Will Tesla Need To Raise More Cash Despite Model 3 Sales Accelerating?

Tesla’s (NYSE:TSLA) cash outflow has accelerated this year, with the company burning through roughly $1.8 billion over the first half as it ramped up production of its mass-market sedan, the Model 3, causing its cash balance to dwindle to about $2.2 billion as of the end of June. However, Tesla has explicitly mentioned that it would not need to return to the capital markets this year, indicating that would be cash flow positive in Q3 and Q4 2018 with the ramp of its Model 3 sales. That said, Tesla investors are still likely to be apprehensive about the company’s liquidity position considering its high operating expenses and impending debt maturities. In this note, we take a look at what Tesla is doing to turn cash flow positive and whether it will 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 two quarters.

Model 3 Ramp Should Help Tesla Turn Cash Flow Positive

Much of Tesla’s recent cash burn has been directed towards setting up production lines and sorting out early production issues for its Model 3 sedan, and now there are signs that the company’s investments could begin to pay off.  Tesla reached its target of producing 5,000 Model 3 cars per week towards the end of Q2 2018, and indicated that it repeated this weekly production rate multiple times through July, while also producing 2,000 Model S and X vehicles. The company’s revenues are expected to rise to over $6 billion in Q3, from just over $4 billion in Q4, per consensus estimates from Reuters. Gross margins are also expected to trends upwards on a sequential basis. While Model 3 margins were positive in Q2, Tesla has indicated that gross margins for the sedan should grow to about 15% in Q3 and around 20% in Q4, driven by a continued reduction in manufacturing costs and an improving product mix. Tesla’s capital expenditures are also expected to drop to under $2.5 billion this year, from around $3.4 billion last year.

Although we forecast that the company will see modestly positive cash flows over Q3 and Q4 2018, there is still a possibility that it will still need to tap into the capital markets later this year, as it has a history of missing production and margin expectations. 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. Moreover, CEO Elon Musk’s relatively erratic behavior in recent months is also likely to be making investors slightly more circumspect about the company’s recent guidance. Although a new bond issue might carry high yields, while an equity raise would dilute existing shareholders, the company would still be wise to de-risk its prospects by raising some extra funds later this year.