Is Tesla Really in Dire Need of Cash, as Market Analysts Suggest?

Tesla cash position

Now that the focus is back on a publicly listed Tesla, questions about Tesla’s cash position and debt repayments have started swirling around the company. Tesla’s unprofitable past has forced the company to stay dependent on debt+cash to fund its operations. Though Tesla says all that will change during the third and fourth quarters and the company will be able to fund itself using its own cash flow, there aren’t many takers for the ‘Tesla will be profitable in the second half of 2018’ theory.

What did the Tesla say?

The company says that it expects total non-GAAP operating expenses to remain relatively stable – at Q2 levels – for the rest of the year. Tesla has repeatedly said that it will achieve GAAP profitability in Q3- and Q4-18.

Why does Tesla think it can turn a profit in Q3 and Q4?

  • Tesla expects Q3 deliveries to outpace production. More cars delivered equals more revenue earned.
  • Tesla also expects Model 3 gross margin to reach 15% in Q3 and increase further to 20% in Q4 as production scale adds cost benefits.
  • Tesla’s average selling price for Model 3 is boosted because of a large number of customers ordering All-Wheel-Drive Model 3s that start at $54,000 over the rear-wheel-drive model that starts at $49,000.
  • Since the time Tesla started registering the AWD Model 3, more than 70% of VINs registered were AWD. This pushes the price mix to a higher level, adding more support to margin levels.

But we have heard about this ‘Tesla is running out of cash’ thing before

A lot of analysts believed that Tesla will run out of cash very soon.

Ascendiant Capital Partners analyst Theodore O’Neill: Tesla needs $2 billion to $3 billion by the end of this year.

Goldman Sachs Analyst David Tamberrino: Tesla needs $4 billion to $5 billion in financing to increase Model 3 Production Capacity to 10,000 units.

Gordon Johnson, managing director at Vertical Group: Tesla will exit second quarter 2018 with less than billion dollars in cash.

Now, here’s what happened in the second quarter

Tesla surprised everyone by exiting the second quarter with $2.236 billion cash on hand, compared to $2.665 billion the company had at the end of first quarter of 2018. Tesla burned less than $500 million during the second quarter, which is a lot less than the near-billion dollars the company burned through during the first quarter.

Tesla has two debt repayments due: The payments are spread out

Due on Nov. 1: $230 million SolarCity convertible

Due on March 1, 2019: $920 million from a Tesla convertible

One is due in the fourth quarter of 2018 and one is due in first quarter of 2019. If Tesla continues its production ramp and reaches a per-week Model 3 production rate of 10,000 units by the end of the year, Tesla will be looking at a quarterly delivery rate of more than 120,000 units for the Model 3 alone – more than 2017 total deliveries.

Tesla believes margins will significantly improve as production scales up, and that this will allow Tesla to improve its cash position, thereby cutting the need for additional funding. But the market still remains unconvinced.