From Seeking Alpha
Jan. 25, 2019 4:09 PM ET About: Tesla, Inc. (TSLA)
Summary
- Tesla is seeing an implosion of demand – not just in US but also internationally. European Model 3 demand is below even bear expectations.
- The company has several major cash calls from maturing debt and organizational changes and does not have the cash to cover these.
- Without a capital raise or favorable vendor terms, Tesla faces solvency risk in Q1.
- This idea was discussed in more depth with members of my private investing community, Beyond The Hype. Start your free trial today »
Fears of a cash crunch at Tesla (TSLA) are not new. Bears have raised these concerns in the past, and bulls have pooh-poohed them. The bear arguments were vindicated when CEO Elon Musk recently admitted that Tesla was within single-digit weeks of going bankrupt in 2018 as it struggled to ramp Model 3. Think about this: In one of the earnings calls in 2018, although there were no disclosures, Mr. Musk felt the Company may not survive until the next earnings call!
In the past, Tesla has been able to pull itself out of cash crunch situations through capital raises based on overly optimistic projections of Tesla’s prospects – and Tesla has largely failed to deliver on the investor expectation set during these raises. Management projections from the most recent quarter are also crumbling as we predicted in October. All of the major predictions from the previous article have come true. Per the article:
– In Q4, Tesla has introduced a lower priced Model 3 as demand for the higher priced version dried out.
– As US demand collapses, Tesla is starting earlier-than-expected shipments to Europe and China in Q1
-And, Tesla has laid off 7% of its employees. (note that Tesla is not disclosing the extent of contractor terminations and performance firings which will likely put the overall termination numbers much higher than 7%).
Unfortunately, for Tesla, the going is likely to get much worse. As they have done in 2018, Tesla management seems to be playing a game of chicken with investors on cash needs and capital raise. The Company continues to deny the need for a capital raise, although fundamentals point to exactly the opposite.
Elon Musk’s recent missive about the challenges that Tesla faces makes for an interesting read. After promising rosy future and sustained profitability about two months back, Mr. Musk did an about face and painted a dire picture of Tesla’s prospects. To quote a few choice paragraphs from the note:
“In Q3 last year, we were able to make a 4% profit. While small by most standards, I would still consider this our first meaningful profit in the 15 years since we created Tesla. However, that was in part the result of preferentially selling higher priced Model 3 variants in North America. In Q4, preliminary, unaudited results indicate that we again made a GAAP profit, but less than Q3. This quarter, as with Q3, shipment of higher priced Model 3 variants (this time to Europe and Asia) will hopefully allow us, with great difficulty, effort and some luck, to target a tiny profit.”
“However, starting around May, we will need to deliver at least the mid-range Model 3 variant in all markets, as we need to reach more customers who can afford our vehicles. Moreover, we need to continue making progress towards lower priced variants of Model 3. Right now, our most affordable offering is the mid-range (264 mile) Model 3 with premium sound and interior at $44k. The need for a lower priced variants of Model 3 becomes even greater on July 1, when the US tax credit again drops in half, making our car $1,875 more expensive, and again at the end of the year when it goes away entirely.”
“As a result of the above, we unfortunately have no choice but to reduce full-time employee headcount by approximately 7% (we grew by 30% last year, which is more than we can support) and retain only the most critical temps and contractors. Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months. Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required to manufacture the standard range (220 mile), standard interior Model 3 at $35k and still be a viable company. There isn’t any other way.”
The problem is that Mr. Musk’s narrative, as usual, is not credible.
Note that Model 3 has been in “production” for over a year now and has gone through many fixes and tweaks. The production line has also been improved considerably in the same time period. Most of the easy cost improvements in parts and manufacturing process have already been made. In the near term, it is extremely difficult to squeeze another 20% or so in costs necessary to make the $35K Model 3 profitable at a net profit level. The 7% workforce employee layoffs will help but will not a big difference as direct and indirect labor is only a small fraction of Model 3 cost structure. Our assessment is that the situation is much direr than the CEO is predicting, and the solutions being proposed do not come close to solving Tesla’s problems. If, as Mr. Musk says, “there isn’t any other way”, then Tesla will die.
