Why I have zero concerns about Tesla running out of cash

Discussion in 'Tesla Discussions' started by KarenRei, Mar 29, 2018.

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  1. KarenRei

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    #1 KarenRei, Mar 29, 2018
    Last edited: Mar 29, 2018
    As someone who bought Tesla stock for the first time yesterday:

    We all know the standard Seeking Alpha hype - we've been hearing it for years. Tesla is going to be imminently bankrupt! Any day now! Last summer they were were supposed to be going bankrupt this winter. Last fall they were supposed to be going bankrupt this spring. This winter the bankruptcy was supposed to be this summer. Get ready for the imminent fall bankruptcy sweeps.

    If I may be allowed to rain on their short-selling parade for a moment.

    1) Let's start with the part that they either ignore or choose not to believe: rising revenue. As Model 3 production ramps -and it is ramping - revenue increases. Negative margins on Model 3s turn into positive ones, and then increasingly positive ones. Even in a bad case, where the Grohmann line is a complete failure and it's back to the drawing board, and all they get is rate improvements from the stabilization of the newly parallelized zones , this significantly delays the "Doomsday". In a "as-intended" case, it completely reverses the situation. Tesla predicts that it will have its first sustainably-profitable quarter late this year. One can refuse to believe then and make "there's always delays with Tesla" arguments. Sure - Tesla is usually (although not always) too optimistic in the short-term. But that doesn't change the fact that even a "miss" pushes the cash crunch into the future, creating more time for said "hit".

    It's also worth pointing out that rising revenue doesn't just apply to Model 3; it applies to pretty much everything Tesla is involved in - energy, solar, etc. Tesla has been going through a capex-intensive phase in every regard recently, and has yet to significantly reap the fruits from that spend; this will increasingly change over the course of the year.

    2) I want to take a second to reiterate the elephant in the room, which is how spectacularly wrong the bears have been with their past bankruptcy calls. Let's see, how has Tesla's cash changed over the past five quarters?

    Q4 '17: $3,4B
    Q1 '18: $4,0B
    Q2 '18: $3,0B
    Q3 '18: $3,5B
    Q4 '18: $3,4B

    Does that look like the cash-on-hand trend of a company that's going bankrupt?

    Now, I bring this up in order to call out the inevitable counterpoint: "Yeah, but the methods they used to generate cash were one-time events!" This would be an excellent point, if only for one niggling detail: where were you talking about the possibility of cash raises from these one-time events before they happened? The bears preached bankruptcy, no way to raise cash except dilution, if even that - but then, once cash raises happened, it became, "Well, of course they could raise cash that way, but they're doomed now!" It's like listening to people saying that Nostradamus predicted the September 11th attacks - well, where were you on September 10th?

    3) I'm not going to go into various ways Tesla can raise cash internally, as I have no particular expertise in this regard; I simply wish to point out one glaring external detail: Elon Musk. A guy who is anything if not famous for going all-in, and who designed compensation for himself premised only on Tesla becoming huge. A few little reminders:

    A) Tesla is not the only company Elon runs.
    B) Tesla has previously used his companies as vehicles to bail out even family members' companies, let alone his own; and
    C) Most stakeholders in Elon's companies cheer him on in the process.

    SpaceX is on a roll. Falcon Heavy was a huge success. They're in the process of doing five (nearly six) launches in a single month right now. They're about to transition to Block 5 (first launch in a couple weeks), which after qualification will allow 10 launches without refurbishment between launches, and 100 or more with refurbishment. They've launched the first two test satellites for their potentially massively profitable constellation. And there's huge market interest to buy into SpaceX (and a lot of (hopeless) wishing for Musk to take it public).

    If Tesla needs cash? Gee, who wants to bet that SpaceX doesn't suddenly decide that they need a fleet of Semis and a megacharger route between Vandenberg and Canaveral? Bet they could use some big Powerpack backups to ensure that the cooling system for their LOX never goes out and to timeshift their power usage, couldn't they? Gee, engineering needs are unexpectedly high for a new support system for BFR, might as well contract it out to Tesla so they can stay focused on the rocket, no? Etc. Incestuous? You bet. Would stakeholders go along with it without much of a fight? You bet.

