Autos

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

I remember when tens of billions of dollars used to be real money. But that was before Tesla started building its Gigafactory.  

Giving reporters a tour of Tesla's partly built battery plant in Nevada this week, co-founder and CEO Elon Musk mused that achieving the company's multiplying ambitions -- of which the Gigafactory is a critical element -- could end up costing this large, amorphous sum.

This is sort of a sensitive subject where Tesla's concerned because it burns a lot of cash already (see here and here). Indeed, Musk acknowledged as much with a follow-up comment:

Don’t quote me saying I plan to spend tens of billions right now because that would be incorrect.

Instead, it is just "necessarily true" that reinventing the automotive and utility industries while simultaneously taking on the likes of Uber in the future robot-taxi wars will require quite a bit of spending.

Musk is correct, of course. As if to emphasize the challenge, the day after he made those comments, Mercedes-Benz said it wants to develop an electric truck, competing directly with one of the vehicles laid out in Tesla's "Master Plan, Part Deux" released last week. Competing with Mercedes certainly sounds like a pricey proposition.

Tens of billions in future spending should give pause to investors in a loss-making company, even one with a $30 billion-odd market capitalization like Tesla's. But the stock traded higher Wednesday morning.

The fact is, that "tens of billions" guesstimate is the perfect coda to Tesla's new Master Plan -- which, as I wrote here, read more like an aspirational manifesto than an actual roadmap. Saying its achievement will require huge, ill-defined amounts of spending is just stating the obvious. After all, the Gigafactory journalists saw this week is only a fraction of the giga-size it is supposed to eventually attain.

Tesla's greatest strength, and gravest risk, lies in its ability to keep selling that vision.

Contrast its tens of billions with the International Energy Agency's estimate of what the global oil and gas industry needs to spend in order to meet demand through 2040: $1 trillion a year. I think we can all agree that's real real money. And yet oil majors are falling all over themselves these days to tell investors just how little they plan to invest in the future, lest it get in the way of funding dividends.

Perhaps I'm just comparing a disruptive growth business with a sunset industry. In fact, at an industry level, there's evidence for that -- not least of which is Saudi Arabia's decision to privatize its national oil champion.

At a company level, though, there's no guarantee Tesla will reap the rewards. Because while Musk continues to do well in keeping investors' sights fixed firmly on the horizon, there has been a steady accumulation of jolts to bring at least some of them back to the here and now.

The latest concerned raising yet more money. While Musk clarified he doesn't plan to spend tens of billions now, he did say Tesla might need a "modest" capital raise as it races to boost its vehicle production almost 10-fold by 2018 vs. 2015 with the new Model 3. Which is a bit awkward, because Tesla only just raised $1.7 billion for the same reason -- and then turned around a few weeks later with a plan to buy fellow Musk vehicle SolarCity.

That announcement did provoke at least a brief selloff. After all, taking on SolarCity's debt and losses hardly helps Tesla get to 500,000 annual car sales, the only hope of actually generating the tens of billions of dollars it needs internally. Yet the stock has since recovered that lost ground and more. It's a pattern that has held true for much of the past two and a half years, as the stock has bounced around in a rarefied range.

The High Road
Source: Bloomberg

Clearly, the marginal buyer of Tesla's shares remains, for now, unconcerned about Tesla's perennial need for more cash and, the corollary, a case of mission creep that is starting to make a mockery of the word "creep." Modesty of ambition would be counter-productive in this sense. Such is the nature of cult stocks -- as is the reality that none of the risks matter, until the day they do. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net