Last week, following the latest abysmal (if only in GAAP terms) quarter for Tesla, we showed what we thought was without a doubt the most important chart for the company that has taken "story" to the next level: its cash flow, or lack thereof, and the stunning observation that in just the first six months of 2015, Tesla burned $1.1 billion in cash. Its current cash levels? Just $1.2 billion more.
The problem, judging by the collapse in its stock price after its Q2 earnings, others are starting to notice too, such as Reuters. And now that the growth "story" has taken a back seat following the latest guidance cut in deliveries, fears that the company will have to dilute shareholders to keep the "story" afloat, are rapidly emerging. Case in point, Reuters calculation of a fact that was known to most observers but certainly not to retail enthusiasts who "bought the stock just because others bought the stock", i.e., that Tesla loses about $4000 on ever car it makes.
The Silicon Valley automaker is losing more than $4,000 on every Model S electric sedan it sells, using its reckoning of operating losses, and it burned $359 million in cash last quarter in a bull market for luxury vehicles. The company on Wednesday cut its production targets for this year and next. Chief Executive Elon Musk said he's considering options to raise more capital, and didn't rule out selling more stock.
Musk has taken investors on a thrill ride since taking Tesla public in 2010. Now he's given himself a deadline, promising that by the first quarter of 2016 Tesla will be making enough money to fund a jump from making one expensive, low volume car to mass producing multiple models, and expanding a venture to manufacture electric power storage systems.
Now that might be tricky, because unless like AMZN, Tesla has a seriously underestimated source of profitability (we have yet to hear of the Tesla Cloud), the company has just pigeonholed itself and is willing to trade off its growth "story" for cash burn. Which with nearly virtual certainty, results in about a 30-50% cut to forward multiples.
Another glass of cold water for TSLA fanboys are comparisons to GM, whose market cap of $50 billion was recently seen as within reach of Tesla. There are, however, some notable differences:
GM sells more than 9 million vehicles a year, while Tesla plans to build between 50,000 and 55,000 cars this year. Tesla, most of whose cars are built to order directly, delivered 11,532 cars in the second period and said it had an operating loss of about $47 million, for an operating loss per car of about $4,000. Tesla's narrower margin for error is just one more way in which it is different from its century old rivals.
So if the car, pardon, battery, pardon hyperloop market can't "grow" into every possible direction its visionary founder wants it to, on the back of unprecednted cash burn, just how will TSLA grow, or rather shrink, into its balance sheet?
The company said it plans $1.5 billion in capital spending this year, mainly to launch its Model X, battery powered sport utility vehicle with eye-catching, vertical-opening "falcon wing" doors. Tesla reported $831 million in capital spending during the first half of the year, indicating it will spend roughly another $700 million.
During the second quarter, Tesla said operating costs and research and development spending rose, while average selling prices for the Model S lineup, which starts at $70,000 before federal and state electric vehicle tax breaks, fell 1 percent as the mix of sales shifted to less expensive models and a strong dollar hit revenue generated overseas. The Model S comes in several different versions, ranging in price up to $106,000 or more, depending on options.
Elon Musk's - and TSLA shareholders' - hope is that Tesla capital spending will plunge next year because the company won't be spending on a major vehicle launch. In 2017, Tesla plans to launch its Model 3 line, which the company says will start at about $35,000 and push total sales toward the goal of 500,000 vehicles a year by 2020.
However, Barclays analyst Brian Johnson disagreed with the company's estimates, and said he expects Tesla's capital spending will go up in 2016 and 2017 as the company ramps up its battery factory and Model 3 development. "Their small scale means the cash generation is not as great as they might have hoped for," he said.
Worse, as noted top, at the current cash burn rate, TSLA can only fund just two more quarters of cash burn at which point, and most likley well before it, the company will have to aggressively raise new capital.
Sure enough, Musk said this week Tesla expects to have $1 billion in cash over the next year, and told analysts "there may be some value" in raising capital "as a risk reduction measure."
Some more troubling comparisons: Tesla's stock is still about 70 percent higher than it was two years ago, and 8 percent ahead of its level on Jan 1. With a market capitalization of $31 billion, Tesla is worth more than Fiat Chrysler Automobiles NV, the much larger maker of Ram pickups and Jeep Grand Cherokees.
"A capital raise, given the way they're burning cash today, given the fact that they have future investment needs, seems very likely at some point," said UBS Securities analyst Colin Langan, who has a sell rating on the stock.
Reuters reminds us that Musk has steered Tesla out of tight corners before. In September 2012, the company faced a cash crunch, but raised money by selling shares and renegotiating the terms of a federal loan. The Model S started production in mid-2012. One
Oh and let's not forget the infamous February 2014 "incident", when Morgan Stanley underwrote a massive $1.6 billion convertible for TSLA the day after it more than doubled its TSLA stock price target: a move which would be grounds for a criminal probe in any country not controlled by Wall Street.
Which brings us back to our favorite topic about TSLA: GAAP vs non-GAAP, and a divergence that should inspire at least one FASB probe into the farce that Tesla's financials have become. Presenting exhibits A and B:
... and Revenue (yes, non-GAAP revenue, which is now flat since December 31, 2014):
Finally the mainstream media has finally figured this out too:
Tesla reports its finances in a different way from the Detroit automakers. Using the generally accepted accounting principles, or GAAP, used by GM or Ford, Tesla's operating losses per vehicle have steadily widened to $14,758 from $3,794 in the second quarter of 2014.
But Tesla points out in its statements to investors that its GAAP accounting excludes certain revenue and profits from Model S sedans that customers lease. In the second quarter, the deferred gross profits from Model S leases amounted to $61.9 million, Tesla said. Analysts say they add back the deferred revenue to make Tesla's figures more comparable to the reporting used by other automakers.
If more start pointing out that the car-making emperor's clothes are made out of non-GAAP thread, as we have since 2012, things Musk will go sour very quickly. In fact, we will conclude with Reuters' own assessment of the situation in gratitude that at least one media outlet finally admitted what we have been saying since 2013: "It's crunch time for Tesla Motors."