Tesla Sparks Fresh Cash Concerns After Model 3 Rollout Stumbles

  • Production delays may prompt Musk’s return to capital markets
  • Carmaker has burned through $2.6 billion in two quarters

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Tesla Inc.’s delay in getting mass production going is increasing the likelihood that Chief Executive Officer Elon Musk will need to turn to Wall Street for more capital.

With battery bottlenecks holding up output of the cheaper new Model 3 sedan, Tesla may need more funds in 2018. While Musk has brought in more than $3 billion this year from equity, convertible bond and debt offerings, his electric-car maker has burned through about $2.6 billion in cash during just the last two quarters.

“We worry that another capital raise may be necessary,” Toni Sacconaghi, a Sanford C. Bernstein & Co. analyst, wrote in a report to clients. He estimates Tesla will have burned through more than $10 billion in cash by year-end since its founding and that it may be the biggest public company ever to have never generated annual profit or positive cash flow.

So far, Musk has been welcomed warmly when he’s gone looking for money. After tapping the equity market eight times in seven years to fund Tesla’s growth, the carmaker raised $1.8 billion in its debut junk bond sale in August at a record low coupon for a bond of its rating and maturity. Tesla’s shares climbed 40 percent this year through Thursday’s close.

But the longer Tesla struggles to get production in gear for the $35,000 Model 3 sedan, the likelier it is the company will be testing investors’ patience. The stock has traded at the lowest intraday level in six months late this week after the company pushed back its 5,000-per-week target for Model 3 output. Musk also shied away from a projection made three months ago that Tesla would be able to build 10,000 units per week at some point in 2018.

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‘Dose of Reality’

“There is a dose of reality for Tesla and the market’s reaction is reflecting that,” said David Kudla, chief executive officer of Mainstay Capital Management LLC. “This raises the question: Can they ever get positive cash flow? Will they ever get there?”

While Tesla exited the third quarter with about $3.5 billion cash in hand, the company is pouring money into its assembly lines and toward the buildup of battery production it needs to deliver more cars and bring in cash.

A Tesla Model 3

Photographer: Troy Harvey/Bloomberg

Tesla forecast $1 billion in capital expenditures during the fourth quarter, roughly in line with its spending in the third quarter. Next year, total outlays will be comparable to 2017 levels, Musk told analysts Wednesday on a conference call.

Analysts at Cowen & Co. and CreditSights Inc. said Tesla may return to the capital markets as soon as early next year. Timing will be critical, as investors are unlikely to be sympathetic if production levels are not up to speed, CreditSights senior analyst Hitin Anand said.

“They’re not in the position to ask for much more and get good pricing execution before the first quarter,” said Anand, who has an underperform rating on Tesla’s bonds. “There’s a bit more of a ‘show me’ force expectation from the bond market.”

Production Hell

Musk didn’t say anything about needing more cash during the earnings call. Tesla Chief Financial Office Deepak Ahuja said that the delays will not have a big financial impact in part because Tesla buys parts and materials and pays suppliers back much later on. So long as Tesla gets out of what Musk called “production hell” and gets to 5,000 cars a week by the end of the first quarter, the impact will be minimal, Musk said.

Not everyone thinks Tesla will need more cash. Robert W Baird & Co. analyst Ben Kallo doesn’t see the company needing additional funds for the Model 3 ramp up and said Tesla has been disciplined with capital expenditures toward charging stations and service centers. Consumers Edge Research analyst Jamie Albertine agreed Tesla won’t need to raise money, barring any “further hiccups or delays that may require further attention.”

If Tesla does ultimately need to raise more funds, it’ll come at a cost, said Kudla, the fund manager.

“At some point, you have to look at the fundamentals,” he said. “They can raise more money, but the cost of that capital will get higher and higher.”

— With assistance by Molly Smith

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