When Will Tesla Have To Raise More Cash?

by Trefis Team
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Tesla (NYSE:TSLA) burned over $700 million in cash over Q1 due to a slower than expected production ramp of the Model 3, the company’s first mass-market sedan. The company’s cash balance at the end of the quarter stood at $2.7 billion, after starting the year with about $3.4 billion. While Tesla expects to be cash flow positive in Q3 and Q4 2018, this may be difficult to achieve. This has caused increasing speculation that the company might have to return to the capital markets this year, as it could require a financial cushion as it scales up sales of the new model. However, on its recent earnings calls, Tesla’s management has explicitly said that it would not be raising additional funds, noting that it expects to be cash-flow positive during both Q3 and Q4. CEO Elon Musk also refused to answer analysts’ questions about the company’s capital requirements.

In this note, we take a look at Tesla’s financials and if (and when) the company might need to raise additional capital. We have also created an interactive dashboard analysis which outlines how Tesla’s revenues, operating profits and free cash flows could trend over the next three quarters.

Tesla Is Reluctant To Raise More Capital

Another capital raise could prove relatively costly for Tesla. A new debt offering might carry high yields, considering the bond market’s negative view about Tesla’s creditworthiness, while a new equity offering would dilute existing shareholders and potentially put pressure on the company’s stock, which is already down this year.  Tesla appears to be serious about avoiding another round of capital raising. Earlier this week there were reports that Tesla is planning on carrying out a new restructuring operation, which it referred to as “a thorough reorganization” of the company. Tesla is also pointing to the fact that the Model 3 will have an exponential ramp, with margins also quickly trending higher. The company expects to produce as many as 5,000 to 6,000 cars per week by early Q3, up from just about 2,000 units towards the end of the last quarter. The company is also targeting high double-digit gross margins for the car over the second half of this year, with margins expected to expand to 25% by 2019.

Tesla Could Still Benefit From A Financial Cushion

However, we believe that another capital raise will likely be necessary for Tesla, considering it has missed production and margin expectations recently, as well as some pending debt maturities in the near term. Moreover, the company’s relatively high capital expenditures (projected at $3 billion) will also put pressure on its finances. As mentioned above, Tesla burned over $700 million in cash over Q1, with its quarter ending cash balance standing at $2.7 billion. The company expects to be cash flow positive for the second half of the year, but we believe that target may not be attainable. We estimate that the company’s free cash flows (cash from operations less capital expenditures) over the second half of 2018 will stand at about ($550 million). Moreover, Tesla also has some near-term debt maturities to take care of, including a $230 million convertible bond due this November, and $920 million in convertible debt due in March 2019. This translates to cash requirements of at least $1.7 billion over the next 10 months. While the company’s cash on hand and credit lines could very well suffice – and of course the company’s cash flows may well exceed our forecast –  the company could de-risk its prospects by raising some extra funds later this year.

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