TSLA Misses Estimates & Stock Soars

Tesla stock had been cratering in the past few weeks because of fears the firm would need to raise capital, that Elon Musk was an aloof CEO, and that the firm would miss Model 3 production expectations. Tesla’s guidance was for a production run rate of 2,500 per week. The actual result was 2,020 in the last week of March. For most companies this would be a disaster, but Elon Musk likes to make high projections which are unrealistic. It’s like the saying “shoot for the moon. Even if you miss, you’ll land among the stars.” Normally, this isn’t the way firms operate, but Tesla is a special company because of its ability to innovate and ‘coolness.’ Elon Musk is working on autonomous vehicles at Tesla and he’s the CEO of SpaceX which is working on a mission to Mars.

Because most analysts and investors know Tesla’s guidance is overzealous, they have lower estimates. Usually analysts expect results a little better than what companies say because they are conservative. The fact that Tesla always misses its guidance is a short trap. Besides a few short term periods where its stock corrected, being a short has been a bad bet. The sentiment was particularly negative heading into this report. The stock rallied after it because the results beat analysts’ estimates for about 1,200 Model 3 cars per week. Bloomberg’s estimate for this week is for 1,279 cars. The criticism among skeptics is that Tesla halted Model X and Model S production to support Model 3 production. The Model 3 will have lower margins because it is a car aimed at the mass market, but it is important to deliver the cars in a timely manner to keep up the brand image.

No Capital Raise Coming

Perhaps the biggest worry was relieved as Tesla said it wouldn’t need to raise capital this year. This is probably the main reason why the stock was up 5.96% on Tuesday. 2018 is the most important year in the firm’s history as its luxury cars were all created with the goal of eventually selling a mass market electric car to lower carbon dioxide emissions and turn Tesla into a profitable business. The most important aspect I’m focused on is how the new Tesla customers like the car and if there is demand outside of the initial group of pre-orders. The $36,000 base model still isn’t out yet, so the demand question is still unanswered.

Spotify (SPOT) Does A Direct Listing

Spotify did a direct listing of its shares. This is different from an IPO because the firm didn’t sell shares and didn’t do a road show. It doesn’t need to raise capital and doesn’t need to explain what it does because it has 70 million premium users. This was the largest direct listing in history. The firm did it to allow its investors to cash out. Direct listings in this manner aren’t going to be the new replacement for IPOs because many firms want to raise capital and don’t have a worldwide brand. However, it is a respite from the IPO process which makes the banks so much money. Bankers also get shares at a discount and set the price of the shares. Its better to have a market centric approach which costs less money. There’s nothing firms can do about regulations besides lobbying, but the IPO process should be streamlined instead of a club like situation where you need to pay oodles of money to join.

Spotify’s Fundamentals

Speaking of paying oodles of money to join, the Big 3 record labels plus Merlin, which represents indie artists, own 85% of all streaming music on Spotify. Because Spotify doesn’t own the content, it will struggle to grow its margins. This issue is why Netflix and YouTube have exclusive content. YouTube is owned by one of the biggest firms in the world (Alphabet) and Netflix has negative free cash flow. Hence, there probably isn’t a way for Spotify to differentiate itself through music production.

Speaking of big firms, Apple, the biggest company in the world, is a direct competitor with Spotify. It will always have a leg up on the firm because it sells smart devices. It owns the portal where people listen to music. It would be ruled anti-competitive to eliminate Spotify on iPhones, but there are ways Apple can promote its own service fairly. Apple is growing its paid streaming business by 5% per month in the U.S., while Spotify is growing this business by 2%.

Spotify will continue to attract new users in the next few years, but the long term moat is questionable since there could be a change in the way we consume music. It seems clear that the big tech names such as Amazon, Apple, and Alphabet, will be able to adapt to the new trends in music consumption better than Spotify since they have more access to talent and capital.

The Stock Falls After The Pop At The Open

The stock’s performance on Tuesday is an important representation of market sentiment and helps private firms understand if a direct listing is the correct strategy for them. The stock opened at $165.90 which was way above the listing price of $132. This was considered a big victory. Usually on IPO day a firm’s stock stays within a tight range as sell side analysts glow about the firm’s growth prospects. Analysts did recommend the stock, but it fell during the day as it wasn’t supported by market makers. It closed near the low on the day which was $149.01. This is sill a 12.89% gain from the listing price. This is slightly disappointing because the stock market had a solid day.

If the stock falls below the listing price in the next few days, it will be considered a failed process. I don’t think firms should blame the process for the fact that this business has a great product, but terrible long term prospects of improving margins and becoming profitable. Direct listings should be considered by firms in a similar situation as Spotify.

Don’t Buy SPOT Stock

Pandora was unable to turn its music genome project into a competitive business that grows profits in the long term. While I love Spotify playlists personally, they are probably an even shallower moat than what Pandora started out with. This stock shouldn’t be owned.