    Let's not forget Boring Company, which is actively bidding for major transportation contracts right now, such as being a finalist for a Chicago Loop system. Expect a major capital raise whenever they feel the need to go from "test tunnels" to "operational systems". Now, remind me again what Loop is? Oh yeah, it's a bunch of battery powered electric vehicles driving through tunnels. Gee, I can't possibly imagine who they'd contract out to build them, can you? Speaking of an incestuous relationship, it was SpaceX engineers that initially did the work on Hyperloop that led to the formation of Boring Company.

    Don't get me wrong, there will always be some investors upset. See, for example, the case of SolarCity. But by and large, most investors have shown themselves perfectly happy to see this synergy (there's many that wish for a literal SpaceX-Tesla merger, although Musk has no interest)

    ----

    In short, to sum up:

    1) Tesla's cash burn will slow, and at some point reverse, as its past capex begins to translate into revenue, across Tesla's divisions. Every bit of slowed burn means more time to achieve their goals. Tesla's bonds due this year are only $232M in November; the big payout isn't until next March ($920M).

    2) Tesla's bears have proven time and time again to only be able to see new sources of capital or decreases in expenses in the rear view mirror, and I see no reason to doubt that again.

    3) Musk's past history of an incestuous relationship between his companies, stakeholder acquiescence to it, and a history of going all-in on his operations, leaves no reason to doubt that this will happen again should it ever be needed.
     
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  2. SoFlaModel3

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    Love this post!

    I certainly wouldn't have invested in the company or bought a $60k car if I wasn't very confident in their long term success!
     
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  3. Michael Russo

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    Same here, nothing can make me renounce my beloved Red Dragon at T day - 8!! ;)
     
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  4. JBsC6

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    Getting funding will never be an issue for a company with such strong brand equity.

    Rumor is tesla exceeds production expectations for this quarter
     
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  5. Gorillapaws

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    While I mostly agree with your bull thesis, I think it's fair to point out that it is a very risky bet. As the volumes of cars increases exponentially, the cost of delayed production also hits a scale that may be hard for even Musk/Space X/etc. to help over the production hump to the other side of positive gross margins. In other words, the stakes are higher and delays are much more expensive.

    I certainly think it's possible that Tesla comes out the winner here (in a big way) but I don't think the bear thesis is all FUD and misinformation (though there is plenty of that too). At some point in time, there could be an existential threat to Tesla if they run low on cash and the share price drops so low that an equity raise doesn't generate the capital necessary to push over the hump to get to profitability. These fears (perhaps irrational) could create a self-fulfilling prophesy that brings about a financial collapse. The other major risk is a market downturn or a major increase in interest rates. Both of these scenarios will hurt Tesla much harder than other companies for a variety of reasons.

    Generally speaking, I am a bull on Tesla in the long run, but make no mistake, they are in a precarious situation until they can ramp Model 3 and get to profitability. I think if they reach that milestone, they should be a pretty safe bet going forward.

    Disclosure: I'm not a financial advisor or anyone who is licensed to give financial advice. I'm just a random dude on the internet with opinions...
     
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  6. KarenRei

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    The higher the production rates, the higher the margins (which should be positive soon, if not already). The more you make, the more money you have - not less.

    As an example of how little concern there is within Tesla itself of running out of cash:

    https://electrek.co/2018/03/30/tesla-moving-ground-gigafactory-1/
     
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  7. Audrey

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    I feel Tesla's in a positioning phase. It's a ten year old company; think of all it has accomplished already. There is so much opportunity on the horizon for their products. The world is moving towards a future of gas-less vehicles and personal stand-alone electricity generation and storage, not away from these things. Tesla is doing everything right for a phenomenal future. As touched on by @SoFlaModel3 - we would not be buying these cars if we didn't believe in that.
     
