A day of reckoning is near for Tesla stock, the Model 3 sedan and the company’s colorful co-founder and chief executive, Elon Musk.
By the end of this month, Tesla (TSLA) plans to finally live up to Musk’s repeated vow to crank out 5,000 Model 3s — billed as a sedan for the masses — each week. In the coming quarter, the maker of luxury electric cars aims to make good on Musk’s relentless promise to be profitable. And in the process, the company and its CEO hope to reassure investors that Tesla’s $10.5 billion debt burden and scorching cash burn will soon be in the rearview mirror.
It’s heady corporate drama. Will Tesla ultimately become a new-age General Motors (GM), a force majeure in the rising electric-car industry? Or will its far-reaching vision fall short?
Musk, a modern-day corporate magnate, is determined to blast skeptical short sellers worried about the Tesla cash burn by mass-producing Model 3s.
Wall Street is divided on whether Musk and Tesla can pull it off. Romit Shah, an analyst at Nomura and a Tesla stock bull, points out that the company has a two-year backlog of Model 3 orders to help smooth the road ahead.
“They don’t have an issue with demand,” said Shah.
Still, Tesla short-seller Mark Spiegel, manager at hedge fund Stanphyl Capital Management, said he considers the carmaker to be “a company so landmine-filled that I think it can implode at any time.”
Tesla Short Sellers
Tesla stock is one of the most shorted issues on Wall Street. Those counting on the Tesla cash burn to help it fail are betting it will miss its production targets for the new Model 3 for the third time, putting the company in a financially risky situation.
Short sellers get Musk’s dander up. The Tesla chief recently tweeted he would torch them with one of the flamethrowers he had made as a moneymaking promotion for one of his other ventures, the tunnel-digging Boring Co.
“Short burn of the century coming soon,” Musk wrote in a tweet last month. “Flamethrowers should arrive just in time.”
It’s unclear, though, just who faces the heat. The Tesla cash burn recently forced a 9% reduction in staff. The usually cheeky Musk has become curt at news conferences. Company goals keep falling by the wayside.
Much of it stems from the Model 3. If Tesla can more than double Model 3 output from the prior quarter to 5,000 a week, Musk believes the company can be profitable in the third quarter and avoid having to raise cash. But profitability has continually eluded the company.
Musk most recently attacked short sellers on June 17, saying they had about three weeks “before their short position explodes.” That time frame coincides with the end of the second quarter and would be about the time Tesla typically reports quarterly vehicle deliveries. A number above expectations could send Tesla stock soaring even higher than the more than 20% jump it has seen since hitting a low four weeks ago.
Tesla shares were down 0.3%, near 332.70 during Monday afternoon trading on the stock market today. The stock hit a record high of 386.99 set on Sept. 18.
Building Teslas Under Tents
Musk, though, is known for setting ambitious deadlines he often can’t meet. The Roadster, the Model S, Model X and the Model 3 were all delayed from his original timeline.
Still, his ambitions persist. Musk plans to double Model 3 production again to 10,000 as it adds a third production line at its Fremont, Calif., manufacturing plant — a line that is being built temporarily under a tent.
Tesla’s long-term Model 3 goal is to ramp up production to 500,000 vehicles per year. That’s a huge leap from its 100,000 annual run rate for the Model S sedan and Model X sport-utility vehicle.
Further, Tesla still promises to price the Model 3 at $35,000, a version that has yet to materialize. The Model 3s coming off the line now are loaded with extras and go for roughly $50,000.
Another obstacle for Tesla is expanding its massive battery plant in the Nevada desert to supply power for all those cars. The 5.8-million-square-foot plant, called Gigafactory 1, already has cost more than $1 billion.
Further, Tesla seeks to add gigafactories in China and Europe. It also will need more retail outlets, service centers and charging stations.
All this is going on at the same time Tesla is developing the Model Y, a crossover vehicle, in addition to a big-rig truck called Semi and a new Roadster.
The Tesla Cash Burn
Perhaps the biggest albatross hanging around the company’s neck, though, is the $10.5 billion in debt that could grow further.
“Of course, the debt load concerns me,” said Brad Erickson, an analyst with KeyBanc Capital Markets. “But the reality is: With the manufacturing improvements and the plodding toward profitability, the cash burns go down dramatically. If Tesla can make the Model 3 in greater quantity, we believe they will turn gross-margin positive in the third quarter.”
The Tesla cash burn will decline dramatically, if not halt, should current Model 3 targets be met, he said. “So the moment you’re not burning cash anymore, that’s a moot point,” Erickson said.
When Tesla reported first-quarter earnings on May 2, it showed a cash balance of $2.67 billion. It burned through $1.1 billion in cash during the quarter. It isn’t clear how much it’s spent in the current quarter.
But it will need to spend billions of dollars more as it expands vehicle production and invests in batteries and other infrastructure. Skeptics say that only cash injections from the outside can help.
In March, financial pressures and production shortfalls spurred Moody’s Investors Service to downgrade Tesla’s credit rating to B3, from B2. That’s six levels below investment grade.
