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.

It looks like Elon Musk just canceled Thanksgiving and probably Christmas, too -- if you work at Tesla Inc., anyway.

The electric-vehicle-cum-battery-cum-solar-equipment company Musk heads reported third-quarter results on Wednesday evening. Tesla missed earnings forecasts by a mile. But that number, never a huge concern, mattered even less this time around. It's cash and cars -- specifically the somewhat more mass-market Model 3 -- that count.

First, cash: Having racked up its first quarter of burning through more than $1 billion of cash in the three months ending in June, Tesla topped that with $1.4 billion of negative free cash flow in the third quarter. In the past two quarters, therefore, Tesla has burned through more cash than the previous six combined.

More importantly, it has burned through roughly four out of every five of the $3.2 billion dollars it has raised since late March through selling new equity and convertible debt and its debut in the high-yield bond market.

The Engine
As Tesla's spending has accelerated this year, its balance sheet has taken all of the strain
Source: The company
Note: Simplified sources and uses of cash.

Consequently, debt has soared. Even just using debt with recourse to the company, on a net basis it has almost tripled since the start of the year to $3.36 billion.

This would matter less if the primary objective of sucking in most of that external funding -- mass production of the Model 3 -- was fast approaching. Instead, it has receded further.

When Musk first talked about production targets for the Model 3 in 2016, they implied Tesla would be producing roughly 3,800 to 7,600 a week in the second half of 2017. By July of this year, Musk was guiding toward production hitting about 5,000 a week by the end of December. I estimated at the time that this implied a second-half average of maybe 1,400 a week.

Now, Musk estimates production might hit 5,000 a week by the end of the first quarter of 2018. As for this year, it might be in "the thousands" by the time New Year's Eve rolls around. He refused to say what the current run rate was. But I would estimate Tesla will be lucky to produce 10,000 Model 3 vehicles in total this year, or an average of 400 a week for the second half -- roughly 5 to 10 percent of the original guidance. As for the earlier target of 10,000 a week in 2018 ...  

What we have brewing here is a credibility problem. This has lurked in the background for a while, with various missed targets on sales, capex or whatnot.

But the Model 3 is far more important than any of these because it is supposed to generate the vast majority of medium-term cash flows underpinning the valuation models supporting Tesla's high-flying stock; and it is the key test of the company's oft-touted manufacturing and design skill.

So when Musk demurred on giving a current production figure because "people read too much into it," he was rather missing the point. It matters that Tesla is struggling to get up its vaunted "S-curve" with its new car. Only a month ago, as Tesla unveiled weak production figures for the third quarter, the company made a point of insisting there were "no fundamental issues" at play.

Now, Musk is apparently sleeping on the roof of the Gigafactory in Nevada, and the company is reducing production of its Model S and X vehicles in the fourth quarter so it can redeploy them to getting production of the Model 3 going.

So Tesla's folks may have to forgo one or two turkey dinners this year to meet even much-reduced guidance. Musk insists these are all early challenges that will be solved and downplays the short-term shifts in the production schedule as being immaterial to the long-term value of the Model 3 and Tesla overall.

But the long term is really just an accumulation of short terms. And with Tesla now burning a billion dollars-plus per quarter, keeping the door open to capital markets and lenders is critical. Confidence about scaling up production of the Model 3 is the key to that door -- and it is slipping badly.

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

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

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net