Let us first consider the near-term challenges that Tesla faces.
Demand Has Evaporated
As Mr. Musk himself acknowledged, the US demand is low. However, the situation appears much more dire than indicated. Anecdotal evidence gathered by Tesla watchers suggests Q1 demand is running at less than 10% of the Q4 level. Even the largest volume Tesla sales center in Southern California is seeing zero sales on many days. Other sites are also showing very low demand.
European demand is far less than even bear expectations. Sum of all orders in the largest European markets is only about 16,000 units. This level of demand may not be sufficient to tide Tesla over for even a single quarter.
Cash Is A Big Problem
Consider Tesla’s balance sheet (from the Company’s Q3 shareholder letter)
We do not yet have the Q4 financials, and we do not know if the balance sheet during Q4 has gotten better or worse or stayed about the same. However, as discussed in an earlier article, Tesla had two significant cash calls in Q4:
- $230M Convert due 11/2018.
- $157M Non-recourse Term Loan due 12/2018.
In the balance sheet above, note the large line items: Account Payable, Customer deposits, and Current portion of long-term debt. These items, at the end of Q3 were $3.6B, $906M, and $2.1B, respectively.
In addition to the convert and term loan needs, the latter two line items discussed above are likely to move against Tesla. In other words, cash needs will increase, and cash is likely to go down than up.
To offset this burn, Tesla may have generated some cash during the quarter. While it is unlikely to be substantial, for the sake of discussion, let us assume that the cash position has stayed the same since Q3.
Now consider that, with the stock below conversion price, the $920M convert due 3/2019 will likely have to be paid out in cash. This event alone reduces Tesla cash position to $2B.
Layoffs Have Direct And Indirect Costs
7% layoffs, along with contractor retrenchments, and other retrenchments through performance reviews, will have their own costs. While it is difficult to estimate this amount accurately, we believe Tesla will incur about $100M in cash costs and an additional amount in write-offs and other non-cash costs.
This brings the cash down to $1.9B
Capex
It is difficult to estimate how much Tesla will be spending in capex. The Company has significant control over its spending although the control comes with trade-offs. Tesla has dramatically scaled back capex in the last several quarters leading to major underinvestment in Superchargers, Service Centers, Sales Centers, etc. The result is that the Supercharger network is overburdened, and there are regular stories of customers facing long delays and descending into arguments. Similarly, service centers are overburdened, and customers have faced long delays and quality has suffered.
Note that in addition to the maintenance capex, CEO Musk sets lofty expectations on new projects. Mr. Musk, for example, promises that the Company will deliver a truck in 2019, a Model Y in 2020, and a China factory in 2019/2020. These efforts will need billions of dollars of investment today if Tesla were to have any chance of meeting the timelines promised by Mr. Musk.
For this discussion, we will assume that, for cash conservation, all these projects will be delayed, and only about $300M in maintenance capex will be spent in Q1.
This brings the cash balance down to $1.6B.
Items Not Being Considered
This cash flow analysis is ignoring a myriad of cash expenses such as:
- Deposit refunds which could be several tens, or even hundreds, of millions of dollars.
- Refund of $5,000 for Model 3 “P” version purchasers in Q3 (due to Tesla adjusting price on the version in Q3).
- Tens of thousands of cars which may not qualify for the $7,500 Federal tax credit because Tesla has not registered the cars before the end of the quarter. Given that Elon Musk has promised to make customers whole if the FTC deadline is missed, Tesla may owe customers $3,750 for many of these tens of thousands of unregistered cars (chart below from Twitter user @TeslaCharts)
It is questionable if investors should trust Tesla Q4 balance sheet when it is released. The cash numbers may be artificially inflated by Tesla not registering several tens of thousands of cars as of the end of Q4. That likely means Tesla has collected the customer cash but may not have paid sales taxes on the cars or paid off ABL vendors on the sold cars.
