Throughout 2018, Tesla Inc. TSLA refused to raise capital. During earnings calls, CEO Elon Musk repeatedly repudiated the notion the company needed a capital injection, insisting it could fund its growth initiatives through internally generated cash flow alone. The punishing loss in the first quarter of 2019 has apparently changed his mind.
Collapse of the growth story
Most Tesla investors and observers were prepared for the company to go red after two straight quarters of profitability in the second-half of 2018. Early in the year, Musk had said to expect a “small loss” resulting from a stretched cash conversion cycle as Tesla’s Model 3 sedan rolled out in European markets. As it turned out, there was nothing small about it: a $702 million GAAP net loss more than erased the gains of the two preceding quarters combined. As we discussed in a recent research note, this loss effectively killed the Tesla growth narrative:
“Demand has not simply plateaued; it has fallen off a cliff. Model 3 leasing, announced this month, may help to firm up demand for a little while, but it cannot solve the broader secular decline. Despite Musk’s protestations to the contrary, it looks like weak demand is here to stay. Tesla cannot sell its current vehicle lineup profitably on a sustainable basis. As tax credits expire and new competitors enter the electric vehicle market, Tesla will face increasing pressure to cut prices again, further diminishing its margins. Meanwhile, it is rapidly burning through cash just to keep the lights on.”
Musk has tried to pass off the first-quarter disaster as a fluke, but few analysts have bought this story. With April delivery estimates showing little sign of improvement from last quarter, Tesla’s growth narrative remains on life support.
Shoring up the balance sheet
After the massive first-quarter loss, and with another loss expected this quarter, Tesla was clearly badly in need of cash. According to Moody’s, this latest capital raise will help Tesla cover looming expenses:
“Tesla’s offering of $2 billion in common stock and convertible notes is credit positive as it will boost the company’s liquidity profile by taking its cash position to over $4 billion. This will provide Tesla with adequate capacity to: 1) repay the November maturity of $566 million of outstanding convertible notes, 2) fund the cash requirements arising from the expansion of Model 3 shipments into Europe, and 3) cover the cash burn that might result from any softening demand for the Models 3, S and X in the U.S.”
The capital raise may be credit positive (most are, after all), but it will do little more than staunch the bleeding at Tesla. Indeed, as Charley Grant of The Wall Street Journal has pointed out, the $2.3 billion is barely enough to cover the company's yawning working capital deficit.
While $2.3 billion is hardly pocket change, it is woefully insufficient to meet Tesla’s capital needs. Even if the company could break even financially from its regular operations, it would needs billions more just to cover necessary investments in service and charging infrastructure, let alone investments in promised new models such as the Semi, Model Y and Roadster. With more losses looming, Tesla’s latest capital barely moves the needle in terms of its long-term financial viability.
Verdict
Despite it being abundantly clear, even to bullish analysts, that internally generated cash flow would never be enough to meet Tesla’s growth needs, Musk continued to refuse to tap capital markets. He could have raised in late 2018, when the stock was touching all-time highs. He could have raised after delivering two consecutive profitable quarters. Instead, it took a catastrophic loss to finally force him to give in to financial reality.
Musk’s staunch refusal to raise capital has been one of the most perplexing mysteries confronting Tesla analysts. That mystery has been answered. It is now clear he allowed hubris to get the best of him. He wouldn't acknowledge the reality of Tesla’s demand cliff until it had already driven over the side.
With the demand story in ruins, Musk has decided to try his hand at another bit of financial necromancy. He is now pinning his hopes on autonomous vehicle technology to resurrect the Tesla growth narrative. But the hope of rebranding Tesla as a mobility company is doomed to come to naught. Musk’s wild claims of achieving Level 5 autonomy have only served to earn him the derision of experts. The notion the company will have fully autonomous vehicles in operation by the end of 2020 is pure fantasy.
Ultimately, this latest capital raise will do little more than restore Tesla’s balance sheet to temporary order. The losses will continue as demand deteriorates in the face of diminishing tax credits and rising competition.
Disclosure: Author is short TSLA via long-dated put options.
Read more here:
- Uber IPO: A Fantasy Valuation Promising a Fantastical Future
- Can Berkshire Hathaway Get Its Mojo Back?
- The Tesla Growth Story Is Dead
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