Proof that Tesla is already Aaa, by Moody's
Proof that Tesla is already Aaa, by Moody's
And yes, they should be irrelevant! Let's help to make it happen.
Let’s get straight to the point: Yes, Moody’s finally upgraded Tesla Inc. to investment grade (Baa3, stable outlook), but only because the heat was on. I explain it in detail in Episode 33 of The Cyberbulls, you can jump right to it here.
Below is the most ridiculous part of the January 2023 Credit Opinion by Moody’s, which has yesterday been upgraded from Ba1 to Baa3.
This scorecard serves to calculate the rating and is based on the rating methodology for automobile manufacturers, which can be downloaded here. In both the backwards looking table (on the left) and the forward looking table (on the right), Tesla is already “A2”.
But then the overall score can be manually overwritten if the rating agency finds reasons to do so. You bet they did. See in the title above the chart: “Tesla’s reliance on a narrow - but expanding - product offering, accelerating competition from legacy automakers and new entrants, as well as corporate governance considerations”.
Let that sink in: the objective financial factors, Factor 2 and Factor 3, are already Aaa-level for all criteria for the “Last Twelve Months prior to 9/30/2022”.
So what are Factor 1 and Factor 4, for which the scoring model has lower results?
Factor 1 - Business Profile:
Trend in Global Unit Share over three years (10%)
A graph says more than a thousand words, and deserves fully a Aaa-rating in this category. Yet, Moody’s attributed to this factor a Baa-rating, in the sole goal to lower the overall calculation.
Market Position and Product Breath / Strength (30%)
Here Moody’s attributes a Ba-rating to Tesla. The definition for this rating level from the rating methodology isDefensible competitive position focused on one of the four key global geographic regions; gaps/areas of weakness in the product portfolio exist with evidence of material variations in the rate of model renewal; earnings rely on specific products or segments or returns on key products cause periodic pressure. Emissions-reducing technologies and AFV product development may be somewhat lagging, but company has articulated a strategy and concrete plans to attain an industry-average market position in terms of customer acceptance; or investments to meet future regulatory standards are uneven, but company has reasonable leeway before delays will have a meaningful impact on ability to meet future regulatory standards.
This argument has been contradicted by the update release yesterday, where Moody’s states “Tesla will maintain its position as one of the leading manufacturers of battery electric vehicles, as the company further solidifies its global footprint. … Considerable investments in new vehicle and battery cell production facilities enable a steep increase in vehicle delivers. Tesla’s product offering is expanding, with early production of the Cybertruck slated for later this year. The development of a next generation vehicle at targeted 50% reduction in cost holds the prospect for a meaningful decrease in the reliance on the earning contributions of Model 3 and Model Y.
So, Moody’s, no doubt, this criteria Tesla deserves a Aa-rating already. (for definition of a Aa-rating in this category, please refer to the Methodology here)
Factor 4 - Financial Policy (10%)
For this factor, Moody’s attributed a Ba-rating to Tesla. The definition of a Ba-rating is
Expected to have financial policies (including risk and liquidity management) that tend to favor shareholders over creditors; above-average financial risk resulting from shareholder distributions, acquisitions, or other significant capital structure changes.
Moody’s notes in its report that Tesla continues to operate with low financial leverage, has very good liquidity with $22bn of cash and investments, and prospects for very considerable free cash flow.
The only two challenges mentioned in this factor are “considerable latitude exercised by CEO Elon Musk with notable key-man risk” and that Kimbal “has close ties with the CEO”.
To sum it up: In all objective measures, Moody’s understands very well that Tesla is already, by far, Aaa. In more subjective criteria, Moody’s disregard for Elon Musk shines through and the rating agency uses arbitrary means to knock the rating down.
At least we have the rating now in the investment grade zone. Climbing up the ladder will have to follow. The most important is that Tesla investors know the truth.
I don't dispute the Moody's rating, but I want to comment on the cult-status that Elon enjoys (and in fact is addicted to). The popular press (including Barron's, Bloomberg and other financial press) frequently publish articles with leading, and fawning headlines, like today's "Tesla Goes After America’s Top-Selling SUVs". It is amazing, and a bit maddening, to see TSLA's constant price cuts as a good sign for the company. An automobile company has an enormous amount of fixed cost, including the supplies and raw materials in inventory to make cars. They're scaled up to manufacture at a certain rate -- they will surely sell 100% of all of the cars that they manufacture. They won't donate them, or give them away, but they'll sell them at whatever price is necessary to unload inventory. All that really matters is demand. They can spend money on advertising, or lower prices.
Eventually, reduction in demand can lead to scaling back of manufacturing rate, but there's no evidence that TSLA is cutting back on any scale. So they're going to sell all of their vehicles at the highest price that the market allows. If they're cutting prices, it is because they see inventories building up (or the imminent likelihood of oversupply of cars). In 2023 TSLA will face 35 competitive models, up dramatically from 2022. Ford says that they'll manufacture 200,000 units in 2023. This, alone, will be a significant volume of competition for TSLA. But add to that the products coming from Volkswagen, GM, and Kia/Hyundai, not to mention Mercedes, BMW, and Volvo, and we're going to see some real competition.
One of TSLA's story lines is that they can make EVs cheaper than everyone else. Maybe, maybe not, we'll see. In any event, most conventional manufacturers have been selling their first EV models at a loss -- it seems to me that every auto mfr. needs a viable, strong, competitive EV line to avoid bankruptcy in 3-5 years. GM is targeting 25% EVs by 2025. Their need to be in the game will put pricing pressure on TSLA. They can finance EVs, to some extent, with their other lines.
We don't know how rapidly EV adoption will happen -- I won't be surprised to see some period of rapidly increasing demand. I bought one last year (a Kia Niro EV) because two friends gushed about their EVs (a Tesla and a Chevy Bolt). I gained confidence that the range was adequate (mine is 240-300 miles, depending on season), and that the charging infrastructure is in place. I've been thrilled with the EV experience -- I see no reason why almost every family would want one (of two cars) to be an EV right now. There is still some hassle for cross-country trips, and there is still some definite burden for doing this in an EV. The only real barrier is pricing -- but that should change rapidly as competition heats up.
So, it remain unknown how increasing competition will scale with increasing demand. TSLA investors are banking that the company can scale up manufacturing by 2-3x over the near term, with little erosion in gross margins. That seems like a losing bet to me, but stock prices are often disconnected from market reality for fairly long stretches. The Elon cult effect is strong!
Yes, we're looking at Wall Street continuing to do the bidding of Oil & gas. Elon is a disruptor beyond Wall Street's payrolls, and IIRC Ron Barron jumped back in to the tune of how many shares? How can Moody's ignore Mr. Barron as well? Honestly, I don't look at the Xquarter production #s for Tesla's viability valuation(s): we need quality, and the Tesla Teams are already producing 1Million mile cars. Almost zero Corporate debt, sticking to his promises/directives in the Master Plans, and now an XCorp merge on the horizon again!? To the Moons!