HT/The GWPF
Tesla has made a great deal of their customers very, very, unhappy.
Services issues and unhappy customers is the kiss of death for mass produced products.
Tesla is a very complicated product that only a Tesla specialist can fix.
No Tesla, no service. With no service how long before it will no longer be safe or possible to drive a Tesla?
Tesla will be an interesting case study for future MBAs.
https://www.sfchronicle.com/business/article/Tesla-owners-fume-about-delays-for-service-13112104.php
“But I don’t want to drive it!” said Kaushal Bhaskar, a software engineer from nearby San Ramon who complained he sometimes couldn’t get the passenger door to open, while other times the door would open up all by itself — including once on the Interstate at highway speeds. “This is a safety concern for me!”
A wide variety of Model 3 quality problems are reported on Tesla customer forums, including broken glass, bad paint jobs, body panel gaps, dead batteries, wind noise, dents, scratches and software problems including door locks and weirdly behaving touch screens.
https://news.abs-cbn.com/business/08/05/18/battery-of-complaints-against-tesla-in-norway
OSLO – “I’ve had the car for eight months and it ran fine for four days,” says Yngve Solberg, who like many Norwegians is fed up with the slew of problems his Tesla X has given him.
In Norway, the third largest market for Tesla cars after the U.S. and China, some customers told Norwegian media they have been waiting months on body parts for their damaged Teslas.
Norway practically pays people to buy elec cars…….and fines them for buying petro cars
….Pay people to buy frozen liver and watch liver sales soar
While motorists are typically subject to punitive levels of taxation, those who buy a purely electric vehicle are rewarded with a string of incentives worth thousands of pounds. Buyers escape heavy import or purchase taxes and are also exempt from 25% VAT. They also avoid road tax, road tolls, pay half price on ferries, get free municipal parking in cities and can usually use bus lanes.
“Norway practically pays people to buy elec cars…….and fines them for buying petro cars”
And if we’d have elected Ms. Clinton instead, we’d probably be doing the same today.
It appears that Mr. Musk is in the process of moving his government-money harvesting operation overseas. Better there than here.
With the sudden layoff of workers from Musk’s other brainchild SpaceX, one wonders if that organization is also on extremely wobbly legs.
I’d hate it if it were so. I’ve been an advocate for private space exploration from the beginning, but at least there are a few viable competitors today.
The best thing SpaceX could do is drive Eloon out before he guts the capital out and runs. They have a working system which shows promise for future expansion.
SpaceX is ramping up reusability, which means they’ll be building a lot less Falcon rocket stages in future. Also they just changed the design for their new rocket to use stainless steel instead of carbon fibre, so they probably need to replace some engineers who have carbon fibre experience with engineers with stainless steel experience for the new design.
So I doubt the layoffs are a financial issue, though obviously they need a lot of cash to pay for the R&D on the new rocket. They do seem to have been bringing in a lot of new investment money in the last year or so.
“They do seem to have been bringing in a lot of new investment money in the last year or so.”
But not as much as they want. Their latest offering was only 1/3 subscribed.
And in a bold move, like every other car manufacturer, VW follows Tesla into the abyss and expands its eCar line up of eUp and eGolf with plans for a $23,000 Tesla rival and their entrance into the energy market with Elli and Naturstorm charging stations. Will environmentalists and the general public wake up in time from their dazed-and-confused-renewable-energy-fantasy before the bottom drops out of the eCar industry and China completely floods the world with their non-renewable non-green green [sic] energy batteries and all the economic and environmental woes that come with them? Meanwhile, across the pond, Elizabeth Warren will be extolling the virtues of sustainably manufactured brewskis during the Super Bowl whilst yelling “BRUCE, I’m gonna go get me an eBud!”
