The bull case on Tesla (TSLA, Financial) is that it is not merely an auto manufacturer but a revolutionary technology company that will change the way we live. Indeed, the company recently changed its name from Tesla Motors Inc. to just Tesla Inc and in its latest 10-K claims to be much more than just a car manufacturer:
We design, develop, manufacture and sell high-performance fully electric vehicles and energy storage systems as well as install, operate and maintain solar and energy storage products. We are the world’s only vertically integrated energy company, offering end-to-end clean energy products including generation, storage and consumption. We have established a global network of vehicle stores, service centers and Supercharger stations to accelerate the widespread adoption of our products. Our vehicles, engineering expertise across multiple products and systems, intense focus to accelerate the world's transition to sustainable transport, and business model differentiate us from other manufacturers.
The problem is that Tesla does not resemble a world-changing disruptor or an innovative tech company. Tesla instead looks like a regular automotive manufacturer in a deeply competitive, capital-intensive business.
Tesla is a cash incinerator
Looking at Tesla’s financials compared to two other relatively new world-changing tech companies shows just how stark a contrast there is. We looked at how Tesla looks at this point in its life cycle compared to a similar point in Facebook (FB, Financial) and Amazon’s (AMZN, Financial) life cycles.
Facebook was founded in 2004 and went public in 2012. We have financial data for the company from back as far as fiscal 2007 from its S-1 filing. Amazon was founded in 1994 and went live online in 1995 (so we will consider that its start date). In order to do an apples-to-apples type comparison we looked at which periods of time had the most overlap for the dataset we had. We used an eight-year period beginning five years after the company was started. This gave us the maximum amount of data to use in our comparison and takes us right up to the end of Tesla’s current fiscal year.
The two charts below show the operating cash flow, capital expenditures (excluding capitalized leases) and free cash flow (defined as operating cash flow less capital expenditures excluding capitalized leases) for Facebook and Amazon.
As you can see both companies were generating substantial amounts of cash flow from operations soon after they were founded. Facebook was cash flow positive by year five and Amazon generated positive operating cash flow in 1998 and then again by 2002.
Even more importantly, five years after their founding, both companies were able to easily support their capital expenditure requirements from operating cash flow. Now contrast this with Tesla. After five years in business Tesla is still burning cash. With the exception of one year in 2013, the company generated operating losses every single year.
Take a look at how Tesla’s last eight years compare to Facebook and Amazon.
In the eight years following the fifth year of their founding Facebook and Amazon generated $29.6 billion and $1.1 billion of free cash flow. By contrast Tesla consumed $11.4 billion of cash. The company isn’t just using a little cash; it’s burning through an astonishing amount.
If Tesla truly was a game-changing disruptor investors would expect its financial to look similar to other wildly successful companies. Instead it looks almost the exact opposite. Thirteen years after its founding Tesla is still unable to fund its own growth.
Summary
Is Tesla an innovative company? Sure. But it’s an innovative company in an intensely competitive industry that requires massive capital expenditures and generates paltry free cash flow margins. Just look at an established player like Ford (F, Financial).
(graphic via Morningstar.com, highlights ours)
Ford free cash flow margins are barely able to climb out of the single digits even in the post-recession auto sales boom. Based on its financial path to date Tesla looks more on track to become another Ford than it does a true disrupter such Facebook or Amazon.
Disclosure: No positions.
Start a free seven-day trial of Premium Membership to GuruFocus.
