Tesla Now Delivering Model S, But Cash Crunch Judgment Waits For Financials

January 11, 2013

One hurdle down: Tesla is now delivering production Model S electric cars to paying customers from its reservations list of 18,000 or so.

Next hurdle: Can Tesla Motors [NSDQ:TSLA] bring in enough cash from those sales, and ramp up production fast enough, to keep the company solvent?

It would appear the market thinks so, as Tesla stock has risen over the last six weeks from less than $28 a share to more than $32 a share.

MarketWatch analyst pessimistic

Nonetheless, a spate of recent articles have quoted MarketWatch financial analyst Jon Shinal suggesting that Tesla is "among the top candidates in Silicon Valley for a 2013 stock collapse" unless it secures additional funds.

Shinal noted on December 20 that Tesla spent down its cash through the third quarter of 2012, and would have been essentially out of money had it not drawn on the last of its $465 million in low-interest loans from the U.S. Department of Energy.

He notes that it had to lower its 2012 revenue forecasts in September, and had less than six months of cash on hand at the end of that month. And that Tesla's assets of $809 million were outweighed by its liabilities of $837 million.

That stands to reason, of course: Tesla had just spent two years completing development of the 2012 Model S, and equipping its Fremont, California, assembly plant to build the car in volume.

And that all costs money.

'Cash flow positive' tweet

Tesla's Elon Musk tweeted on December 3 that the company had been "narrowly cash flow positive" the previous week. He hasn't repeated that tweet in any successive weeks.

The salient question is now: Can Tesla ramp up production quickly enough, and garner sufficient margin on each early Model S it sells, to keep the lights on, the vendors paid, and the production lines humming?

Tesla Motors isn't talking about its financials, and won't until it reports to shareholders on its year-end results--likely sometime in February.

Analysts will pore over those figures to see if the company achieved its revenue projections--the midpoint of the range was $420 million--and whether it did actually deliver 3,000 or more cars.

But it's clear that the company is working hard to do everything it can to boost revenue and cut expenses.

High-dollar models first

With perhaps 3,000 Model S cars delivered by Dec 31--roughly in line with its September statement that it would deliver 2,700 to 3,225 cars, though down from its first 2012 estimate of 5,000 cars--the company says it's now building 200 cars a week or more.

And those cars have all been the most expensive models with the 85-kilowatt-hour battery packs, which means Tesla is building the Model S variants that earn it the most cash first.

That's led to some frustration among reservation holders for the 60-kWh version, which has now been EPA-certified at 208 miles of electric range.

But discussions on stock forums like SeekingAlpha offer the views of both investors bullish on Tesla stock and those who've shorted it.

Bulls vs bears

Often, the optimists focus more on the company's achievements, awards, and largely satisfied customers (much of that covered on this site).

The pessimists, on the other hand, look more closely at the financials.

There's a nice roundup of the arguments on each side in a piece called "Is Tesla A Buy, A Short, Or A Stay-Away?"

A December article, "When Will the Tesla Investment Unravel?", notes that as of December 17, the seven preceding articles on the company had been favorable--indicating that sentiment among the site's authors and readers had shifted from bearish to bullish.

But one point made last week is worth considering.

Success priced in already?

In "History And Valuation Make Cash-Guzzling Tesla A Short" author Sneha Shah suggests that the stock price pretty much assumes that the company is already a success.

The car business is historically highly capital intensive, Shah notes, with very long product cycles and low profit margins of 2 to 5 percent.

We'd add that building cars is not only breathtakingly expensive, it's also very, very hard to do right. That's why it usually takes new car companies 10 to 20 years to learn how to design and build cars to global standards.

Today, speculation on whether Tesla is in the midst of a cash crunch is relatively pointless.

No analyses can assess the company's situation as of mid-January, because Tesla has not released data since September on production, sales, revenues, expenses, or average transaction price and cost basis per car sold.

All public financial data is now more than three months old, and Tesla now appears to be building hundreds of cars a week, whereas on September 30, it obviously wasn't.

Wait for February

So, Tesla could be perilously close to a cash crunch, or it could now be covering each week's outflow with revenue from cars delivered.

And analysts will only be able to weigh in on whether the company is headed toward financial sustainability once they see that data--and likely that of several more quarters as well.

After all, while achieving something few thought could be done--building a fast, stylish, comfortable, all-electric luxury sedan--is a remarkable achievement, it's a separate accomplishment from doing so profitably and generating enough cash to fund expansion and new models.

One encouraging sign: So far, no major quality issues with the Model S cars delivered to date appear to have surfaced. A few owners report that their car would not release the charging cable, but the problem seems to be limited.

Tesla still tiny

Finally, note that Tesla's market capitalization of roughly $4 billion would still be a drop in the bucket if a major global automaker wanted to buy the company.

That $4 billion is less than half the annual R&D budget of a Toyota or Volkswagen or General Motors.

While Tesla Motors has already done remarkable things, it is still a tiny company by global automaking standards.

Which means that if it survives a near-term cash crunch--or even if it doesn't--it may be coveted by one of those global makers.

Is pessimism warranted?

Sinal is clearly negative, saying Tesla's stock "in worse shape even than such high-profile Internet IPO flameouts as [online game developer] Zynga and [social group-couponing company] Groupon." Others disagree, clearly.

What do you think? Is Tesla Motors stock a sensible investment for the short term? Long term? Will the company survive?

Leave us your thoughts in the Comments below (and, please, stay respectful).

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(c) 2013, High Gear Media.

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