Whether you love or despise Tesla Motors Inc (TSLA) CEO Elon Musk, never let it be said he doesn’t keep things interesting.
Along with yesterday’s released of the company’s Q1 numbers, he not only affirmed that the electric car company would be able to produce vehicles at a pace of half a million per year in the foreseeable future, he said the company would be doing it by 2018 rather than the initially suggested 2020.
Instead, by 2020, the annual production pace should reach 1 million units.
Owners of Tesla stock loved the news (plausible or not) at first, given a quick 3%-plus jump in after-market action Wednesday night. Surely Musk wouldn’t say it if he didn’t at least believe it was possible … even likely, right?
Well, given Thursday’s quick turnaround back into the red, some sort of doubt is starting to creep in.
Maybe that’s because whether Tesla Motors is capable of producing 500,000 vehicles in 2018, or if it must indeed wait until 2020, is a debate that’s overshadowed something else far more concerning to owners of Tesla stock: That is, how much dilutive fundraising will have to happen in the meantime to grow the company’s capacity to that level?
It Won’t Be Cheap, or Easy
Just as a reminder, Tesla Motors did relatively well last quarter. Sales of $1.6 billion were in line with estimates, and the per-share loss of 57 cents was less than the loss of 60 cents per share of Tesla stock the pros had been calling for. On the other hand, the company’s second-quarter production estimate was a bit lackluster. Tesla expects to deliver 17,000 electric vehicles in the quarter currently underway, versus analyst expectations of 19,500.
The longer-term outlook trumped any short-term worries, though. TSLA still plans on producing between 80,000 and 90,000 cars this year, and now intends to build 500,000 electric vehicles per year by 2018 now that massive demand for the Model 3 has been revealed.
A five-fold increase in production capacity is a tall order. It’s also going to be an expensive one. Musk explained in his letter to Tesla stock holders:
“Given our plans to advance our 500,000 total unit build plan, essentially doubling our prior growth plan, we are re-evaluating our level of capital expenditures, but expect it will be about 50% higher than our previous guidance of $1.5 billion for 2016. Naturally, this will impact our ability to be net cash flow positive for the year, but given the demand for Model 3, investing to meet that demand is the best long-term decision for Tesla.”
Musk also made it clear earlier in the shareholder letter:
“Increasing production five fold over the next two years will be challenging and will likely require some additional capital, but this is our goal and we will be working hard to achieve it.”
Most observers are fairly removing the “likely” qualifier from Musk’s statement.
The dollar amount Tesla needs isn’t clear. For perspective, though, TSLA has access to $1.2 billion in cash, could sell its $1.2 billion worth of inventory, and tap into its $865 million secured line of credit, and it still might not be enough to get Tesla Motors to the proverbial promised land. Tesla will have to fund the expansion first before it can make any money selling cars … even if it can scale production up over time.
Most analysts expressed more concern than optimism in terms of the company’s brewing cash crunch, but Bank of America’s John Murphy may have summed up the opinions best:
“Given ongoing manufacturing issues and delayed ramp of the Model X, we question whether (i) this target is actually achievable, and (ii) can be done so without a significant capital raise in the near future…By our estimates, TSLA will burn roughly $(1.6)bn in cash in FY16 (includes Model 3 deposits), with no real relief in sight…TSLA has raised capital every year since 2010, and we believe if the company fails to turn the corner on free cash burn in the near term, which we view as unlikely, support for the stock may dissipate…[We] do not expect the company to be free cash positive on an annual basis in at least the next three years.”
The magic number is still unclear, but selling $2 billion worth of Tesla stock doesn’t seem like an out-of-line possibility. In fact, don’t be shocked if it’s even more than that, as the company tends to underestimate costs and the amount of time required to make production progress.
And then, of course, there’s the similarly big question: Even if Tesla didn’t have to raise a penny, is it even logistically possible to build that much production capacity in just two years?
Never say never, but again, Tesla has a history of not meeting its ridiculous deadlines … even ones it imposes on itself.
Many experts don’t see it happening either. Kelley Blue Book analyst Karl Brauer is one of the, who noted on Wednesday “He has a history of not ever delivering on time. … It isn’t that he has to avoid a hiccup. He has to avoid 78 hiccups. … It’s impossible for things to go that well, or that smoothly.”
Bottom Line for Tesla Stock
As yours truly noted yesterday, and as the Wall Street Journal iterated today, owning Tesla stock is an investment in a premise rather than actual results; there’s not even a great deal of reason to have hope the premise will be a financially viable one.
And yet — for the time being anyway — the premise of a mass-produced, good-looking electric vehicle is good enough for most investors, regardless of whether dilution is in the cards.
Elon Musk doesn’t have an unlimited amount of time to produce a profit, though, particularly when he keeps asking the market for more money.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.