Two major news announcements have surfaced for Tesla Motors (NYSE:TSLA) recently and we believe neither bode well for the company’s liquidity. Firstly, the automaker plans to pay off the $465 million loan it took from the U.S. Energy Department by 2017, five years ahead of the schedule. Secondly, the Model X, the crossover whose production was earlier slated to begin at the end of 2013, will now be produced a year later.
While the loan prepayment suggests that Tesla is anticipating better-than-expected future cash flows which will help it accelerate payments, there is a pretty big incentive for the automaker to pay off the loan early. As per Tesla’s agreement with the Energy Department, the government has the option of buying more than 3 million shares at a discount if the loans aren’t paid off by 2018. 
Coming to Model X, Tesla had earlier faced production issues with the Roadster and Model S as well, and so it may have decided to be more pragmatic this time around. This means it won’t be before 2015 that the car could contribute any meaningful amount to the top line. 
- How Much Of Tesla’s Overall Revenue Is Unrecognized Due To Accounting Principles?
- How Much Do Tesla’s GAAP and Non GAAP Margins Differ?
- How Much Revenue Does Tesla Make Per Each Unit Vehicle Sold?
- How Has Tesla’s Gross Margin Behaved Over The Last Three Years?
- How Much Does Tesla Spend On Research and Development?
- How Much Does Tesla Spend On Selling, General and Administrative Expenses Per Unit Sold?
Tesla’s operating activities generated negative cash of $207 million last year.  Now with considerably higher production levels, this year should be much better though. In 2012, the company paid back only $12 million of its long-term debt. And if Tesla plans to pay off the entire loan by 2017, it will need to pay about $90 million annually. So, you’re basically talking about an additional $80 million of cash payments each year. Combine this with the production delay of Model X and there isn’t much scope left for production hiccups. That just makes the company a riskier investment.
Liquidity is often a concern for companies in their growth phase, especially in the auto industry. Since the business model relies on a high initial investment, there is often a risk of returns not matching expectations, leading to a liquidity crisis. Moreover, any unexpected events in the future could put the company in a precarious position.
Overall, the fundamentals of the company still look solid. Tesla has a niche following; its cars are considered cool and have generally received positive reviews. The number of bookings that Tesla has received for the Model S shows the excitement surrounding its cars. As of December 31, Tesla had 15,000 reservations for the model. Trefis estimates that the automaker will sell all 20,000 Model S units it manufactures in 2013 which should translate to revenue in excess of $1.5 billion. 
We currently have a Trefis price estimate of $40 for Tesla, which is slightly ahead of the market price.Notes: