Tesla keeps finding ways to keep Wall Street happy, and cash in the bank

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Tesla keeps finding ways to keep Wall Street happy, and cash in the bank

In business, hitting your numbers is a fickle thing. For Tesla, one thing is sure: there’s a way to get there just when it seems like Wall Street is ready to give up on you. Tesla has turned a profit only two quarters since it went public more than eight years ago. Each time it has scraped by with a profit of less than $25 million. It managed to bring its numbers over the finish line with around-the-clock productions sprints, deferred spending, and selling credits for zero-emission vehicle programs. Afterwards, of course, it has resumed its cash burning habit, topping more than $1 billion per quarter on average since 2017, most of it for equipment and facilities.

There’s nothing wrong with a company pulling out the stops to fortify its finances. Yet nature of these maneuvers underlies the vulnerability of Tesla’s position as it struggles to turn consistent profits. Its strategy of delivering impressive products months late, and over budget, has worked well as long as investors have been willing to fund Tesla’s losses. Yet the company has always pulled through by slogging through “production hell” or securing almost $1 billion of what in effect are no-interest loans from the 450,000 or so people willing to put down deposits on a Tesla. If credit markets freeze or Tesla is hit with an expensive recall, the carmaker could face a severe cash crunch, plummeting share price, and—potentially—bankruptcy. Eventually it can’t get by on window dressing. It’s going to need to be a manufacturer that can deliver cars and profits consistently.

Yet CEO Elon Musk is adamant about his company’s bright financial prospects. Following predictions (paywall) in March by investment bank Jefferies and credit rating firm Moody’s that the company would be forced back to raise as much as $3 billion this year, Musk tweeted on Apr. 12. “Tesla will be profitable & cash flow+ in Q3 & Q4, so obv[iously] no need to raise money.”

The most recent effort to shore up its finances has been to lean on its auto parts suppliers. On July 22, the Wall Street Journal reported (paywall) Tesla sent letters to suppliers asking for discounts on future work, and even cash for work already paid for as far back as 2016. The memo framed the move as a way to support Tesla’s financial health and the growth of both parties. Although carmakers and suppliers often arrange for discounts and favorable financing arrangements, one manufacturing consultant quoted by the Journal called Tesla’s effort “desperate.” Musk later clarified in a tweet that it would not apply any historical cost savings to the current quarter, and was only looking to extend its leverage from its growing Model 3 production.

Before this, Tesla has turned to zero-emission vehicle (ZEV) credits to bolster its books. California and other states require carmakers to produce a certain number of vehicles that emit no greenhouse gas emissions. Carmakers who exceed their quota can then sell those ZEV credits to others. Tesla’s all-electric vehicles means it has hundreds of millions in dollars of such credits to sell. Over the last five years, it has sold them at opportune times to burnish its image on Wall Street, or at least mitigate losses that would be even deeper. Those sales have boosted earnings performance at key times for the company, helping deliver profits in 2014, and soften the company’s mounting losses in recent years.

Production sprints at the end quarters have given the appearance of steadily ramping up production, even when the manufacturing pace hasn’t always proved sustainable in the short-term. Earlier this April, Tesla approached its target of producing 2,500 Model 3s per week by moving workers from positions on the Model S and Model X assembly lines, but production fell afterwards. It repeated this feat on July 2 to meet its goal of building 5,000 Model 3s over the prior seven days (it made 5,031) using expensive overtime and weekend shifts. Tesla still has to prove it can maintain its numbers this time.

Cash deposits have proved a reliable source of what are in effect interest-free loans: almost $1 billion as of the end of last quarter. The Model 3 raked in about $400 million in initial deposits. Tesla is now offering 1,000 reservations for Founder’s Series Roadsters. If all the reservations (with no delivery date promised) are snapped up at $250,000 per piece, that will be a $250 million cash influx for Tesla, more than its 2010 IPO. Buyers can place deposits for the standard Roadster ($50,000) and the Semi ($5,000) as well. While not counted as revenue until a vehicle is sold, the cash can still be put to work and is merely represented as a liability on Tesla’s balance sheet without special protection in the case of bankruptcy. “You understand that we will not hold your Reservation Payment separately or in an escrow or trust fund or pay any interest on your Reservation Payment,” states the Model 3 reservation agreement (pdf).

Tesla’s strategy has worked. Each time it has eked out just enough cash to reassure Wall Street, raise more, and move on to the next goal, even if the next car arrive months late and pricier than expected (there’s still no sign of the promised $35,000 Model 3 as Tesla prioritizes more profitable configurations).

Whether Tesla can continue in this way is debatable. Wall Street analysts at Instinet estimate Tesla will see its cash pile decline $750 million to $1.9 billion. That’s leaves precious little cash on hand as the company is losing about $700 million each quarter. Even after Musk has pared back capital expenditures, and slashesd Tesla’s workforce by 9%, it will depend on cash from Model 3s, or another equity raise, to survive. Compounding the problem is Tesla’s looming interest payments: $230 million will come due in November, followed by $920 million in March next year. Overall, it owes $10 billion (paywall) in long-term and convertible debt. “Based on the current liquidity position and expected cash burn,” states Moody’s, “Tesla will need to access meaningful additional capital over the near term, and into 2019 as well.”

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