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  8. Gorillapaws

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    I suspect that they're a ways off from positive gross margins still. When they ran the numbers for the Model 3, I have to assume they were planning on 5-10k per week production levels. Tesla has to reach those levels before they burn through the cash they have. Remember, they have the staffing and the lines in place already so their operational costs are likely near where they will be at max production (less material costs of course). I think they'll get there, but I do think it's a risky bet. I don't want to discourage anyone from investing, but I'd hate for someone to invest money they can't afford to loose assuming it's a sure thing. If the stock ever drops down below 200 again, I'll be interested in picking up shares (sold mine last summer for a huge gain to buy my fiance an engagement ring).
     
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  9. KarenRei

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    From the conference call:

    Producing more cars doesn't mean that they lose more money. The raw component costs on the cars aren't more than the sales prices. The margins are negative because they're tooled up for much higher production volumes, which means high depreciation and operations costs, which are relatively constant regardless of whether they're churning out 5000 vehicles per week or 1 vehicle per week. Low volumes means that this overwhelms the difference between the cost of the raw materials and the value of the finished product and renders the margins negative. At some point, the production volumes will be high enough that this situation will reverse - but even before that point, more vehicles always improves Tesla's financial position. Their fixed costs remain fixed, and each car produced helps offset them.
     
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  10. José Calviño

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    Karen,

    Your post:
    Why I have zero concerns about Tesla running out of cash


    was astounding! I love it! It was such FUN to read. I found myself excited, laughing, cheering - wow! Such a range of emotions. But it's all because of the freshness of what you said. Such common-sense, and straight-shooting in your words. And you left no stone un-turned there: covered all the bases of why Tesla has been successful, and the business fundamentals that point to success going forward. Not just with Model3 but the synergy off all that Tesla does ... and not just Tesla, but everything Elon Musk is involved in; and I love the no-shame boasting about how all his companies share information and technology and personnel and business - and they COULD do more of that! Love it! Goes against all the CONVENTIONAL "wisdom" out there, but it is all so practical. Has been all along! Yes, they could share business. I've never thought through all of this in one shot like you presented it, and it just gets me so excited I can't stand it! From all the reading I've done, starting with Ashley Vance's biography of Elon Musk, this post sums things up so nicely, and squares so well with all I've gleaned in all my study.

    OK, can you tell, I REAALY like this post!?!? I even love the responses of the other readers, and you, Karen, the author's follow on responses too! This is such a healthy thread for anyone who needs a boost after last week's thrashing in the market (yes, I needed a boost myself ...).

    My hat is off you, Karen, having just bought into Tesla for the first time two days ago!! I can tell you've done your research ... and that it appears to be an ongoing activity - as it very well should be. You've entered at a very good price too - I gather you have a bit of patience that you exercised for that good price. Congratulations on that too!

    Thank you!
     
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  11. Kbm3

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    There is another additional detail the bears overlook. Tesla currently has 60 to 90 day terms with the suppliers. This means that this week they are paying the suppliers for the parts for the 700 cars they built 6 to 10 weeks ago. Meanwhile, they are getting revenue for the 2000 cars they are delivering this week.


    During a ramp, this delay before the suppliers are paid generates a lot of cash, even if they are at 0% or even a little less gross margin.
     
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  12. dizzle

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    I see your viewpoint.

    Why would I trust what you are saying over the cold, hard analysis provided by Tesla's sinking bonds (indicating increasing credit risk) and declining share price? Do you really believe that a bunch of random retail bears chatting on message boards are responsible for these two major changes, both of which will affect the ability of this company to borrow more money (which it will need) to survive?
     
  13. Greg Peden

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    The problem is that suppliers will not renew these deals if it looks like Tesla might not survive 90 days. Confidence from suppliers is very very important, this failure in confidence is what doomed Toys 'R' Us long before it actually ran out of cash.
     
  14. avoigt

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    Karen, a personal Thank you for the effort to write this as well to your very well appreciated and informative posts in the past. It went around and I hope some people read it carefully although there are many out there who just want to see Tesla fail and try to find an argument for it despite all facts.

