Tesla's Model 3 Struggles Leave Little `Wiggle Room' on Cash
Tesla Inc. pushed back a production target for its Model 3 again and shipped fewer of the sedans than expected.
(Bloomberg) -- Tesla Inc. pushed back a key production target for its pivotal Model 3 sedan again, raising questions about whether the electric-car maker may need to raise more cash.
The Elon Musk-led company now expects to assemble 5,000 Model 3s a week by the end of June, delaying plans to reach that milestone by another three months. Tesla didn’t come close to achieving an initial goal to manufacture that many of the sedans a week by the end of 2017.
Tesla’s slower ramp up in manufacturing Model 3s led analysts to speculate another capital raise could be coming. The carmaker has been blowing through more than $1 billion a quarter as it’s had trouble scaling up output despite spending heavily on robots, assembly lines and tooling for the sedan that is Musk’s cheapest yet, starting at $35,000.
“Bears will point to this as another missed promise,” Joe Spak, an analyst at RBC Capital Markets, said in a note to clients Wednesday. While a capital raise may not be required, Tesla lacks “a ton of wiggle room” and should seek more cash to mitigate risks, he wrote.
Tesla shares pared losses Thursday after falling as much as 3.6 percent, the biggest intraday drop in five weeks. The stock climbed 46 percent in 2017 and the company ended the year with a $52.3 billion market capitalization, placing it ahead of Ford Motor Co. and behind General Motors Co.
Fundraising ‘Necessary’
“We believe a fundraise will be necessary for Tesla in 2018,” Brian Johnson, an analyst at Barclays Plc, wrote in a report to clients Thursday. He projects the company will burn through $4.2 billion this year and assumes the company will raise $2.5 billion in an equity offering, likely during the third quarter.
Tesla reported deliveries of 1,550 Model 3s in the final three months of the year, trailing analysts’ average estimate for about 2,900 units in a Bloomberg News survey.
Including Model S sedans and Model X crossovers, Tesla delivered a total of 29,870 vehicles during the fourth quarter. The company delivered 101,312 Model S and Model X vehicles for the year, exceeding its forecast for 100,000 units. Sales of those more expensive models jumped 33 percent from 2016.
In the months leading up to launching the Model 3, Tesla raised at least $1.2 billion through an offering of stock and convertible debt in March and another $1.8 billion by tapping the junk-bond market in August.
Major Focus
Buyers of the latest bonds have since taken a hit, and it would likely cost Tesla more to borrow in that market again. The 5.3 percent notes were yielding 6.09 percent on Thursday after the price of the debt dropped.
Tesla still has options for financing given its equity market capitalization, said John McClain, a money manager at Diamond Hill Investment Group. The company could probably also issue unsecured, convertible or secured bonds since the market in general is so strong, he said.
“It would be concerning to me if I were an existing lender that they pushed back production goals and it continues to be a show-me kind of story,” he said. “But I would not question their ability to finance at this point.”
Robert W. Baird & Co. analyst Ben Kallo said he sees Tesla having enough cash and additional liquidity sources to get through the revised 5,000-a-week schedule, meaning no capital raise will be required in the first half of this year.
“We think there is even room to hold off returning to the capital markets if the new schedule goes slightly slower than expected,” he said in an email. “That said, this continues to be a major focus by the market.”
In a statement Wednesday, Tesla thanked customers “who continue to stick by us while patiently waiting for their cars.” The company announced the acquisition of Perbix, a closely held maker of automated machines used for manufacturing, back in November, a week after Musk cited challenges with automating Model 3 production.
Lofty Goals
“Tesla has really lofty goals for automation,” Tasha Keeney, an analyst at ARK Investment Management, which holds Tesla shares, said in a phone interview. “One you have it right you can ramp really quickly, but getting to that phase is the difficult part.”
Tesla ended September with about $3.5 billion cash in hand and projected another $1 billion in capital expenditures during the last three months of the year. By postponing production plans, the company may also be deferring spending, said Jeff Osborne, an analyst at Cowen & Co. who has the equivalent of a sell rating on the shares.
The company may need to raise another $1 billion to $1.5 billion over the next six months, Osborne said Thursday on Bloomberg Television.
Tesla reported 860 Model 3 sedans were in transit to customers at the end of December. The company said it made significant progress on speeding up manufacturing of the sedan late last month, producing 793 units in the last seven working days.
“Tesla is always a quarter away, and now you have to wait six months to get your report card on your investment thesis,” Osborne said by phone Wednesday. “They’ve kicked the can down the road.”
--With assistance from John Lippert and Molly Smith
To contact the reporter on this story: Dana Hull in San Francisco at dhull12@bloomberg.net.
To contact the editors responsible for this story: Craig Trudell at ctrudell1@bloomberg.net, Anne Riley Moffat
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