Autos

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Coming back from a long weekend is bad enough without having to contend with a to-do list as long as your arm. And Tesla's is considerably longer than that.

During the second half of the year, Tesla Motors must, among other things:

  • Deliver more cars than it did in all of 2015
  • Start producing battery cells at its giant Gigafactory facility in Nevada
  • Continue accelerating development of the Model 3 toward the company's 2018 target of selling half a million vehicles -- roughly 10 times 2015's total
  • Deal with the fallout -- and regulatory investigation -- into May's fatal crash involving a Model S using the semi-autonomous Autopilot feature
  • Convince shareholders that it makes sense to buy SolarCity

Ambition has never been in short supply at Tesla. Indeed, announcing grand plans and teasing new products have been central to regular fundraising efforts. Back in May, the company sold $2.3 billion worth of new shares -- contrary to guidance given three months earlier -- on the basis that it needed the money to bring forward its annual sales target of 500,000 vehicles by two years (to 2018 from 2020).

Half-Time Report
Source: Bloomberg

Above all else, Tesla's critical advantage is its ability to keep the faith of investors until that day comes when it transforms into a self-funding, mass car manufacturer. That's why the past two weeks or so have made the next six months so important.

Tesla packed more into the weekend just gone by than most. On Thursday, it announced that investigation by the NHTSA into May's fatal accident. Then, on Sunday -- when you were all surely clicking refresh on Tesla's website -- the company said it had missed its sales guidance, delivering slightly less than 14,400 vehicles in the second quarter rather than the 17,000 or so expected.

Tesla said 5,150 vehicles were in transit at the end of June and that it was ramping up production rapidly. So it might just make its full-year guidance -- sort of. The promise of "about 50,000" deliveries in the second half implies a full-year total of about 80,000, the bottom of the range Tesla has been touting.

The Need For Speed
Tesla has to reverse falling deliveries, and then some, to meet even the low end of earlier guidance for 2016
Source: the company
Note: Figures for 3Q and 4Q 2016 are implied by a full-year target of 80,000 deliveries.

Tesla dropped 3 percent when trading resumed on Tuesday, but its investors are used to missed targets.

What's different, though, is the context. If it wasn't obvious already that getting from 50,000 vehicles to 500,000 vehicles -- running on electricity and sporting autonomous-driving features -- in the space of three years is something of a challenge, then news of May's fatal accident should serve as a reminder. Quite apart from anything else, designing, making and potentially recalling cars is an expensive business.

Tesla's cash burn already runs to about half a billion dollars per quarter. Adjusted for May's stock sale, Tesla is carrying net cash of almost $600 million, or about one quarter's worth. Analyst estimates for free cash flow, as compiled by Bloomberg, imply that by the end of 2016, net debt could be just over $400 million -- which looks more than manageable. The problem? Since Tesla began to seriously jack up its spending in 2013, analysts have seriously underestimated its talent for burning cash.

Catch Me If You Can
Tesla's free cash flow deficit in 2015 was 5 times what analysts had expected at the start of the year
Source: Bloomberg
Note: Starting forecast shows analyst consensus as of Jan. 1 of each year.

Current forecasts already look suspect. For example, they imply Tesla swinging to several hundred million of positive operating cash flow per quarter over the rest of the year from a negative $250 million in the first quarter. The company hasn't reported a positive operating cash flow figure for a quarter since early 2014. By the time 2017 kicks off, Tesla's net debt could be much bigger than current forecasts imply.

In fact, it could be much, much bigger if Tesla ends up owning SolarCity, which was carrying $2.9 billion at the end of the first quarter and has a similarly voracious appetite for capital.

Apart from the absolute dollars of debt taken on, the bigger problem with Tesla's play for SolarCity is that it looks like a bailout for another company involving Elon Musk rather than a sensible strategic deal (Musk dismisses the idea, but see this for my take). And for Tesla's shareholders, who must vote on whether to approve the deal, the impact so far has been to cut their company's valuation by much more than the market capitalization of the company being bought.

If they vote no, it would be a victory for governance and common sense. Yet, it would also carry fallout of its own given the vital role that faith in Musk's vision plays in furthering Tesla's ambitions. Come December, Tesla could find itself contemplating another share sale in the not-too-distant future -- even as confidence in its vision has faltered.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net