How much money Tesla will need — and how hard it will be to get it — are critical questions for investors in the electric-car company with a stock valuation that a majority of Wall Street analysts already think is stretched. But as Tesla stockholders weigh several big questions at its annual shareholder meeting on Tuesday, the cash-crunch scenario is one that defies an easy answer.
If investors take founder and CEO Elon Musk at his word, Tesla has no current need or plan to raise capital. Wall Street analysts, though, peg Tesla's cash needs in line with their view of the car maker's ability to meet Model 3 production goals. That results in a wide range of estimates for cash that will be required — from as little as $2 billion to as high as $10 billion over the next few years.
Tesla has missed production targets for the Model 3 many times since promising it would begin to reach consumers last year. Cash flow expected from sales of the 400,000-plus Model 3's on order have been expected to help fund several other Tesla initiatives — a new gigafactory to make batteries in China, a new auto plant to make the Model Y small SUV, and managing roughly $3 billion in debt maturing between this year and 2021.
But Tesla's cash situation is not the apocalyptic event some pundits think it is. At least, that's the view of several sell-side stock analysts who follow the Silicon Valley-based automaker.
If Tesla meets production targets calling for it to be making 5,000 Model 3's a week by the end of June and hits 10,000 by 2019, then the company will need to raise as little as $3 billion to $4 billion, some analysts estimate — and should have an easy time doing it. If Tesla continues to miss, its capital needs could hit $10.5 billion by 2020, to be raised in a market that will be digesting fresh explanations for already-broken promises that have helped make Tesla a target of short sellers and strained relations with analysts. Only six of 17 analysts with ratings on the shares recommend buying it, according to Zacks Investment Research.
The lack of buy ratings is partially a function of the stock's sky-high valuation and the gains its shares have already made. Even amid a steady stream of negative headlines, Tesla shares are still near-$300. The stock price also gives the company financial flexibility.
"With the stock at $296, I don't see any reason to think they would have a problem" selling either stock or debt, said CFRA analyst Efraim Levy, even though CFRA's fair value estimate model calculates that Tesla shares are overvalued by more than $150. "If they miss production targets, they get increasingly vulnerable. How much depends on how much they miss by.''
The most exhaustive recent analysis of Tesla's debt issue comes from Goldman Sachs analyst David Tamberrino, who has a sell rating on the stock. Tamberrino and his colleagues note that Tesla had $2.7 billion in cash on its balance sheet at the end of the first quarter, down from $3.4 billion at the end of 2017. Goldman projects that Tesla's free cash flow will be –$2.3 billion this year, thanks to capital investment that is still aggressive, even after Tesla recently lowered its 2018 spending forecast by $400 million, to $3 billion.
Tamberrino is skeptical that Tesla will meet its production goals, leading to his forecast that the company will be low on cash by year-end. If the company does hit its production targets, making 5,000 vehicles per week by September and 10,000 weekly by the end of next year, then Tesla will have to raise about $5.7 billion to refinance debt, fund operations and sustain capital spending, Goldman estimates.
Goldman thinks capital expenditures will be about $3.6 billion each of the next two years. If that's the case, the company should not have to sell stock, diluting current shareholders, and should be able to make the numbers work well enough to accomplish most borrowing in the less-expensive market for bonds that are convertible into Tesla shares if the stock rises, Goldman said in a May report.
"The company has [targeted] a sustainable rate of 5,000 [Model 3's] a week in 3Q18 of this year, and the ability to hit the 25 percent gross [profit] margin target over time," Goldman said. "Should the company meet those targets, and ramp production of the Model 3 to 10,000 a week by the end of 2019, the company may not need to raise equity capital in 2018 or 2019. However ... we still believe Tesla would need $4 billion to $5 billion in financing required to build out [its] capacity. With a more healthy balance sheet from the ramp of Model 3 units in this scenario, this could likely be achieved in the debt markets alone.''
The problem gets tougher if the company continues to miss production schedules, delivering cars more slowly than CEO Elon Musk has led the markets to expect. In the worst-case scenario, Tesla has to raise $10.5 billion by 2020 — a tallish order for a company with a $50 billion market valuation and $9.4 billion in long-term debt already — to accomplish the same goals, Goldman said. If that's the case, Tesla's own contention that it won't have to raise money in 2018 would go out the window, with the company likely selling about $1 billion in stock this year and another $1 billion next year.
Even if Tesla does make production targets, it will also have to meet targets for gross margins that most of Wall Street considers unrealistic in order to deliver on its stated goal of being profitable and free-cash-flow positive by the third quarter, according to Sanford C. Bernstein analyst Toni Sacconaghi.
At the low end of reasonable, Tesla may need to raise as little as $3 billion to get through the next couple of years, Levy said, adding that if the company gets to profitability, it will be less dependent on capital markets and have "more control over [its] destiny.'
Ascendiant Capital Partners analyst Theodore O'Neill says if things go badly, Tesla could need $2 billion to $3 billion by the end of this year.
"If Tesla hits the $10-per-share net income loss, they're going to run out of cash by the end of the year,'' said O'Neill, who said the consensus estimate on Wall Street is that Tesla will lose $9.70, including $4.19 in the already-reported first quarter, under generally accepted accounting principles. Many analysts project that Tesla will lose just about $6.89 a share, excluding certain noncash expenses, such as stock compensation.
But even that isn't necessarily a disaster, O'Neill said. The question isn't whether Tesla will need to borrow money at some point — that's a given if the company wants to keep expanding and adding to its product line, he said. The real question is whether it can make enough cars by the time it needs cash to make clear it will be turning a profit big enough to repay new bondholders, O'Neill said.
"If they are at 5,000 Model 3's a week [produced and shipped] by the end of the year, it will be an easy sell" to the financial markets, O'Neill said. "It will be obvious to everyone that they need working capital. But if it goes into 2019, it will get harder, because they will have disappointed everyone for another year."
Tesla has said it doesn't plan to raise capital this year and has no plans to raise equity capital, but they haven't always said it nicely. When Sacconaghi asked about it on the company's first-quarter earnings call, a now infamous response from Musk was offered.
"Boring bonehead questions are not cool," Musk said. "Next.''
Musk has not backed down from his attack, and followed it up by saying the questions he dismissed on the conference call were from analysts who represent short sellers. Chances are, Tesla shareholders will insist on a better answer in person, but as the wide range of Wall Street analysts suggests, it's not a question that has a single answer.