Tesla Motors is 15 years old and it is still not profitable. Hyperbolic stock values have encouraged investors to keep showering Elon Musk and his crew with billions of dollars to keep the EV company afloat and develop new products, but now the Bloomberg news agency says that Tesla’s cash burn is severe enough to make the company insolvent this year if they don’t raise new capital, something made more difficult by a recent 24% decline in that stock’s value.
Reporters Dana Hull and Hannah Recht did a deep dive into Teslas finances, both where their money has come from and where it’s been going. They came up with some interesting data. The company is going through cash at the rate of about $6,500 a minute, a bit more than $9 million a day. Free cash flow has been in the red for over a year. That’s how much money a firm generates after subtracting capital expenses.
The company’s cash situation is closely related to employment levels. In just three years, from 2014 until last year, Tesla went from about 13,000 employees to more than three times that number and they are still looking to hire thousands more as they try to ramp up production on their Model 3. The Model 3 is unarguably vital to the company’s success.
As the payroll increased, and with sales relatively flat before the Model 3 finally started shipping, revenue per worker dropped. Musk has often spoken of showing Detroit how to do things, but GM and Ford each take in more than twice as much revenue per employee as Tesla does. In the 4th quarter of 2017, Tesla paid out as much in interest on its debt as General Motors did, with Tesla earning one tenth of the revenue of GM. The revenue per employee problem is exacerbated by what Musk himself called a “Russian nesting doll” of contractors and subcontractors at the California assembly and Nevada battery plants.
At the start of 2018, Tesla had $9.4 billion in debt and $3.4 billion in cash. Moody’s says that $1.2 billion of that debt has to be repaid next year and over and above that, to stay operating it will need another $2 billion this year.
Tesla claims that it won’t require additional financing this year, save for existing credit lines, but that’s contingent on the positive cash flow that would result in the company actually hitting 5,000 units per week production level on the Model 3, something it hasn’t yet proven it can do.
Jeff Osborne of Cowen & Co. doesn’t believe Tesla’s claims, since Musk has made similar statements in the past and then gone out to raise more cash. Osborne thinks Tesla is going to try to raise $3 billion with a stock sale late this year, and another $2 billion late next year, to cover cash burn and debt retirement while still keeping more than $1 billion in cash reserves. I don’t believe that figure would include the $854 million in (mostly Model 3) deposits, but it likely includes the substantial interest earned on what amounts to interest free loans to the company.
If Tesla does collapse, those deposit holders would not be the biggest losers. That would be Musk himself. He’s Tesla’s single biggest stockholder and if his current compensation package vests, he’ll own more than a 1/4 of the company.
TTAC founder Robert Farago was highly skeptical of Tesla’s chances for success and the Tesla Deathwatch series was a staple here before Robert retired it a decade ago, after readers asked him to lighten up on the negativity. In light of Bloomberg’s report, our editor emeritus’ final post in that series sounds a bit prescient.
I still believe Tesla doesn’t have a hope in Hell of staying in business. But it will take a while for that to play out.
I don’t think it’s time just yet to revive the Tesla Deathwatch, but maybe we should dust it off to have it ready just in case.