Tesla (NASDAQ:TSLA) to the Dust-bin of Automotive Wannabees?

Tesla (NASDAQ:TSLA) to the Dust-bin of Automotive Wannabees?

Tesla (NASDAQ:TSLA) to the Dust-bin of Automotive Wannabees?


From the outset Elon Musk’s strategy for Tesla has been bootstrapping: Use the money from the Lotus based roadster to develop and build the M-S; use cash from the M-S to develop and build the M-X; use cash from the M-X to develop and build the every mans M-3.

A combination of cash from sales, capital raises from Wall Street’s equity and debt markets have helped the company to grow a war chest over the past several years.

Chart of Tesla's Cash Balance
Chart of Tesla’s Cash Balance Data source: SEC filings, the Y 2018 figures accurate as of 30 September 2018.

A lot of pessimism surrounds the company, some from Musk’s Noise, but there are other things far more deeper and important.

It is a fact that of all of America’s car makers only Ford (NYSE:F) and Tesla have never declared bankruptcy.

Running a car company is 1 of the most difficult tasks in the business world, as there are huge up-front costs, including building manufacturing facilities to procuring the raw materials to build the cars, there are huge numbers of employees to pay, and demand can be dicey depending on the macro-economic environment.

Tesla is not immune to these headwinds.

A close look at the company’s accumulation of long-term liabilities offers a case in point.

Chart of Tesla's long-term liabilities
Chart of Tesla’s long-term liabilities. Data source: SEC filings. Reflects total liabilities minus current liabilities. All figures rounded to nearest $100-M, the Y 2018 figures accurate as of 30 September 2018.

In an effort to dramatically ramp up production of the M-3, Tesla’s balance sheet got loaded with debt in Y 2016. As stories of production Hell trickled out to the press, many have become concerned that Tesla will have trouble meeting its debt obligations.

Some of the company’s convertible notes may come nowhere near their strike prices, creating huge obligations that need to be fulfilled.

If those fears were realized, it could avalanche the company.

The stock would deep dive, making capital raises difficult, and lenders would demand ‘junk’ interest rates, making funding next to impossible.

But Tesla is not at that juncture just yet.

The most important long-term figure for investors to watch is FCF or free cash flow.

FCF represents the amount of money a company puts in its bank account every year as a result of running the business, minus any capital expenditures. Since going public, Tesla has never meaningfully generated positive free cash flow, until Q-3.

Chart of Tesla's free cash flow
Chart of Tesla’s FCF.
Data source: SEC filings. All figures rounded to nearest $100-M. The Y 2018 figures represent trailing 12 months as of 30 September 2018.

Not surprising, given Tesla’s very young tenure as a car-maker. But, it cannot stay this way much longer. The M-3 is supposed to represent Tesla’s move toward financial sustainability.

If the company manages to come through the tight, debt-laden space it has put itself in and fulfills its mission to fully wean drivers from a world awash in cheap gasoline, it will be awesome, and mean huge gains for investors.

If (a big if) it does not, it will end up in the dust-bin of super but failed ideas that could not be executed.

HeffX-LTN Analysis for TSLA: Overall Short Intermediate Long
Neutral (0.23) Bullish (0.27) Bullish (0.42) Neutral (0.01)

Stay tuned…

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