Moody’s declares Tesla not worthy of an investment

Moody’s declares Tesla not worthy of an investment

Why doesn’t Tesla have investment grade ratings? All their financials improve and they earn billions of dollars. S&P & Moody’s still refuses to assign Tesla an investment grade rating. Here’s why according to Dave Lee.

The answer is actually very confusing. Moody’s was contacted by someone and the explanation was as follows:

Dear Ms. Merz, Thank you for contacting us. For reference, I’ve copied our considerations for a Tesla upgrade below (see Jan. 24 press release). The considerations are not so much qualitative in nature, but more qualitative. Above all, we are looking for an expansion of the company’s product line. Today, Tesla remains closely dependent on two models mainly, although very powerful. Also note in this regard that one of the models was first introduced in 2017. More concrete prospects for a wider vehicle range would be seen as a positive development in this regard.

The email goes on to say:

The ratings could be improved if Tesla successfully expands its global footprint, maintains a strong competitive global presence as other automakers offer a growing number of battery-electric models and improves its product lineup. Tesla’s ability to maintain an EBITA margin of at least 7% (measured excluding the contribution of emission credits) and a consistent and prudent financial policy are also important considerations for higher ratings. Additionally, Tesla will need to maintain very good liquidity, including ample cash and considerable committed availability under its revolving credit facility.

Let’s dive deeper into this and see what Dave Lee has to say about it:

What does one of the models released in 2017 have to do with anything? Moody’s also claims that having two models as top sellers isn’t enough either. They say Tesla needs more vehicles… Why? To be like traditional automakers?

Why doesn’t Tesla get investment grade ratings?

Since Tesla depends on Model 3 and Model Y, with no other main source of profit, this is not enough for Moody’s. Moody’s also says other automakers are offering a growing number of battery-electric models and that Tesla needs to expand its product offering.

This reasoning ignores Tesla’s revenue, profit, growth, demand and simply indicates that Tesla doesn’t have enough models. Elon Musk has an intentional strategy of not having too many role models. If you have 10 to 30 models, it adds complexity to the supply chain and building the vehicles. This slows down innovation and improvements. It’s better to have a small number of models and it makes it easier to improve over time.

Vehicles from legacy automakers do not improve much over time due to the large number of models.

Tesla having only a few models is a bullish sign for its future. This shows that Tesla is competitive because a Model 3 and a Model Y are bestsellers. And that’s only with the current range of cars. Tesla may also introduce FSD technology and a cheaper model in the future.

Moody’s should just let numbers and demand be the basis for the decision to upgrade Tesla to investment grade ratings. This should not be a personal bias against Tesla’s vehicle model count, which ignores the reality of Tesla’s demand and numbers.

Because they don’t have an investment grade rating, some funds and pensions can’t invest in Tesla because they don’t have an investment grade rating. Tesla still hasn’t updated Tesla. If you look at Tesla’s financial statements, you can see GAAP net income doubling through 2021 every quarter. A similar trend continues with EBITDA.

Tesla’s operating cash flow is also growing and strong. Tesla has also paid off a good portion of its debt. Tesla now has $52 million in recourse debt, giving them a strong balance sheet. Tesla, other than its vehicle loans, has virtually no debt.

Tesla is in fantastic financial shape and getting stronger. They are still aiming for 50% unit growth every year. Their gross, operating and profit margins are all improving. Moody’s saying Tesla needs to expand its vehicle lineup is ridiculous. Where does the bias come from? It’s not from the numbers.

We may not see an investment rating until the Cybertruck comes out and the semi hits volume production.

For more information, watch this video by Dave Lee:

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Jeremy Johnson is a Tesla investor and supporter. He first invested in Tesla in 2017 after years of following Elon Musk and admiring his work ethic and intelligence. Since then, he’s become a Tesla bull, covering everything he can find on Tesla, while dabbling in other EV companies. Jeremy covers Tesla developments at Torque News. You can follow him on Twitter Where LinkedIn to stay in touch and follow his coverage of Tesla news on Torque News.

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