History repeats itself.
DeLorean went bankrupt into receivership in 1982.
A popular movie (Back to the Future) was made using a DeLorean as an iconic centerpiece of the era of flashy futuristic autos made of brushed aluminum. (1985).
In a few years, after Tesla is in deep into receivership, someone will make a movie with a Tesla Model X or S (in “Ludicrous mode” probably) as a iconic centerpiece of this current era of Green stupidity.
Easy Prediction: We are living TODAY in an Era of Renewable EnergyLies and Green Deceptions that will be mocked in 15-20 years, if not sooner as the climate scam and the wind-solar hustle collapses. Sadly, vast landscapes will be covered with broken, busted, and rusted solar farms and frozen-in-place wind turbines as a multi-generational reminder to how much wealth can be lost to stupid ideas in politics.
I’ll keep my used Toyotas and watch all the fun from the sidelines……until they come for bailouts.
I’m with you except my vehicle is a 1992 F150. Starts every day and for weather like this, it also has an amazingly good heater.
You got a good one. That’s great.
It’s a bit like a savings plan that also takes you places but is hard to explain to others since direct comparisons of savings and checking accounts is rare. Three used, long-life vehicles that last 2x longer or more than other choices should have some king of online calculator to demonstrate it.
I had a E-250 work van that would melt my boots for hours on end in 0 degree weather up in Maine. Freezing to death in a Tesla is a distinct possibility.
Having the engine and tranny close to you does help. I ran a Chevy Econoline van for work and that thing would roast you out in summer, even with AC running and it did not most of the time.
I learned to drive a stick shift on an old Econoline that my Grandfather owned.
Since progressive government believes IT has the answer to all problems, I suspect that Sacramento will pass a new law REQUIRING the purchase of electric vehicles or be subject to a special tax… TeslaCare. And perhaps only ones made in California.
Once the major car manufacturers moved into EV they where always going to eat Tesla’s lunch, they have after all spent years mastering the large scale manufacturer of cars dealing with supplier chains etc.
Tesla has been living off other peoples money and government subsidies for years, the last thing, and perhaps the only thing, he made money on was the flamethrowers .
Not sure I’d want to book passage on one of Musk ‘s spaceships when his cars can’t make short cross-country trips effectively.
SpaceX has been rather successful in lofting cargoes to ISS and have put no few satellites up. I am no fan of Eloon, that said whoever is actually operating SpaceX is doing a good job.
WHAT is this guy on about?? Tesla Model 3 US sales in December were 25,250 (http://carsalesbase.com/us-car-sales-data/tesla/tesla-model-3/). Mercedes C class for comparison was 6,799.
We don’t have any kind of reliable numbers for January yet – just the speculations of short sellers trying to talk down the stock to make a fast buck
It’s called flooding the pipeline. Tesla had a huge backlog of profitable Model 3 cars it could pre-produce and sell in Q3. This was a one-off event and not sustainable in the long term. It was a gamble to lift the share price to swap equity for debt payment. It failed.
remind us of the total sells for both manufacturers without the smoke and mirrors ?
Mercedes has a lot of other cars to help keep the pipelines full.
They don’t even have to make a profit on the C class.
Those who work on the C class, don’t just work on the C class. They also work on other vehicles.
Many car manufacturers deliberately make high end cars that they know they are going to lose money on just so they can maintain bragging rights.
(BTW, bragging rights also helps sell other cars in the line.)
“Tesla Model 3 US sales in December were 25,250”
That’s because sales were being pulled forward from January, when the federal tax credit was halved from $7500 to $3750, and also due to Tesla’s inducements and appeals to prospective buyers. (E.g., it offered leaseholders of S and X models foregivness of their unpaid lease amounts if they’d by an M3.) Estimated sales in January will be released in a few days and will show a pronounced drop, from early indications.
