Musk’s ‘no new capital’ promise faces scrutiny

Investors are accustomed to the bold promises of Tesla Inc’s Elon Musk, but his assertion that the electric vehicle maker will not need more funds this year has many scratching their heads. How can the chief executive deliver on his many goals without a fresh infusion of outside cash?
The California-based Tesla faces a crucial time in its 15-year history. Production setbacks with its new Model 3 — the hotly anticipated sedan Tesla vowed would push electric vehicles into the mainstream — have cast a shadow over Musk’s promises and judgement. A host of new projects in the pipeline, from a semi truck to an SUV, now appear to some analysts as expensive, time-consuming distractions, even as rival automakers come to market with their own electric offerings.
A capital raise would raise alarm bells with investors as the company continues to burn money. Tesla reports first-quarter results on May 2.
Understanding Musk’s bullish prediction is a complex accounting exercise that relies on multiple best-case scenarios. These include: building a promised 5,000 Model 3 sedans per week by the end of the second quarter; curtailing or deferring high spending that added up to $3.4 billion in capital expenditures in 2017; and improving gross margins.
The dearth of information about Tesla’s multiple capital-intensive projects — from the Model Y crossover this year, the partially built battery Gigafactory in Nevada, and the Semi truck and Roadster, forecast to begin production in 2019 and 2020 — complicates the task.
“There are a lot of moving parts there,” Andrew Walker of Rangeley Capital, which holds a small short position in Tesla, said. “It’s just so many questions and such a black box, it’s very difficult to determine going forward.” Shorts bet that a share price will fall.
UBS analyst Colin Langan has estimated that Tesla — which ended 2017 with $3.37 billion in cash — could fall below a cushion of $1 billion at the end of June due to estimated negative free cash flow of $1.6 billion in the first half of the year. Some, like Bernstein, put that estimate higher, at negative $1.8 billion.
Subtracting another $1.2 billion for 2018 debt refinancing and accrued liabilities reduces Tesla’s cash level to $600 million, UBS calculates. Using a more bullish free cash flow model, such as Morgan Stanley’s first-half estimate of negative $880 million, Tesla would still hover just above the cushion, at $1.3 billion.
“Tesla may not ‘need’ to raise funds, but many investors expect that the company will very much ‘want’ to,” wrote Morgan Stanley’s Adam Jonas in a note published last week. — Reuters