Moody’s said Tesla faces liquidity pressures due to its large negative free cash flow and pending debt maturities. Moody’s thinks the company needs to raise $2 billion to cover the Tesla cash burn for 2018.
$10 Billion Needed?
Goldman Sachs analyst David Tamberrino said in a report last month that Tesla could need to raise more than $10 billion in capital by 2020 to fund operations and expansion. That includes the cost of a new facility in China that could serve as both a vehicle manufacturing plant and gigafactory.
He has a sell rating on Tesla stock with a six-month price target of 195, little more than half of where it currently trades, around 360. Tamberrino is skeptical that Tesla will meet its production goals for the Model 3. He forecasts that the company will run low on cash by year-end.
Other Tesla stock skeptics include UBS analyst Colin Langan, who has a sell rating on Tesla stock, also with a price target of 195. Langan, in a research note last month, said he remains cautious on Tesla stock, “given the cash burn, the volatile and uncertain production timeline, and initial quality concerns.” He also said it’s unclear how Tesla can fund its aggressive product plans.
Ryan Brinkman at JPMorgan, a Tesla bear, has a price target of 180 and rating of underweight.
KeyBanc’s Erickson is also critical of Musk for mismanaging expectations and being a poor forecaster of his business. On the other hand, he says, Musk is on a long leash.
“Who else can announce an electric car in a webcast and not advertise or say when the car will come and take in nearly a half-billion dollars in deposits?” said Erickson. He was citing the company’s Model 3 debut.
Tesla Stock Bulls
Nomura’s Shah, perhaps the most bullish analyst for the company on Wall Street, says the Tesla cash burn doesn’t worry him. He recently raised his Tesla price target to 450 from 420, with a buy rating. That’s roughly a 25% premium from where the stock now trades.
Narrowly focusing on Tesla’s balance sheet is a backward way of looking at things, he says.
“We see them overcoming the production issues and accelerating growth in the back half of this year for Model 3,” Shah said. “I expect that in the next three months we’ll go from talking about the balance sheet and negative cash flows to market opportunity and market growth.”
Shah’s confidence in Tesla is due in part to the company’s size and fast growth. Revenue rose 68% in 2017 to $11.76 billion from the year-ago period. That comes after 73% growth in the previous year, though Tesla can boast of only two profitable quarters.
“It’s really unusual to find a company in the multibillion-dollar range growing revenue more than 60% per year,” Shah said. “I don’t see that slowing down.”
Model 3 Competition
The Model 3 comes just as Ford (F), General Motors (GM), BMW, Volkswagen (VLKAY), Toyota Motor (TM) and others threaten its standing among electric-car makers.
General Motors previously announced a goal to make 1 million GM electric vehicles a year by 2026. Ford has said it will invest $11 billion in electric-vehicle production.
Among the challenges faced by Musk is that he’s stretched thin. Musk spends about half his time as chief executive of SpaceX, which is routinely launching satellites.
Musk also runs Boring Co., which is more of a side project. It promises to lessen traffic congestion by digging underground tunnels for high-speed transportation. The multiple demands could be among the reasons Musk abruptly cut off analysts halfway through Tesla’s first-quarter conference call for posing what he called “boring” and “boneheaded” questions.
Despite Tesla’s history of burning cash at a rate better-established companies would likely be crucified for, Musk has steadfastly opposed the idea of raising more equity or debt later this year. Tesla says it has significantly cut its projected capital expenditures by focusing on critical near-term needs.
The company recently laid off 9% of the Tesla workforce, part of a thorough reorganization announced in May. Musk said the cutbacks would not affect the company’s ability to reach Model 3 production targets.
Model 3 Reservations
Musk expects cash flow from selling Model 3s to the 450,000-plus people who have placed a $1,000 reservation deposit. He says that will help fund several Tesla initiatives. Among them are its gigafactory expansion and a new plant to make the Model Y crossover vehicle.
During the recent Tesla annual shareholder meeting, Musk once again reiterated his target of becoming cash-flow positive in the third quarter of this year with the ramped-up production for the Model 3.
Tesla could meet its production targets. But it also will have to meet targets for higher gross margins to hit profitability.
Several Wall Street analysts consider that unrealistic, given the company’s missed production goals and high debt.
Then there are the short sellers. Among the most vocal is Stanphyl Capital’s Spiegel.
“I don’t think Musk can make this company profitable, or even save it at this point because of all the debt,” said Spiegel. “The company seems to require more than $4 billion a year, and that’s without building a second factory to make the Model Y, or a truck.”
Expiring Tax Credits
Spiegel also thinks Tesla is on shaky ground because of the $7,500 federal tax credit that buyers of electric vehicles can receive.
That tax credit has limits. It’s available to the first 200,000 U.S. Tesla buyers, as is the case with other electric-car manufacturers. Upon meeting the 200,000 threshold, the credit begins to gradually wind down over the next several quarters.
Tesla should hit the 200,000 limit this year. That would effectively raise prices for buyers of Tesla vehicles. General Motors is also nearing its limit, but new providers of electric vehicles will have the full $7,500 credit.
Yet, as Erickson notes, Musk has come out on top many times.
“It would be foolish to count him out at this stage of the game given all that he has been able to accomplish to date,” he said.
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