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Moody's Says Tesla Is Not Investment Grade Worthy

Moody's has given a reason of why Tesla is not investment grade worthy and it is mind blowing.


Moody's Says Tesla Is Not Investment Grade Worthy

Why doesn't Tesla have investment grade ratings? All their financials are improving and they are making billions of dollars. The S&P & Moody's still refuse to give Tesla an investment grade rating. Here is why according to Dave Lee.

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

Dear Mrs. Merz, Thank you for reaching out to us. For reference, I copied below our considerations for an upgrade of Tesla (se press release January 24th). The considerations are not so much of a qualitative nature, but more qualitative. Importantly, we are looking for a broadening of the company's product line-up. Today, Tesla remains narrowly reliant on primarily two models, albeit highly successful ones. Note also in this respect that one of the models was first introduced in 2017. More concrete prospects for a broader vehicle line-up would be regarded as a positive development in this respect.

The email continues on to say:

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

Let's dive into this more and see What Dave Lee has to say about this:

What does one of the models being released in 2017 have to do with anything? Moody's also says that having two models being their main sellers is not good enough either. They say that Tesla needs to have more vehicles... Why? To be just like the legacy auto makers?

Why Isn't Tesla Getting Investment Grade Ratings?

Due to Tesla being reliant on the Model 3 and Model Y, without any other primary profit sources, that isn't good enough for Moody's. Moody's also says that other automakers are offering an increasing number of battery electric models and Tesla needs to widen their product offering.

This reasoning ignores Tesla's revenue, profits, growth, demand, and instead just says Tesla doesn't have enough models. Elon Musk has an intentional strategy to not have too many models. If you have 10 to 30 models, it adds complexity to the supply chain and the construction of the vehicles. This slows innovation and improvements. It's better to have a small number of models and that makes it easier to improve over time.

Legacy auto makers vehicles don't improve much over time due to having so many models.

Tesla having just a few models is a bullish sign for its future. It shows that Tesla is competitive because a Model 3 and a Model Y are best sellers. And that is just with the current lineup of cars. Tesla can also introduce in the future FSD tech and a cheaper model.

Moody's should just let the numbers and demand be the basis for the decision of upgrading Tesla to investment grade ratings. This shouldn't be a personal bias against Tesla's number of models of vehicles, which doesn't look at the reality of the demand and numbers for Tesla.

Because of not having 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 upgraded Tesla. If you look at Tesla's financial statements, you can see a GAAP net income doubling through 2021 each quarter. A similar pattern goes on with EBITDA.

Tesla's operating cash flow is also increasing and strong. Tesla has also paid down quite a bit of its debt. Tesla now has 52 million dollars of recourse debt and this gives them a strong balance sheet. Tesla, besides its loans on vehicles, has virtually no debt.

Tesla is in fantastic financial condition and is growing stronger. They are still guiding for 50% unit growth every year. Their gross, operating, and profit margins are all improving. Moody's saying that Tesla needs to widen their vehicle lineup is ridiculous. Where is the bias coming from? It's not from the numbers.

It's possible we won't see an investment grade rating until the Cybertruck comes out and the semi is reaching volume production.

For more information, see 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 anything about Tesla he can find, while also dabbling in other electric vehicle companies. Jeremy covers Tesla developments at Torque News. You can follow him on Twitter or LinkedIn to stay in touch and follow his Tesla news coverage on Torque News.

Image Credit, Dave Lee, Screenshot