Tesla Motors (NASDAQ:TSLA) Chief Executive Elon Musk recently announced that the company’s cash flows finally turned positive in the last week of November. There was concern that Tesla could face a liquidity crunch as the automaker faced problems in ramping up production of Model S in the previous quarter. The electric car manufacturer, which originally projected annual revenue in the range of $560-600 million at the start of the year, had revised it downward to $400-440 million primarily due to a decline in the expected number of Model S units produced during this year.
The company’s stock price jumped more than 10% last month helped by the Q3 earnings and now comes this announcement.  A positive cash flow is a big step in the life cycle of a company. If cash flows continue to stay negative, creditors and investors start doubting the company’s profit generating ability and the further cash needed to grow operations either becomes unavailable or is only available at a significant premium.
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Next year will be a big one for Tesla as it looks to boost its Model S production to 400 units a week (or 20,000 cars annually). Compared to 268 units it sold last quarter, this will be a big jump. It is also in the process of establishing a network of Supercharger electric car recharging stations across the country. It has already set up a number of stations in California and more of these will mushroom in the coming quarters.
Along with the initial high cost of purchasing an electric car, the lack of charging stations across the country is a big deterrent for consumers looking to buy electric cars. Thus, how well the charging stations are distributed will be a big factor in determining the general public’s predilection towards electric cars.
Furthermore, Tesla is in the process of rolling out Model X and Gen III models for which it will again need sufficient liquidity to cover expenses related to R&D and capital expenditure. Therefore, the automaker does need a substantial amount of cash for its future endeavors, and the company’s cash flows turning positive is a significant development on its path to sustainability and future profitability.
We currently have a Trefis price estimate of $37 for Tesla, which is more than 10% above the market price.Notes: