Authored by Mark St.Cyr,
Cash burn, did you know that was, or could be: a problem?
In days of yore (i.e., 2008 BQE) businesses actually had to survive by selling products and services at a price that was more than they cost to produce, as to cover all other ancillary expenses. (I know, heresy, but stay with me.) If they didn’t? They weren’t called a business, they were called a charity.
If they did so manage to do this (i.e. continually, unabated, always replenishing ) for any length of time. Usually, the authorities from any number of agencies (think IRS, FBI, et al) would be knocking on the doors demanding to see the books. For the only way something like that could be taking place usually involved either, “dirty laundry” or someone with a name ending in Ponzi.
Today? It’s just called speculative “investing” or, “Angel” or, “Series A,B,C,” – LMNOP fund-raising. Bernie Madoff must be sitting in his cell wondering, “And just what am I in here for, precisely?”
Since I just brought up Bernie, let me give you what I call a “fun fact” to ponder. Ready?
If Madoff’s “cash burn” had allowed him to survive for about another 18/24 months, or so (he was arrested on Dec. 2008), he would have been able to not only cover his problematic “cash burn.” But with the help from Mr. “The Courage To Print” Ben Bernanke, he would probably be hailed today as one of the greatest investors of all time. For his so-called “stated” returns would now be in line with what was truly transpiring in the “markets.” i.e., Never a downdraft, and consistent double-digit gains for years. And no one would be the wiser, or at least, would care about how he did it. Think about it. But I digress.
Cash-burn since the development and implementation of QE (quantitative easing) and all its corollaries, has morphed from something to be concerned with (i.e., it usually signaled how many days were left before bankruptcy) to now it’s been deemed as something akin to: “No big deal, who cares, sell more Series ____(fill in the blank.) And while you’re at it, structure it so it raises the valuation a few more $Billion. I’m looking at getting a new yacht after this thing IPO’s and I want a big one, with a submarine, helicopter and such, like that Russian dude’s got. Oh, and what’s a ‘trep’ got to do to get a gluten-free-latte around here?”
But that was then, and this is now, and let’s just say, “it’s different this time.”
Just before the holiday Elon Musk took to the stage, once again, to unleash his next creation, in P.T. Barnum fashion, that I deemed “Future Hype.” To be fair, I’m a fan of Mr. Musk and his chutzpah when it comes to big thinking ideas. What I’m speaking directly to here is business and the models for conducting it.
It is here where “big ideas” have performed what can only be called “magical thinking” alchemy. i.e., The Model S, X, and 3 may be wonderful vehicles, but the business model to produce them are anything but. And it seems Mr. Musk needs to now focus as much time and energy producing future-hype scenarios (think range and power still not developed) to sell the idea to any and all investors, just as much, if not more so, than trying to produce already “sold” production commitments.
Suddenly “Cash Burn” is becoming a hot topic. I was surprised (actually very) to read two very provoking pieces in regards to Tesla™ over the last few days. First, there’s the outright questioning of battery claims. But what caught my attention was the second, which almost in the same breath, suddenly questions Tesla’s survivability claims based on current (wait for it…) cash-burn projections.
Do you, or can you dear reader, remember a time before this year when business metrics, of any type, where the two words “cash burn” were included or even questioned? Let alone, actually laid out prompting that “concern” might be a reasonable conclusion going forward anywhere in the mainstream business/financial media? Again – anywhere?
It would appear the worm-has-turned (or turning) in the “it’s different this time” bottle of magical business alchemy, yes?
Suddenly Mr. Musk’s claims, rationales, or responses to anything regarding his entire business structure are now open game for in-depth questioning and testing of metrics where 2+2=4 math applies. This alone should be concerning for any and all BTFD devotees, regardless if one is an investor in Tesla, or just the broader “markets.”
The reasoning? Just look at a current snap-shot regarding the big-picture, if you will. Where future-hype had once reined supreme. Here’s an example, for if a picture tells a thousand words, than a chart can portend $Billions of reasons for concern. To wit:
The above is a chart showing Tesla on the left and the NASDAQ 100™ on the right, via daily intervals. Notice anything? That’s right, suddenly, as sung by Sesame Street®, “One of these things is not like the other…”
The time frames are the same, but no longer is their BTFD trajectory in lock-step, as they once were. Today, that “trajectory” seems to be stunted as further questioning of prior claims, promises, and future-hype takes its toll on questioning “investors.” Unlike the Nasdaq which still (at least for the time being) has its BTFD mojo propellant working in the unquestioning vacuum of central bank hopium.
