The cash-burning ways of Tesla Inc (NASDAQ:TSLA) have long been one of the biggest arguments flung by those who are bearish on TSLA stock. Tired of being a niche luxury brand for the rich, the California-based electric-vehicle maker wants to take on Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) in mass-market automotion by ramping up production of its newest car, the Model 3.
Beating Ford and GM is going to cost tons of money, which is why Tesla just announced a $1.5 billion bond offering.
Tesla Is Betting on Itself
Tesla has to produce 100 Model 3 units this month, then ramp up to 20,000 per month by December, to meet its own expectations. That makes now a make-or-break period for TSLA stock. That level of production ramp, which could drain Tesla’s cash reserve, won’t be chump change. Tesla ended its second quarter with $3 billion in cash — down from $4 billion in the first quarter.
So it’s no surprise that the Palo Alto-based automaker, which lost $336 million in its most-recent quarter, announced on Monday morning plans to sell $1.5 billion in corporate bonds, which the company will use to strengthen its cash position.
Although the company was still determining the interest rate, redemption price and other terms of the new bonds, it marks Tesla’s second capital raise this year. Tesla raised $1.15 billion back in March to help fund the Model 3 and other expansion projects.
Analysts already are speculating whether Tesla will need to raise more cash before the year is over. The rate at which TSLA is burning through cash is estimated to surpass $2 billion this year and has prompted short-sellers like Greenlight Capital’s David Einhorn to bet on the fall of TSLA stock.
Long investors, on the other hand, are not overly concerned. That’s despite CEO Elon Musk admitting that his company would face months of “manufacturing hell” as it increases production of the Model 3.
Will the Cash Spigot Run Out?
TSLA stock, which has risen some 14% over the past month, is hardly reacting to Monday’s announcement, down just fractionally after a few hours of trading.
Good on investors.
Musk recently announced that even after 63,000 cancellations, the company still boasts 455,000 preorders of the Model 3, with each customer paying $1,000 up front. That’s still a good place to be from a cash perspective, and it almost guarantees that Tesla will sell all of the vehicles it can produce not only this year, but also for all of 2018.
But can Tesla make enough money per vehicle?
The Model 3 base unit costs $35,000, which is about half the price of Tesla’s next-cheapest car, the Model S. While Tesla believes the lower price point would enable it to become more mainstream, analysts worry about the impact on margins, which already are under pressure. Depending on who you ask, Tesla reportedly spends anywhere between just under $30,000 and up to $80,000 to build a Model 3.
Even if reality is somewhere in between, that’s not necessarily a black mark against the Model 3. While the base price is $35,000, Musk believes the average price once options are included will hover closer to $42,000. Data from Model3Tracker.info shows that “most reservation holders are preparing to pay between $45,000 and $55,000.”
Still, as s a whole, Wall Street seems generally worried about the expense to build a Model 3, or at the very least, accepting but realistic about it. Morgan Stanley analyst Adam Jonas had perhaps the most colorful response to Tesla’s second-half capex guidance of $2 billion, saying it will “make your eyes water. … Time will tell if they are tears of joy.”
Cash-need projections have sent TSLA stock on a roller coaster ride over the past three months, falling as much as 21% from its June high of $386.99 to a recent low of $306.30. While Tesla is racking up debt, however, much of it is being used for research and development, shoring up its infrastructure and technology which Musk believes will make it even more difficult for competitors to catch up.
To be fair, Musk never promised it would be a smooth ride.
Bottom Line on TSLA Stock
The bull case for Tesla centers on the company’s ability to disrupt or transcend the auto industry on its way toward becoming the tech behemoth Musk implies it can become. The question is, how much of that future disruption should investors bet on by sacrificing near-term profits?
From my vantage point, the cash burn aside, Tesla is operating on all cylinders. And I expect TSLA stock to reach $400 by the end of the year, driven by increased enthusiasm for the Model 3.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.