If a company is running out of money fast, should you own its stock? That is the question facing Tesla investors. And with a Wall Street analyst forecasting that Tesla will burn through its cash in the next 12 months, the answer is of more than academic interest.
Before getting into that, let’s look at the last time I wrote about Tesla’s cash flow woes back in December 2016 when Mark Spiegel, founder of $9 million (assets under management) hedge fund Stanphyl Capital Partners suggested that setting the Model 3’s price at $35,000 could present cash flow troubles for Tesla. Spiegel presented his ideas about a year ago at the Robin Hood Investors Conference. He argued that Tesla was worth “zero” for three reasons:
“Horrible” financial results when it faced no direct competition but before Tesla must deal with “massive” competition — and he included press clippings of EV announcements from GM, Ford, BMW, Porsche, Audi, Jaguar and Mercedes among others to bolster that case
No proprietary technology (he noted that Panasonic made Tesla’s battery cells and would sell them to anybody) — with assets worth far less than its $6 billion in debt. Spiegel also pointed out that Samsung, LG, BYD, and others were competing in the battery market with Tesla). What’s more, Tesla faced significant competition in battery storage, autonomous vehicles, and fast-charging networks, argued Spiegel.
Betting on Elon Musk was unwise because he “has a long track record of making hugely misleading statements.” Spiegel then cited contradictions between Musk’s statements and reality on a number of statements including Musk’s 2012 claim that Tesla did not need more financing — before it went on to raise nearly $6 billion, and other claims about Tesla not discounting — which Spiegel contradicted with evidence.
Spiegel presented an unappealing analysis of Tesla’s financial performance — noting that it would be worse once SolarCity’s $2 billion in annual negative free cash flow was included. For example, he pointed out that Tesla would report negative free cash flow of $1.5 billion in the final quarter of 2016 due to normalizing payables that “ballooned” in the third quarter, adding in $1.1 billion in capital expenditures that were deferred into Q4 2016.
Add to that Spiegel’s assumptions about Tesla’s Zero-Emission Vehicle (ZEV) credit sales to other car manufacturers — which helped Tesla report a $22 million third quarter profit, according to the New York Times. Spiegel expected Tesla not to post any ZEV sales in the fourth quarter.
Since December 6, 2016 when I wrote that post, Tesla’s shares have soared 78% from $186 to $331. I am not sure how much money Spiegel lost assuming he bet that Tesla shares would go to zero. He was directionally correct about how much negative free cash flow Tesla would report in the fourth quarter — it was negative $1.1 billion instead of negative $1.5 billion. What’s more in the twelve months ending June 2017, Tesla produced a whopping negative $3.1 billion in negative free cash flow.
When Tesla reports its results November 1 — investors expect it to post a loss of $2.23 per share and $2.94 billion in revenue — Model 3 sales numbers and cash burn rate will be under the microscope. UBS’s Colin Langan noted that in the second quarter Tesla burned through a record $1.2 billion as it tried to produce the Model 3 and increase battery output. And in August Tesla tried to raise $1.8 billion through a bond offering, leaving it with $4.8 billion in cash.
Langan does not believe that Tesla’s fund raising can keep it from running out of cash in a year. He sees Tesla burning through $900 million in the third quarter of 2017 and needing to repay $1.4 billion in debt by the end of 2018. As Langan — who set a price target of $185 along with a sell rating wrote — “With limited Model 3 profitability, infrastructure expansion needs, and Model Y capacity build (late 2019), we believe Tesla will eventually need additional outside funding.”
Tesla is certainly having production problems. After all in October, it produced 26o Model 3s which was way below the 1,500 it had forecast for the month. Musk promised that by the end of 2017 Tesla would be producing 5,000 Model3s a week, according to Bloomberg, which expects Tesla to discuss its cash situation during the call.