So here’s where things get interesting from a cash-burn prospective. How you say? Good question, and it is this: If, Tesla the stock just hovers in its current location, what are the ramifications (again, if any for it’s all conjecture) if we suddenly have some form of a pullback or heaven forbid, bonafide correction within the very near future?
Again, if the indexes such as the Nasdaq and others, which have been impervious to any and all bad news, whiffs of impending Armageddon, European sovereign risks, Middle East turmoil, just to name a few: What happens to not just a cash-burn dependent company such as Tesla? But rather, the entire complex?
What complex is that? Once again, great question, did I mention unicorns yet? Let’s do that now, shall we?
I’m only going to use one for this example, not to pick on them, but I really feel there is no other mascot of the current unicorn debacle that sums up everything facing it. Of course, I’m speaking of Uber™.
And here again is where “it’s different this time” thinking has turned in Judas fashion against the once claims and models for valuation, and business domination.
Over the last year, or so, there have been more negative stories in regards to Uber than positive. This once Wall Street darling has gone from championed mythical creature sporting a “horn made of gold” – to having its head removed in full public view, then allowed to be seen via that same public reminiscent of the old joke of “letting it run around with its head removed as it continued to spurt “cash.” (i.e., Remember the initial and unfolding debacle with its CEO’s ousting and its fallout, all while it was publicly reported on, and playing out with, its Board and current investors?)
And then, suddenly, like a bolt-of-lightning from beyond, cash-burn questions began, and are becoming the norm, when any discussion about them arrises. Talk about its different this time!
The problem here for Uber (and all its stablemates, I’ll contend) is it faces the same abnormality as does Tesla. For it would seem the old “play book” is no longer working. Because, if the underlying cash-burn issues it has will not go away, nor, at the least be turned a blind-eye as was prior? Are you beginning to see my point?
Again, if the “market” as much as hiccups in the very near future: Will the putting of money in the line of fire of further cash-burn, with no end in sight, be the first place scared money goes? Or, the last? And if it’s the latter?
Add to this almost forgotten item: If the Fed. does indeed raise in a few weeks, and the budget debacle begins simultaneously, along with the possibility of a failed meaningful tax bill by year-end?
Can you say, “It’s different this time?” The reasoning? These business models needed to produce, or reduce the concern of cash-burn, stat. And not only does that not appear to be happening within these once “darlings”, but rather, they’re disappearing along with ever-the-more “cash” at an alarming rate and scale.
Uber it seems is losing more territory than its gaining, the latest is London. But what’s more concerning is the loss of its perceived credibility for forging a more disciplined path forward. And it’s here where things might go awry in a manner and form once vigorously outmaneuvered or outright disregarded.
Here I’m speaking to the revelation that Uber not only had a data breach, but paid to cover it up, and the new CEO, the new supposed “adult in the room” reportedly also knew, months in advance.
Can you say, “Uh, oh?”
The issue again here is this: The future-hype playbook is no longer as effective as it once was. But it’s not for a lack of trying, I’ll contend.
The media was all abuzz about 6 days ago (remember this timeline) with the proclamation that Uber entered into an agreement with Volvo™to purchase up to 24,000 self driving vehicles. Sounds just “fantastic!”, right? What you may not have heard about (unless you’re truly paying attention) is that about 5 days ago Colorado fined Uber $8.9 Million for driver issues. Funny how that driver issue thingy came only a day after the hoopla of setting the stage for not needing drivers at all. Can you say “future-hype?” But that’s just me, I guess.
However, this data breach debacle may be the very issue that any type of “hype” future, or not, may not quell. For if there’s one thing governments and politicians, of all types, whether it be in certain locales, nations, or otherwise. There’s one thing they all have in common and will agree on – if there’s an issue to place their bullseye on when it comes to their fund-raising. Let’s just say, laser-focus and pit-bull-jaws immediately come to mind.
And this (e.g., data breach) is just the sort of issue that allows politicians to decry for justice, and the extraction of large quantities of cash-burn resources, out of “their public duty and concern for constituent, or consumer protection!”
It would be somewhat ironic if it was a government regulatory issue that causes Uber the most distress at this point in its life, since it has openly made a mockery of how it both felt, dealt with, as well as adhered, to any so-called rules, regulations, or business ethics since it began.
And make no mistake: “Cover-up”, and “data breach” are two terms no company wants any politician to be both able too say, let alone prove it’s correct, in today’s current political environment. Hint: See Equifax™ or even Wells Fargo™ for clues.
You think any of this “future-hype” along with “cover-up” has anything to do with keeping any Softbank™ hope of investing further cash burn fuel alive?
And if it didn’t, or doesn’t?
Heads will roll, again, for any and all “it’s different this time” believers, showered in the electric sparks from a crashing “it’s different this time” reality.