    Elon just announced some important news in a few hours and I believe he would have used a different wording and not posted it at Twitter if it is bad news. Lets all hope the discussion from "our friends" who claim to see the ship sinking since years despite it gains speed and volume ever year and not taking water, will be reduced after it.

    BTW... welcome in the investor community. Good decision.
     
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  15. ratsbew

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    More proof anecdotally from me: My Iowa corn farmer parents want a Model 3 as does my midwestern sister. Neither of them are the "typical" demographic, but they were sold *immediately* upon one test drive of a Model S. Teslas are simply great cars that cannot be compared to a regular ICE. Tesla's Model 3 production will not meet demand even at 500,000/year. They can afford to keep the margins at 20%+.
     
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  16. Kbm3

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    What makes you think the suppliers could unilaterally change the terms in the middle of the ramp?
     
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  17. Kbm3

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    None of the incidents that lead to the sinking stock price have anything to do with Tesla’s long term prospects.

    The Moody’s change was puzzling, as nothing has materially changed since the Q4 report.
     
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  18. KarenRei

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    #18 KarenRei, Apr 1, 2018
    Last edited: Apr 1, 2018
    Indeed. That's a key issue: apart from the Moody's change, there were a number of really minor events with no material long-term impact - nothing about the fundamentals changed at all. The car accident is going to be old history soon enough. The Model bolt replacement - even if Tesla had to eat the whole cost - would be something like $10m to fix. The SolarCity lawsuit only affects the board (particularly Musk, alleging that he exerted undue influence in the decision), and is unlikely to go anywhere. There've been a number of groundless quality hit pieces - we all know that nothing is perfect, but that the reports we see from owners don't even remotely resemble the sort of fearmongering about Model 3 quality you see in the attack articles. Tesla had to slow Norway deliveries because of a shortage of trucks. Bloomberg production numbers - which if I had to guess, would be the reason for the Moody's change - are heavily laggy, being dragged down by the old Fremont line downtime and not reflecting the recent info. And there was the fatal Uber crash, which got people spooked about self-driving in general, despite the fact that it had nothing to do with Tesla. And Goldman Sachs gave a negative prediction (which started the whole slide), but they've long been making negative predictions; it would have been news if they hadn't.

    Meanwhile, Tesla's purchase incentive has been restored in the second largest market in Europe (Germany). Production, at last check, was over 200/d (1400/wk) and in a push for over 300/d (trying to approach an extrapolated surge rate of 2500/wk). Even if that's just temporary, contrast that to Dec-Jan which had an average rate of 200-450/wk and an extrapolated surge rate of 1000/wk. The latest AP update was a *huge* improvement, and just last night the biggest interface complaint in the Model 3 was fixed (TACC/follow distance control on the steering wheel). Model S's SCU got upgraded. Interviews with service centres shows the rate of issues with new Model 3s continues to decline. Powerpack orders continue to grow and solar roof installs to non-Tesla customers have started. On and on and on.

    The big difference between the negatives and the positives is that literally all of the negatives are temporary issues and/or issues with little long-term repercussions, while the positives are all material, long-term impacts.
     
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  19. Trent Eady

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    If I’m understanding correctly, I think Gorillapaws’ point is that Tesla is in a bit of race to turn Model 3 production cash flow positive before it runs out of cash. I will breathe a sigh of relief when that threshold is crossed. I think 1) Tesla’s rate of cash burn, 2) its difficulty in raising cash, and 3) the slowness of the Model 3 ramp are all being exagerrated, leading to an exaggerated sense of crisis. I think it’s highly unlikely that Tesla will run out of cash before Model 3 production turns the corner from cash flow negative to cash flow positive. However, it is not a baseless concern.

    Even Elon has pointed to stalled Model 3 production as a potential existential threat to Tesla. This is a quote from Ashlee Vance’s book (chapter 11):

     
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  20. JBsC6

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    Don't worry...tesla brand has tremendous equity as do his supercharging network which of course could be leased out...

    Chinese investors are waiting in the wings..

    Hell waymo just ordered 20000 jaguar I paces over a two year period.

    Tesla will be just fine.

    Everybody loves a news cycle crisis..
     
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