Tesla Motors Inc Has A Serious Cash Problem For Now

  • Concerns about Tesla's cash burn are continuing to pile up and are hurting the stock now.
  • The short-term cash outlook remains quite murky due to high R&D expenses and Gigafactory expansion.
  • The long-term outlook is likely to improve once construction of the Gigafactory is complete and Tesla starts selling Model 3 vehicles.

Concerns regarding Tesla's (NSDQ:TSLA) need to raise capital and the possible near-term liquidity constraints have been dominating headlines lately, and are hurting the Tesla stock. Tesla is down 10.3% over the past 30 days.

Short-term likely to be murky

Tesla currently has a quick ratio of 0.54, which implies that the company has 54 cents in cash for every $1 in current liabilities. Although that's a slight improvement from the last quarter when the metric clocked in at 0.49, it's still far below the target quick ratio of 1.0 or higher which is considered healthy for an enterprise. Tesla recently disclosed in a SEC filing that covered preparation for the merger with SolarCity (NSDQ:SCTY) that it plans to pay out a total of $442M to convertible note holders during the third quarter. That note payout is likely to be a drain on Tesla's already squeezed cash position. Tesla notes in the SEC filing that it plans to raise additional funds by the end of the year through debt offerings. The company plans to use those funds for the Gigafactory expansion as well as Model 3 manufacturing build-out.

Also read: Should You Buy Tesla Motors Inc Stock After The Recent Decline?

Tesla's decision to make a debt offering at the end of the year is actually a matter of necessity. The company closed the second quarter with nearly $3.25B in cash but used up $678M in July to repay a revolving credit line. When you add the planned $442 million convertible notes payout, Tesla will be left with $2.15 billion in cash. But that's before you factor in the $1.75 billion the company said it plans to spend during the second half of the year on plant and equipment in readiness for mass production of Model 3.

This in effect means that Tesla is looking at a cash balance of just $400 million. Now that does not seem like much when you consider that Tesla is soon going to assume the liabilities of SolarCity's massive $5B debt load and effectively double its long-term debt.

With such a backdrop, Tesla has little choice than to raise extra capital either through a debt offering or a secondary share offering to shore up its near-term cash reserves. The company has opted for the former.

Long-term cash outlook good

Last year, Tesla stock sold off quite heavily after Barclays sounded the alarm over the company's long-term cash burn, saying Tesla is likely to burn through as much as $11 billion over the next five years, equal to ~20% of revenue over the period:

‘Tesla  will continue to burn through lots of cash in its quest to become a bigger car maker, and Wall Street may be underestimating how much spending remains ahead. TSLA does not boast a strong track record in spending efficiently, and its business strategy will keep it a capital intensive company.’’

But that was well before Tesla realized much better-than-expected Model 3 bookings. Initial Model 3 bookings now hover around 400K, more than double Tesla's initial expectations or those by Wall Street. Such a high level of bookings could lead to a dramatic improvement in Tesla's cash position--but only if Model 3 is profitable.

Tesla is banking on falling battery costs and rising battery energy densities to be able to start turning a profit on its auto sales consistently.

TSLA-5

Source: Tesla

Tesla's current battery pack cost of $190/kWh is considerably lower than the industry average of $350/kWh. Industry analysts estimate that pack costs for EV makers will have to fall to around $100/kWh for EVs to be able to compete on an even keel with their gasoline-powered counterparts. Tesla is therefore well ahead of the curve in the rush to $100/kWh. Tesla can achieve lower pack costs through a variety of battery technologies and innovations. For instance, new approaches to formation cycling and electrode solvent is likely to help the company to hit the $100/kWh mark much earlier than the likes of General Motors (NYSE:GM).

Argonne Lab’s model for battery costs, the gold standard in the battery industry, is also known as BatPac. BatPac version 2 was released in 2012 and predicted that Tesla-type batteries will cost $163/kWh for 90kwH packs at a production volume of 500,000. That's about 14.3% cheaper than Tesla's current average pack costs. BatPac 3 was released in December 2015 and showed pack costs dropping to just $109/kWh at a similar production volume. That's 42.6% cheaper than Tesla's current average cost.

Battery costs constitute the biggest cost component for EVs. The long-term trend points to significant cost reductions. This means that even if Tesla only manages to breakeven on Model 3 gross margin when it launches the vehicle in 2017 (a likely scenario), the vehicle could soon become profitable due to falling battery production costs.

Falling R&D Expenses

This bodes well for Tesla's long-term cash position. It's also imperative to note that the company's R&D is also likely to fall significantly once the construction of the Gigafactory is complete by the end of 2016. Tesla spends close to 20% of its automotive revenue on R&D. That's much higher than spends by mature incumbents GM and Ford (NYSE:F), which spend only 5% of automotive revenue on research and development. Investors can expect Tesla's R&D to moderate once construction activities on the Gigafactory come to an end.

Investor Takeaway

Tesla's cash burn is likely to remain a point of concern for investors over the short-term as the company continues expansion of the Gigafactory as well as Model 3 manufacturing build-out. The long-term cash outlook is however likely to improve once construction of the Gigafactory comes to an end and the company starts selling Model 3. The debt offering that the company expects to make towards the end of the year should not be much higher than the $1.6B convertible notes (half due 2019 and the rest by 2021) it issued in February. Those notes are convertible to mostly cash and a little common stock upon maturity.

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Comments on this article and TSLA stock

joeinslw
bullish
You know I think this article is funny because the author forgets that many companies like GM, Ford and others have had a debt to pay to one Bank or another.
GM had a bailout from the Government they never paid back and wasn't mentioned in this article.
Tesla had a 465 million dollar loan they paid back in full early, and with interest, but this article fails to mention that as well.
Funny how the bears pick and choose what they want to use to bad mouth
Tesla, and they will never mention that GM also built EV-1 cars in the 1990's, leased them, then asked the lessees to return them for upgrades, but never intended to do that, instead they CRUSHED every one of them in 1999.
It's obvious why they did that, and it's also why we are not driving EV's today, I can find one word to describe why they did that,----GREED.
5 1 reply
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135krpm
bullish
This article is written at the lowest point...just before a new influx of cash, and forgetting that it's virtually all good news going forward. Q3 may well show a small GAAP profit, the Model 3 second release will light a fire, followed by the actual release itself (likely in late August, much sooner than expected), followed by surprisingly large numbers of 3's rolling out within the one year discount period, followed by ongoing profit as a Y and then pickup truck are teased/revealed. This is one of those articles you save, because in years to come nobody will remember just how negative the media was on Tesla at one time.
1 1 reply
Do share this awesome post