- NTB Scanpix/Heiko Junge/via REUTERS
- After two profitable quarters in a row, Tesla is once again in financial trouble.
- The company has guided down first quarter expectations, and analysts are worried about margins on the new Model 3.
- Plus, the company has taken on more debt and has a $566 million bill to pay in November.
Just over a month after Tesla CEO Elon Musk told investors that the company would be profitable going forward, its finances are once again the subject of Wall Street’s most intense scrutiny. Tesla skeptics see blood in the water, while the company’s supporters (still optimistic for the long term) have resigned themselves to yet another nail-biter of a year.
Of course, Wall Street being what it is, all this inevitably meant there would be a gentleman’s wager (for charity, of course). And so there was.
“If Tesla reports even one profitable quarter in 2019 (defined as ‘Net income (loss) attributable to common stockholders’ from the 10Q/10K above zero), I will make a donation in the amount of your wager to a charity of your choice,” investor Whitney Tilson wrote in an email to clients and friends. (If you took this bet, feel free to reach out to this correspondent at email@example.com.)
In 2018, it achieved a somewhat steady (though below promised) production of the Model 3, its lower-priced sedan that was supposed to bring electric vehicles to the everyman. The company had two consecutive quarters of profitability for the first time in its history (third quarter and fourth quarter). And in March, it defied its critics and paid off a $920 million loan.
The good times did not last.
At the end of February, Musk shocked the Street when he announced that, to sell the standard Model 3 at about $35,000, it would have to close many of its stores and sell cars mainly online. To analysts all over Wall Street, that was a distress signal.
And looking forward through 2019, it’s unclear who or what could come to Tesla’s rescue.
Questionable margins, questionable demand
“International deliveries have begun and are not progressing without some delays; when combined with our expectation that Model S/Model X deliveries disappoint (we lower our 1Q19 delivery forecast), we now expect a meaningful working capital headwind in 1Q19 – and for quarter-ending cash to come closer to the $2bn mark,” the Goldman Sachs analyst David Tamberrino wrote in a note to clients on Wednesday.
It sounds like a lot, but Tesla has some hefty bills to pay and plans to execute. The company needs about $1 billion to $1.5 billion to just run itself, according to analysts. That means having cash come in as soon as possible is paramount.
The company’s recent moves have some worried. For even the most optimistic analysts, Tesla’s rush to the standard Model 3 and move to online sales was a sign that demand for higher-priced, higher-margin versions of the car was all but spent. Over at the investment bank Cowen, the analyst Jeff Osborne called the move a ‘”Hail Mary” and said he also saw it as a sign that Tesla was unsuccessful at reducing Model 3 production costs.
It’s unclear what kind of margins (or loss) Tesla is making by speeding up the release of the standard Model 3. Musk was adamant about not answering questions about that in a call with reporters earlier this month. More optimistic analysts, such as Emmanuel Rosner at Deutsche Bank, say that Tesla’s cost-cutting effort will still result in a 25% margin by the end of the year.
“We believe Tesla management has a reasonably good handle on its cost trajectory, so whether Tesla can indeed achieve its 25% gross margin target before the end of this year may largely depend on the trim mix of Model 3 demand,” Rosner told Business Insider in an email.
In other words, if people trick out their standard Model 3s with extras, Tesla might be able to make its margins. If not, who knows.
In the meantime, we know there isn’t a lot of cash coming in at the moment. Musk went back on his promise to continue the company’s profitability and told shareholders that the first quarter would not be profitable. Musk said this was a result of one-time charges and challenges of getting cars delivered to China and Europe.
It’s all in the timing
So maybe 2019 is a soft year for Tesla- so what? It’s just one year. Plus, auto sales around the world are declining, so everyone is in trouble. US sales saw their worst February since 2015, and even sales in China are contracting. Every carmaker is going to feel the burn – this is why GM keep tens of billions in cash on their balance sheet. Cars are a cyclical business.
In contrast, Tesla is entering this downturn without much of a cushion to speak of.
According to government filings, Tesla just raised about $520 million from a syndicate of Chinese state banks in order to build a third Gigafactory in Shanghai. The funds can be used only to build the Shanghai factory, and the loan will mature on March 4, 2020. That means Tesla has a short time to turn this factory, and this money, around.
In the same filing, Tesla told investors that it added another $500 million to an asset-backed revolving credit facility it has with Deutsche Bank. It extended the maturity date for that now $2.42 billion loan to July 1, 2023.
So just as Tesla paid its $920 million loan on March 1, it added another $1 billion in debt to its balance sheet.
In November, Tesla has another big bill to pay, too – $566 million worth of convertible debt related to the company’s takeover of SolarCity in 2014. The price at which this debt converts into stock is $759.36 – a price the stock has no hope of touching where it sits now at about $275. So Tesla will have to pay this bill in cash.
A Tesla spokesperson said the company does not “expect any changes in our ability to service debt obligations.” Moody’s, on the other hand, published a recent note that described Tesla’s credit profile as “strained” because of “ongoing operational missed steps and strategy reversals over a short time period.”
The proof of Moody’s point is in the numbers. From year to year, the company’s expenses have ballooned beyond what it has been projecting. This is important to note as it plans to begin manufacturing Model 3s in China before the year is out and Model Ys in the US in 2020.
Here’s how Tesla’s projections have played out over the 2 years:
- Tesla’s 2017 annual report projected contractual obligations of $5.6 billion in 2019.
- Tesla’s 2018 annual report, however, projected contractual obligations of $8.1 billion in 2019.
The majority of that $8.1 billion comes from purchase obligations, here’s how those projections fared:
- In 2017, the company projected that 2019’s purchase obligations would come to about $2.7 billion.
- In 2018, that number exploded to $4.8 billion.
This is an indication that the Model 3 has been more expensive to build than Tesla thought. In its filings, Tesla said that purchase obligations include “any additional amounts we may have to pay vendors if we do not meet certain minimum purchase obligations.”
On Thursday, Tesla rolled out the Model Y, a crossover SUV built from the Model 3 platform. Tesla said the two cars share 70% of parts (something the company tried and failed to achieve with the Model S and Model X, which share less than a third of their parts). Tesla reportedly also has yet to figure out exactly where it’s going to build the Model Y, which is scheduled for production in 2020.
Gene Munster of venture-capital firm Loup Ventures said reservations for the Model Y won’t impress, coming in much lower than the Model 3’s 325,000 reservations in a week. He estimates there will be about 175,000 Model Y reservations two weeks after its unveiling. This is considering the fact that Model Y production is a year and a half away and lots of die-hard Tesla fans got a Model 3.
In fact, cannibalization is on more than a few people’s minds.
“In our view, the recent announcement by Tesla of its upcoming Model Y unveiling event was perceived negatively by the market, partly due to concerns that Model Y could cannibalize current Model 3 sales given the general industry shift from sedans to trucks/SUVs,” Rosner told Business Insider before the unveiling. “Therefore, any announcement by Tesla that addresses these concerns could be positive for the stock.”
But they were not addressed at Thursday’s unveiling, and on Friday when the market opened Tesla’s stock was down almost 4%.