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The good times are no longer rolling at Elon Musk’s Tesla, the premier maker of electric vehicles. The price of Tesla’s bonds suggests the company’s shares are turning into a lottery ticket.

Bond investors pride themselves in spotting danger before the rest of us poor saps relaxing in the equity cabana. The performance of Tesla’s 5.3-per-cent bonds, due in 2025, went into something close to free fall in late March. At last count, they were trading at about 87.50 US cents, taking their yield up to 7.5 per cent.

A yield that high suggests that Tesla is losing its magic touch. The US$1.8-billion issue, flogged by Goldman Sachs last August, is high-yield bonds, otherwise known as “junk” bonds. They went soggy shortly after they were sold and now substantially underperform their peer group.

Evidently shorted in large quantities, there is some chance they will pop back up once the squeeze ends. But the high yield is not surprising, given Tesla’s horrendous cash burn and fresh run of bad news.

Equity investors are finally getting the message. The shares are down almost by a quarter in the past couple of weeks, taking Tesla’s market value to US$45-billion. Not long ago, Tesla, which made a few more than 100,000 cars in 2017, was worth more than General Motors, which made 10 million. The shares, too, could pop back up, given Mr. Musk’s propensity to dazzle investors with product rollouts, visions of endless growth and clever marketing stunts, such as sending a Tesla Roadster into space.

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A Tesla supercharging station.JASON HENRY/The New York Times News Service

But they may not, for Tesla faces a tough year on the car front. The rest of 2018 could make or break the company.

The proximate causes of the bond and equity sell-off were the Moody’s downgrade of both the company and the bonds; the general tech downturn; the fatal accident in California involving a Tesla Model X, which may or may not have been operating in autopilot mode at the time; the recall of some 123,000 Tesla Model S sedans to replace power-steering bolts; and fears that the April production update of the new Model 3 will, once again, come in below expectations.

The downgrade and the Model 3 production shortfall were the biggies and the two were related. The downgrade was inevitable in good part because the Model 3, Tesla’s entry into the mass electric-vehicle market, with a price starting at half or less than the luxury Model S, has dragged the company down when it was supposed to make it soar.

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Elon MuskJoe Skipper/Reuters

Mr. Musk has backtracked several times on the Model 3’s production targets. At one point, he said 100,000 of the cars would be made in 2017. The real figure was only 2,425. The new plan is to make 2,500 a week, but, given the setback, investors are not convinced the new target will be met.

Tesla desperately needs the Model 3 to succeed so it can pay back investors and raise new capital to finance its ambitious development program, which now includes a Tesla highway truck. If the car flops because of production problems or competition from dozens of new electric vehicles about to be pumped out in the highly efficient factories of GM, Volkswagen and other global auto giants, Tesla will feel the pain.

Already, the company faces financial stress. At the end of 2017, Tesla had US$3.4-billion of cash and cash equivalents, plus another US$550-million from bonds sold in February (although not all of the bond amount can be spent). Barclays has forecast Tesla will consume US$4.2-billion this year, which means the company will have almost certainly have to raise debt or equity, or both, in a few months. No wonder Tesla has become a favourite among short-sellers. One of the more prominent ones is Jim Chanos, of New York’s Kynikos Associates. In December, he said Tesla “is headed for a brick wall.”

Mr. Musk probably made a mistake building factories; technology, not production, is his specialty. He could have contracted the production to a world-class contract manufacturer, such as Canada’s Magna International. But it’s too late to do so. Tesla’s factories, including a battery factory in which Panasonic is its partner, are built and sucking cash.

Mr. Musk could surprise us all yet even as his bond and equity investors get jittery. He could be developing a new battery that would constitute a leap-change in the technology. If he does, he and his investors could make fortunes, because the lithium-ion batteries that dominate electric vehicles still lack the range of gasoline and diesel cars. But a long-shot bet on a battery breakthrough is scant reason to own the shares. Investors have to go with what they know and what they know is the company is burning cash at horrendous rates.

A year ago, even less, Tesla seemed the invincible poster child of the tech and transportation revolution. But with competitors coming on strong, the halo effect is wearing off. That became clear the other day, when Waymo, Alphabet’s self-driving car project, ordered 20,000 electric cars from Jaguar Land Rover. It was a symbolic blow to Tesla and may signal that Mr. Musk’s easy ride is over.

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