Analyzing The Cash Burn of Tesla Motors Inc (NASDAQ:TSLA) — Will More Capital Be Necessary?
Tesla Motors Inc (NASDAQ: TSLA)’s cash burn during the first quarter this year stood at $558 million compared to expected $300 to $350 million. Tesla has seen negative cash flow from operations for the last four quarters. The automaker is facing criticism on account of its inability to achieve operational efficiencies and timely launch of new vehicles, despite aggressive capital expenditures. However, Tesla’s management indicated significant progress towards ramping up production capacity and development of the Model X. The company expects positive cash flows by fourth quarter this year.
Reasons for this “eye watering” cash burn
While Tesla is compelled to invest in production capacity to achieve economies of scale, it is stretched towards investing in development of the Model X. Further, the company aims for a fully functional Gigafactory by 2016. Deteriorating operating cash flow causes further concern regarding the firm’s ability to maintain sufficient liquidity for operations.
Morgan Stanley—a known Tesla bull—called the cash burn “eye watering” and reduced its price target for the automaker to $280, from $320 earlier this year. The management is expecting a capital expenditure budget of $1.5 billion for 2015. Without external capital infusion, the firm’s liquidity hinges on the timely launch of the Model X and Gigafactory while ramping up production capacity to meet the demand for its flagship Model S and its latest variant S70D.
Deepak Ahuja, Tesla’s Chief Financial Officer attributed Model X development as the largest component of capital expenditure during the first quarter this year. As Tesla gears up for the launch of Model X during the second half of the year, the second quarter will put further pressure on its cash flows.
Will more capital be necessary?
The company entered 2015 with $1.90 billion in cash and equivalents; however, $1.50 billion is where its cash pile stands after three months into the year. The company will exhaust this cash in three quarters at the current rate without any capital infusion.
Tesla has raised capital in every financial year since it became a publicly traded company. However, its conventional way of financing through issuing convertible debt seems increasingly implausible with long term debt rising over $3 billion—more than 40% higher year over year.
Interest expenses rose over 123%, to $26.60 million during the first quarter of 2015, compared with the first quarter last year. The management will use external financing as the last resort; however, to avoid an increased burden on the company’s cash flows, timely execution of their plans, along with favorable consumer response, is necessary.
With a sales target of 55,000 cars in 2015 and potential revenue of $150 million from services and battery sales, Tesla expects positive cash flow from operations by the fourth quarter this year. At current profit margins it appears that the company will not be able to fund its capital expenditure from those proceeds. Thus, it will not be surprising if the company issues convertible notes by the end of 2015.
How can Tesla become free cash flow positive?
Factors which can turn Tesla’s negative free cash flow to positive during 2016 and thereafter:
- Production capacity: Tesla—having produced 11,160 cars in the first 12 weeks of 2015, averaging 1,000 vehicles per production week—is aiming at production capacity of 2,000 vehicles per week by the end of this year. Elon Musk, Tesla’s Chief Executive Officer, is expecting to double the production rate at the Fremont plant. During its earnings call, Tesla indicated towards near completion of a new paint shop and body shop to provide extra production capacity to Model S and Model X vehicles. Greater economies of scale could improve the firm’s gross profit margin by 2%-4%. The Detroit reported Tesla’s intentions towards acquisition of Riviera Tool, a Michigan based supplier of stamping tooling. Acquiring Riviera will further reduce the cost of production for Tesla’s cars.
- Renewed demand for Model S: Tesla is targeting to sell 50,000 Model S and upgraded Model S70D vehicles during 2015. The company is expecting stronger demand for the car on account of hardware upgrades, such as additional auto-pilot features and all-wheel drive functionality. Bank of America Merrill Lynch analysts—recognizing Tesla bears with a price target of $65 for the company’s stock— criticized its Model S70 D launch on account of possible cannibalization of sales of expensive variants of the Model S. However, Tesla believes that the S70D launch will strengthen its position against other premium car brands, such as BMW and Audi.
- Model X launch: The already twice delayed launch of its crossover SUV—built on the Model S platform— is expected in the third quarter of 2015. Priced above $70,000, gross profit margin to the tune of 29% is anticipated on the Model X, compared to 24%-26% on the Model S. Tesla announced reservations for the Model X have exceeded 20,000, resulting in over $100 million cash inflows as it charges $5,000 for pre-order; however, the amount is refundable in case the customer retracts. Analysts expect Tesla to sell 3,000 to 5,000 cars in the second half of 2015, which will boost its revenues by $210 to $350 million for this year.
- Powerwall/Powerpack: Bloomberg estimated potential revenue of $800 million from battery products where utilities account for over three forths of that amount. For Powerwall battery systems the company has observed 38,000 reservations for retail customers while 2,500 for utilities. Tesla expects to begin production of a full range of batteries by 2016. This is unlikely to add to cash flow until mid-2016, at the earliest. Morgan Stanley analyst Adam Jonas has argued that the company’s batteries could end up being more disruptive than its cars, and said the company could be making up to $2 billion a year in additional revenue by the end of the decade from grid storage.
- Gigafactory: Timely launch of the $5 billion Nevada plant, the largest lithium-ion facility in the world, will reduce the cost of production for Tesla’s automotives and enable the company to meet staggering demand for its battery products, Powerwall and Powerpack. Tesla drew $22.0 million in revenue during the first quarter this year from sales of powertrain components to Daimler AG for its A-Class and B-Class electric vehicles. Toyota is sourcing full electric powertrain systems from Tesla for its electric vehicle the RAV4. Currently, Tesla has set priority on its cars on account of limited production capacity for the batteries; thus, battery systems won’t aid the cash flow at a significant level during 2015.
- Model 3 launch: With reduced battery cost and a ramped up production facility, a key component of its capital expenditure, the company aims to launch its first mass vehicle in 2017, priced around $35,000, named the Model 3, which is expected to increase the electric vehicle market substantially and become Tesla’s highest revenue generating model. Even the most conservative estimates are of over 500,000 car sales by 2024.
Tesla Motors Inc (NASDAQ: TSLA)’s stock settled at $248.35 on Tuesday, June 2nd 2015; registering 6.61% in gains since it declared the quarterly earnings on May 6, 2015. Tesla’s capability to increase the production rate and demand for the upcoming Model X will be a key catalysts which can rescue the company from its cash flow bottlenecks. Despite positive cash flows, it’s highly probable that Tesla opts for conventional or alternate ways of financing by the end of 2015 to fund its capital expenditures.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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- Analyzing The Cash Burn of Tesla Motors Inc (NASDAQ:TSLA) — Will More Capital Be Necessary? - June 3, 2015 05:33 AM PDT