Henry Ford knew that you had to have a cheap model that most could afford. A Tesla Model “T” or at at least Model “A” without all the frills. I think one could reduce the cost by half and still put out a serviceable car at a profit. You may have to close your trunk by hand, or even wind your windows with a crank.
The folks who want to drive into the New Dark Ages would go for a Tesla Dune Buggy. Even the proletarian Volkswagen attracted snobbish types. Get a couple of million on the road and then try a few luxury models on for size. Sheesh, the pathway was already paved for these guys.
Also they would have made good use of all the subsidy largess and made the electric car mainstream. Now it’s too late. Subsidies are gone, CAGW basically died after climategate revelations, Trump gave it a burial and the ‘New World тотаliтагiаиism Is Kool” schtick is old hat now.
I think this line is relevant:
This idea was discussed in more depth with members of my private investing community, Beyond The Hype. Start your free trial today »
Looks like a bit of a red flag to me.
Many articles on Seeking Alpha have that sort of postscript. Publication on Seeking Alpha is used as an inducement to obtain subscribers to the Premium or early bird version. It’s been going on for years.
A large part of this is their refusal to go with the traditional dealer arrangements.
Used and certified pre-owned Teslas would have a HUGE market pull and act to prevent devaluation of their vehicles. For the right price, I could see myself considering one of the earlier S sedans in a couple years if they had a proper dealer network where I could acquire parts… but I’m not about to be at Tesla’s whims, so I don’t consider them a viable choice in any view.
Many horror stories abound from those attempting to buy a used Tesla… directly from Tesla… These things would not be a problem if your standard Mazda/Ford/BMW/etc.. dealers just happened to pick up some Teslas… these dealers generally know how to sell a car.
Not so sure.
Frankly, I’d consider layoffs at Tesla a step toward maturation, the reason they hired so many assembly workers is because their Model 3 automated production had failed so badly. Are they laying off in a desperate move to save money, or because they’re actually getting some headway on automating Model 3 production?
I said some months ago that Tesla would eventually have to dispose of a bunch of the desperately hired Model 3 assembly staff if they were going to meet unit-cost targets, and maybe it’s come to pass. Or maybe it hasn’t.
Can car order deposits be held in a bankruptcy?
My take: the deposit agreements stated they were refundable which would make the depositors secured creditors. A policy which Tesla has now abandoned.
But their is a hierarchy of bankruptcy payouts, so they very well end up getting nothing or fractions of a dollar on their claims. Worst off are the normally unsecured trade vendors, where it is often worth the time to attempt to get some of the leftover crumbs.
All lenders have some kind of contract under which they either get their money back, or some other kind of compensation.
If having a promise of repayment was all it took to make one a secured lender, then all lenders are secured lenders.
It’s hard to take Musk seriously when he keeps pulling stuff like this:
https://twitter.com/elonmusk/status/1083095876392964096?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1083095876392964096&ref_url=https%3A%2F%2Fwww.breitbart.com%2Ftech%2F2019%2F01%2F10%2Fmusk-promises-flying-cars-while-cutting-tesla-production-models%2F
This might be a very, very bad week to own and drive a Tesla in the
Chicago area.
Why ? Their batteries may or may not be too functional at sustained below
zero air temps. This will be their first test in harsh cold conditions.
You probably didn’t know TSLA was the top selling car in Norway. This is hardly their “first test” in cold conditions.
Enoch,
Chicago is not Norway:
https://teslamotorsclub.com/tmc/threads/lousy-range-cold-weather.105476/
Also, Oslo in January 2018 (degrees in Celsius):
https://www.timeanddate.com/weather/norway/oslo/historic?month=1&year=2018
Most second cars used for the tax breaks and other freebies EV get. Meanwhile the boat with big outboards, the ‘other car’s and for some the private jet are also available.
And once you get out of cities you’re chances of seeing EV drop off a cliff.
I drove electric forklifters for 10 years. A heavy battery in the rear is good as a counterweight to the load on the fork.
