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Tesla Shares, Bonds Under Pressure as Elon Musk Warns of Shrinking Profits in Q3

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【Summary】Shares of Tesla Inc (TSLA.O) sank 14% on Thursday and its bonds traded lower, a day after the electric carmaker said it needed more time to turn a profit, reported lower margins and announced the departure of its CTO.

FutureCar Staff    Jul 25, 2019 5:25 PM PT
Tesla Shares, Bonds Under Pressure as Elon Musk Warns of Shrinking Profits in Q3
Tesla CEO Elon Musk. (Photo: Bloomberg/Getty Images)

(Reuters) Shares of Tesla Inc (TSLA.O) sank 14% on Thursday and its bonds traded lower, a day after the electric carmaker said it needed more time to turn a profit, reported lower margins and announced the departure of a key executive.

Investors wiped out more than $6 billion of Tesla's market value in response to the company's lackluster second-quarter results.

Only two Wall Street brokerages reduced their existing share price target for the company, but a batch of downbeat research notes from analysts focused on shrinking margins, a key challenge in delivering profit going forward.

Tesla's automotive gross margins dropped in the quarter to 19% from 20%.

On Wednesday, Elon Musk said in an investor call that Tesla now aims to be profitable in the fourth quarter, adding that Tesla will only "break even" the current quarter (Q3). The company said it was focusing less on profit and more on volume growth, capacity expansion and cash generation.

That contrasted with the billionaire CEO's promise this time last year that the company would be profitable and cash flow positive "henceforth".

The eurobond portion US166858275= of Tesla's $1.8 billion junk bond, which debuted two years ago, was down 2 points in price in brisk trading, pushing its yield back above 8% for the first time since July 1. Its yield spread over Treasuries, a measure of the added risk investors take for owning Tesla's speculative-grade rated bond rather than safer U.S. government securities, widened by more than 40 basis points.

In all, it was the bond's biggest loss since September 2018 when its chief accounting officer quit after just a month on the job and Musk was filmed smoking marijuana and wielding a sword on a popular webcast.

"I would have guessed that (the bonds) would have moved a little more than they have," said Tom Graff, portfolio manager, head of fixed income, Brown Advisory. "I think any kind of core thesis about how this company has a sustainable path forward is pretty challenged now. My read on what's left over for bond holders is not 90 cents on the dollar – it is less than that. I don't think it should price like a bankruptcy is imminent, it just feels like more than a (two-point move)."

Newer debt securities from Tesla were also under severe pressure. The $1.84 billion convertible note it issued in early May fell 8 points, the most since it hit the market just over two months ago. It had closed at a record high on Wednesday.

Several analysts were also concerned by the suprise resignation of chief technology officer and pioneer of the company's electric batteries, J.B. Straubel, the last of the company's old guard left in its top echelons outside Musk himself.

"Straubel has been at the forefront of the company's technology leadership, which we believe will increasingly be called into question as competitors catch up," Cowen analysts said.

resource from: Reuters

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