This is my position on the matter.
If we're talking about a long slow buyback that starts now and consumes like $1B per quarter or less, then of course the risk is commensurately lower, but so is whatever benefit we would expect from the buyback.
That future and order backlog is useful if only if Tesla can actually make cars and Megapacks to fulfill the orders, which is subject to numerous severe risks while we have only two factories that are located in areas with unusual risk of natural disasters and with presiding governments who have shown willingness to shut down the factories and supply chain because they feel like it. There are many exogenous factors outside Tesla's control which are extensively documented in the 10-K.
Boeing, for example, had a very bright-looking future in 2018. It was a century-old industrial company with technology that was in many ways industry-leading, in a duopoly position in a rapidly growing industry, with heavy support from the US government, strong financials, a diverse product portfolio, tens of thousands of employees, and overwhelming demand that resulted in a multi-year order backlog. Yet Boeing nearly went bankrupt in Q2 2020 due to the ongoing lack of production and costs from the 737 Max program combined with the costs of having to shut down the factories for three weeks to implement emergency COVID safety measures while customers were canceling or postponing orders and the supply chain descended into chaos. Were it not for support from the emergency government lending programs, the stock exchange probably would be listing $BAQ right now instead of $BA. You know what Boeing Co was doing in the years leading up to this crisis? Throwing away the rainy day fund on stock buybacks and dividends in the name of efficiency and pleasing Wall Street.
Tesla could survive something like that for three weeks, but three months? Six months? It's not that clear. Even if they could survive, how much damage would be done to cut spending? Tesla makes most of the money on 3/Y which share like 70% of parts in common. Tesla's engineering is elite, but there's still a chance they made some major mistake that will result in major warranty costs, loss of demand, class action lawsuits, bad press and an extended period of paused production. Hubris can be dangerous and we should watch out for complacency, as Elon has repeatedly stated.
Those very specific circumstances for returning capital to shareholders are very likely to arrive by this time next year. What's the rush? Why risk the mission and also tens of trillions of dollars of future profits in exchange for some pocket change of a few tens of billions at best? Penny wise, pound foolish.
I have been concerned about these unlikely risks for years. I have only been publishing my thoughts on Tesla for one year and I've had a lot of other more important topics to write about, but this topic is hot right now and I would like to influence the outcome. The short sellers and current stock price have nothing to do with this. I am about 140% all-in on TSLA including a substantial amount out-of-the-money call options. I do not know how I could get much more bullish and I do not believe any of this calamity is especially likely. I still have a smile on my face as I'm writing this. I'm still projecting a base case of $16/share earnings next year. However, I want to have a rational investment thesis and that means considering risk factors and estimating relevant probabilities. Right now, the business still has some vulnerability which cash protects against, and I wish they had more like $40B right now instead of $18B.
The probability of Tesla, due to no fault of their own, having an extended time period with zero operational profitable factories is uncomfortably high when it's just Fremont and Shanghai. Every additional factory reaching volume production exponentially reduces the risk of insolvency. Going from 2 to 4 makes orders of magnitude difference to the risk. We just need to wait a bit longer; we're almost there.
For example, there is an enormous amount of elastic potential energy stored up under the Fremont factory, and with every passing moment the spring winds slightly tighter. Seismology models don't all agree completely, but it looks like the probability of a severe earthquake from the Hayward Fault in the next year is about 3% or 1 in 30. I'm not super comfortable with Tesla taking cash off the table right now with those kind of odds, especially when the risk is also pretty high of Shanghai being simultaneously shut down and that's at the mercy of the whims of the Pacific Ocean (which sometimes isn't quite "pacific"), the Yangtze river, and the CCP's ridiculous COVID policy and a number of other risk factors.
The very fact that shorts can make bank by spewing FUD and manipulating the stock price and causing people to overthink things by emphasizing the negatives and amplifying the dips is a big part of Tesla's tail risk profile. People are saying that if Tesla needs the cash back then they can just sell the stock and recoup the value. Are we sure? The stock's reaction in March 2020 to events and short amplification of those events indicates otherwise, and just as initiating a buyback can signal strength to the market, an emergency equity offering to raise funds can signal weakness and contribute to a crisis of confidence and accelerate a nightmare death spiral. And forget about 2020, what about 1929 or 2008? That's two horrendous financial crises in 100 years, or roughly 2% probability in any given year, and there is no first principle of economics that says it can't get even worse than that in a crash. In 2008, there was no way a car company could get billions of dollars of financing by any method other than government bailout. It was a miracle and an act of heroism that Elon risked everything he had and managed to pull together financing from other parties and get Daimler to invest. Our modern economies are based on lending and having more liquidity than the underlying cash actually would allow without this credit system. Most of the time this helps with growth and facilitates entrepreneurialism. Sometimes, the music stops for a while and the ones holding the cash have the power. I want that to be Tesla.
ratings today, suckers!
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