of profit for the first time in Tesla’s history; and the carmaker delivered 250,000 vehicles in 2018, a record.
By contrast, 2019 is off to a rotten start. Tesla returned to its money-losing ways in Q1, and it revenues backed up substantially, down $3 billion from over $7 billion in Q4 of 2018. The writing has been on the wall for a new capital raise for some time, and last week, Tesla pulled the trigger, bringing in $2.7 billion (the offering was a mix of convertible debt and equity).
Tesla has two choices for 2019
This should take much of the pressure off 2019 and give Tesla a window to put its head down and simply execute. Short-sellers should be happy that they can borrow more stock to bet against the company, but their more extreme representatives have also witnessed their “go to zero” arguments undermined by Tesla’s improved balance sheet.
Two things could now happen. First, Tesla could seriously engage with what Musk now appears to believe is the Next Big Thing, a robotaxi service. This has been percolating for a while. About three years ago, Musk realized that self-driving was the hot new idea in transportation, displacing the electric-car revolution that had enabled Tesla’s rise. He pivoted and pivoted fast. At an investor event a few weeks ago, we saw the fruits of that effort: some rather compelling Tesla-centric autonomous tech.
Musk told Morgan Stanley analyst Adam Jonas that autonomy was going to gobble up all Tesla’s adventurous spending, so it’s safe to assume that much of the new capital could head in that direction.
But there’s a second possibility: become a functional carmaker.
Tesla has always been a dysfunctional carmaker. That was okay because being a functional carmaker in 2010 would have spelled Tesla’s doom. It needed to buck the auto industry to attract enough customers to take a crazy chance on an electric car.
But it’s now time for Tesla to put aside those childish games. That’s because Tesla dominates the electric-car market. That domination, however, is still pretty small-time, as the EV market is rinkydink. It’s critical that Tesla grows its domination as that market expands.
Why? Because the cost structure of attacking the EV market for a newer entrant from the traditional industry isn’t daunting. Automakers are raking in so much money selling pickups, SUVs, and luxury vehicles now that they can afford to throw money at the “problem” of electrification.
But for Tesla, the cost structure is totalizing. The company doesn’t really have another business. It sell EVs or bust. Given its financial vulnerabilities, Tesla needs most of the profits in EVs to flow to its balance sheet. That’s the only way it will survive. And the price of that survival is functional execution. Incredibly boring, functional execution.
A crazy dream for Tesla
My dream is that Tesla will wisely take its new $2.7 billion and say, “Thanks very much, now we’re going underground for a while so we can figure out how to make money more consistently by building and selling cars.”
Based on Musk’s comments about autonomy, that isn’t going to take place. So I’d be happy with the same statement, just aimed at rolling out a functional self-driving service in the next few years. Regardless, stealth mode would be dandy prerequisite for either decision.
Musk has a tough time controlling his tongue, so I’m not optimistic. BUT, stealth Tesla isn’t unprecedented.
Take the robotaxi tech. I’ve spent a few weeks digging into it, and it’s actually incredibly impressive. In a nutshell, Tesla has developed a massive multiplayer online game, overlapping reality with a sort of real-time simulation and using its large fleet of vehicles (equipped with cameras and sensors) as the players. In simple terms, the robotaxi tech creates an AI simulation that the fleet can use, then imposes it on reality and merges the two environments. Basically, it’s “ The Matrix Reloaded,” when Neo combines the actual and virtual worlds of the film.
Tesla hadn’t uttered a peep about this prior to the recent investor presentation; the only intel provided by the company was to offer updates on full-self-driving hardware and updates to Autopilot, Tesla’s existing semi-self-driving system. Tesla designed its own chip for the robotaxi plan (after using Nvidia’s state-of-the-art chips prior), and if any other company had come out of stealth mode having pulled this off while also selling a quarter of a million vehicles, it would have been a staggering entry into the self-driving business.
The upshot is that Tesla can do stealth. It now has a bit of what we might call “eff-you” money. My recommendation is to take the cash and shut up for the rest of the year.