Despite the positive news from Tesla (NASDAQ:TSLA), the company’s cash flow problems, and the resulting drag on TSLA stock, will not go away anytime soon. But TSLA has a strong brand which it can leverage for the next few quarters. Moreover, TSLA has already shown great product development capabilities compared to other auto companies that have more resources.

Using those two strengths, Tesla can start selling electronics products, enabling it to build a strong cash flow machine that can fund its ambitions in the electric vehicle (EV) and solar segments.

Currently, Apple (NASDAQ:AAPL) is the only U.S. company among the world’s top five smartphone manufacturers. Overseas smartphone makers Huawei, Xiaomi and Oppo have faced regulatory hurdles in launching their products in the U.S market. Tesla can take advantage of this situation by entering the electronics segment, enabling it to build a business with strong cash flow and huge margins. Such an initiative would also help the company build a better ecosystem for its cars.

Solving Tesla’s Cash Flow Problem

As TSLA ramps up production of its Model 3, it has proved most of the naysayers completely wrong. A huge amount of attention is devoted to the actual production levels of the company’s Model 3 cars every month. It would be better to focus on long-term production trends and let the company’s management iron out any production issues.

But it is quite obvious that Tesla’s biggest hurdle is actually its cash burn rate. Bloomberg has built a nice tool which shows Tesla’s cash burn rate.

It is possible that TSLA will need to raise more money if its cash burn continues at its present rate. A recent report by Goldman Sachs estimated that Tesla would require a whopping $10 billion by 2020 to fund the launch of new models, bankroll its expansion in China and make its cars. That is a staggering number. but Musk has said that it would be able to continue its operations without additional funding.

However, even if Model 3 production accelerates meaningfully and the company successfully launches new models, the company’s cash flow problem will not be solved. So TSLA immediately needs to enter asegment within its core competence which can provide it with sufficient margins.

TSLA has a huge brand presence with a strong fan following. As a result, it has been able to maintain its customer base and its Model 3 deposits while it solved the production issues. Earlier this year, Musk was able to sell 20,000 flamethrowers for $500 apiece, generating $10 million, of revenue within a few days and without any marketing.

Tesla has built a strong brand, but it needs to provide customers with the ability to buy the brand at a much lower price point. A college graduate might not have enough money to buy a Tesla car, but he would still like to experience the Tesla brand. The ideal option is to sell smartphones or other electronic products which cost less than $1,000 and still provide the company with sizable margins and free cash flow.

The Total Addressable Market

AAPL sold 216 million iPhones in its last fiscal year. These smartphones generate close to two-thirds of its total revenue and possibly a higher percentage of its net income. Apple’s annual free cash flow has been relatively stable at $50 billion for some time. If TSLA was to start competing with AAPL, it would ideally target the premium category within smartphones and wearables, in order to protect and enhance its brand image.

A significant percentage of Tesla’s customers has supported it because of its mission of bringing clean energy into the mainstream. Any customer who buys a $1,000 Tesla phone can be assured that any profits that the company makes on the product would directly fund the development of better EV vehicles and platforms. That is a much more appealing use of profits than using them to fund the buybacks of billions of dollars of stock, as AAPL is doing every quarter.

Can Tesla Build a Profitable Electronics Segment?

An entrance by TSLA into the electronics segment would carry less risk than other initiatives it has undertaken, while allowing the company to leverage some of its core strengths.

Tesla has shown that it can sell tens of thousands of cars annually without spending any money on any advertising. Its product development has also been superior to other, much larger companies. Another one of the advantages of the strategy I’ve proposed is that TSLA can easily outsource the manufacturing of smartphones and other electronics. Tesla’s manufacturing abilities have not been great, to put it mildly. Finally, TSLA wouldn’t need to invest that much in R&D to launch and sell its own line of electronic products.

One of the smartphone manufacturers which has recently gone public is Xiaomi. It currently commands a market cap of close to $50 billion. It spent 3.2 billion yuan or roughly $500 million on R&D in 2017. Last year it shipped 91 million smartphones.

Tesla is already increasing the amount of electronics within its cars. A recent teardown by Munro & Associates shows that TSLA will be able to increase its margins by integrating more electronics within its cars. By entering the smartphone segment, TSLA can not only add millions of new customers but also expand its own electronic ecosystem.

Overall, it looks like Tesla can afford to take this step. However, the company’s management is already busy with a whole host of difficult problems which include ramping up Model 3 production, running the company’s solar business and bringing new models to the market. Any additional business segments will reduce the amount of time that management can spend on dealing with car production issues. Ideally, once TSLA starts producing 10,000 Model 3 vehicles per week, the operation  should become much smoother, enabling the company’s management to oversee other businesses.

Tesla’s ability to leverage its brand image to build new profitable segments is not reflected in the current price of TSLA stock.

The Bottom Line on TSLA

Tesla desperately needs to build a new segment which can meaningfully boost its free cash flow, helping to support its auto production. The ideal choice for this new segment would be electronics in general and premium smartphones in particular, since they have high margins. Tesla has a great brand and tremendous product development capabilities. As a result, it can bring new, innovative electronic devices to the market.

As of this writing, the author did not hold a position in any of the aforementioned securities.