An electric forklifter accelerates very high – and brakes very fast: in counterpulse mode.
The thing also drives fast: 18 km/h in winding factory halls aisles appears quickly.
The battery was initially enough for 2 weeks.
When the truck was used in 3 shifts, the battery was exhausted after 7 hours.
That thing was fun to drive in factory halls. Not on the highway, not on minor roads.
Lol.
This was all about Musk making money for himself.
Having been involved in a number of R&D projects through the years I find the Tesla situation rather sad.
Research has shown up a couple of interesting trends re R&D:
– The last 10% of development gobbles 50% of the cost
– Usually it is not the inventor that gains the profits but the next in line that adopts it
Another common occurrence is the constant blabbing of armchair critics who have never laid their own initiative on the line.
I admire anyone who has the courage to set new boundaries. It is better to die a failure than to have never tried at all.
Regards
M
You be the first in 200 years to solve the battery problems, then you build a car. You don’t build a car and screw around how you are going to take on the world and build a viable battery to make it go.
We said it this way, “The first 90% of the work is 90% of the cost, the last 10% of the work is the other 90% of the cost.”
This past weekend I saw, for the first time ever, a Model S on a used car lot. Granted, it’s been lowered and has aftermarket wheels on it, so could be the owner hit a rough patch and just needed some quick cash.
But still, a strange thing when they seem to be such beloved possessions.
“It’s worse than we thought”. Ever heard of VIE (Variable Interest Entities)? Tesla sold off parts of their cashflow in return for financing. See https://seekingalpha.com/article/4233257-teslas-day-vie-reckoning-approaches It’s a bit of a dry read.
When companies resort to “creative financing” like this, I tend to worry about them.
No electric car company is viable. Tesla lack of viability is hurting sales. It was never a matter of if it goes bankrupt, but when and in what form it implodes.
I was worried that this would happen.
As Mr. Wonderful says on Shark Tank:
“If you succeed, the big guys are going to come in and squash you like the bug you are.”
If Musk had stuck with producing a fair number of high-end cars, he could have had a profitable business as other niche carmakers do (though many haven’t done well).
In moving down market, to true mass production he’s facing competition on price and the infrastructure to deal with masses of users over a world-wide market. This is something the big guys know really well.
He’s still got a little bit of a chance, in that electrics are doing so poorly in the market, the big guys are backing off somewhat but, of course, electrics doing poorly in the market is really bad news for him in itself.
He really needs a lot of government intervention on his part to force electric cars on the market quickly before the big guys get spun up.
One of the biggest problems for Tesla’s future is not only that they will have to sell the lower priced Model 3 versions, but that by the time they have to do it, there are going to be much more interesting alternatives in the market. The long range versions of the Hyundai Kona and the Kia Niro look really interesting right now for about the same price. And I am sure other companies will soon start offering good alternatives to the basic Model 3.
Tesla is a classic example of good people doing the wrong thing for the wrong reasons. They have produced the wrong sized car into a market that is not geared up to supporting their overpriced though loss making product.
In most of Europe any car designed to combat city pollution should be able to park in bays designed for city sized cars. Tesla failed even that simple requirement. So if your car does not fit on European city streets where do you sell the vehicle?
The share price of Tesla has been remarkably resilient over the past two years. While the trend is down it has managed to find supporters who keep buying the stock when it has its periodic sharp drop. We might wonder who are these investors? I just hope my pension fund managers are not part of the cavalry support for Tesla.
A fast electric sports car for the peculiar Californian market, made in Cal, and a sensible low cost no frills city sized car able to ride on the tail hype of its sporty brother, but made in China, may have given Musk a fighting chance.
Who knows if Gov Brown can find enough tax payers money to secure electrical supply for Cal now one of the big utilities has said enough is enough and gone bust, he might push money into Tesla because it is a Green icon. The economics of investment return is of no significance to the Green spenders who use tax payers money.