Tesla’s Life After Hell: 7 Charts Show Musk on Firmer Footing
(Bloomberg) -- One year ago, Tesla Inc. was struggling to turn out a few hundred Model 3 sedans in a week—and then things got worse. Elaborate plans for factory automation had to be scrapped at extraordinary cost, debts piled up and investors were spooked. At the lowest moments of 2018, Chief Executive Office Elon Musk said, the company bled $100 million a week.
To start 2019, Tesla is turning out more than 4,700 Model 3s each week. The electric-car maker has emerged from its year of existential uncertainty as one of the most valuable car companies in the world, with a stock value greater than Ford Motor Co., General Motors Co., BMW AG and, depending on the day of the week, Daimler AG. This may end up helping the company reduce its debt obligations and limit future borrowing costs. The hot mess that was last year has, somewhat surprisingly, forged Tesla into a company on more solid footing for the year ahead.
As more cars roll out, money is flowing in. The Model 3 is now generating more revenue than any other sedan in the U.S., and Tesla’s cash flows have flipped from burning about $1.7 billion in the first half of 2018 to generating $774 million in the third quarter. (Results for the fourth quarter and full year are expected in February.)
A decade after cobbling together its first car, Tesla and its havoc-making CEO still have much to prove. But the question of whether Tesla would ever make the leap to mass manufacturing has been answered. Here are seven themes capturing Tesla’s tumultuous year of “production hell” and indicating where the company could go next.
Finally Cashing In on Mass Production
In the final weeks of 2018, Tesla sold its 500,000th car. That milestone took 10 years to achieve. The next half-million car deliveries will take about 15 months, if the company maintains its current pace, which would make Tesla both the first automaker in the world to sell 1 million electric vehicles and the first major American carmaker to emerge in nearly a century.
Tesla sold almost as many cars in 2018 as all the years that came before it, combined. This growth fueled Tesla’s climbing shares, which rose more than 50 percent from an October low—after Musk lashed out at the Securities Exchange Commission over his punishment for problematic posts about taking the company private—to a December high. In the closing weeks of 2018, Tesla’s market capitalization overtook Mercedes-Benz maker Daimler as the third most-valuable automaker. Since then, the two have vied back and forth for the spot.
It’s worth remembering just how unlikely this happy ending for the year seemed back in the spring. Tesla had spent billions in preparation for the Model 3, building the world’s biggest battery factory in Nevada, expanding production facilities in California, hiring thousands of new employees and assembling an army of robots with the intention of building the automated factory of the future. When those plans went awry, the spending continued—but without the revenue that Tesla was counting on from selling Model 3s.
The turning point came in in the third quarter after Model 3 production suddenly doubled to more than 4,000 cars a week, and the money started to flow into the company, not just out. The chart below shows Tesla’s free cash flow since 2012. With each progressive car launch, Tesla dug deeper into its pockets than ever ever before. Musk told Bloomberg Businessweek in July that it was Tesla’s “last bet-the-company situation.” A few months later, Musk said Tesla had moved into the black for good.
“As Tesla delivers steady cash flow, a new group of investors will begin taking positions, helping drive shares higher,” said Oppenheimer analyst Colin Rusch.
All analysts surveyed by Bloomberg now predict that Tesla will turn a profit in the fourth quarter, with an average estimate of $206 million on a GAAP basis. That’s a major reversal from April, when analysts’ consensus was for a fourth-quarter loss of about $234 million. The change in expectations for Tesla’s 2019 free cash flow are even more stark, flipping to about $837 million from negative $795 million as of early May.
Selling cars in larger numbers turns out to do wonders for the bank account. By the end of September, Tesla increased its cash on hand by a third to $2.98 billion. That’s enough, Musk says, for Tesla to continue funding growth while covering debt obligations—all without selling more stock or new bonds. Those obligations include $920 million in convertible debt due in March, which Tesla intends to settle with a 50-50 split between cash and stock if it’s able to keep its stock above roughly $360.
Tesla’s improving outlook doesn’t necessarily make its high-flying stock a good investment. Just 13 out of 37 analysts surveyed by Bloomberg recommend buying shares. Morgan Stanley analyst Adam Jonas told Bloomberg in December that Tesla should raise at least $2.5 billion to give it another year to 18 months of “extra oxygen in the tank.”
Staying on Top Without Tax Incentives
Tesla now dominates the global market for electric cars. In the first nine months of 2018, it sold 19 percent of the world's EVs, as shown in the chart below. Three of the next four manufacturers are from China, the world’s biggest EV market, where Tesla intends to build the first major auto factory owned entirely by a foreign company on Chinese soil. Musk made a surprise trip to Shanghai for a ground breaking ceremony on Monday and said on Twitter that production of the Model 3 will begin at the new plant in late 2019.
The question now is whether Tesla can hold its position in 2019. Morgan Stanley's Jonas warned that U.S. demand for the Model 3 will decline in early 2019, as the U.S. federal tax credit begins to taper down for Tesla. A pending Model 3 roll-out in Europe, Jonas said, might not make up the difference.
Tesla started the new year by dropping prices for all of its cars by $2,000 to partly offset that expiring tax credit. Tesla’s stock plunged 9.7 percent the following two trading sessions as investors questioned whether the company will be able to sustain both strong demand and profit margins at the same time.
Tesla will also face real competition in 2019, with the roll-outs of the Porsche Taycan, Audi E-Tron, Jaguar I-Pace, Mercedes-Benz EQC and the BMW Mini. It’s still nowhere close to accumulating the revenue, earnings, and capital resources its biggest competitors have.
Tesla’s Little-Noticed Edge: Battery Costs
A key to Tesla’s success thus far has been its heavy investment in batteries. Lithium-ion battery production follows a well-documented learning curve: Whenever global production capacity doubles, prices decline by about 18 percent, according to data from Bloomberg New Energy Finance. By moving into mass battery production early, Tesla has consistently beat the industry average for price.
In a rare disclosure of Tesla’s battery prices, Musk said in June that his company’s costs for battery cells—the small cylindrical components of its battery packs—had dropped to $110 per kilowatt hour (kWh) and would reach $100 per kWh by the end of 2018. That compares with an average price of about $127 per kWh industrywide, according to data compiled by BNEF.
Another way to measure battery pricing is on the pack level, which includes cooling tubes, wiring, packaging and other components. Tesla is on track for pack prices of $100 per kWh in 2020, according to Musk. If accurate, that could put Tesla about three years ahead of the its competitors.
To maintain its market share and stock value, Tesla must continue to come up with winning products like the Model 3 and execute them more smoothly than the company has with previous launches.
Tesla arguably has the most highly anticipated product roadmap in the industry for the next few years. But even when Musk is ahead, he’s always running late: A Bloomberg analysis last year found that Musk typically blows his own deadlines by about 50 percent of the original projection.
Tesla’s New Product Roadmap
Beyond the Model 3, 2018 was full of drama for Tesla. Musk tweeted that he might take Tesla private at $420 a share, then quickly backtracked. He was subsequently charged with fraud, settled with the SEC and had to give up his role as board chairman. Tesla disclosed additional probes by the SEC and Justice Department, and investors and whistleblowers filed lawsuits. Key executives left the company amid widespread coverage of Musk’s mercurial management tendencies.
In the latter half of the year, there were some signs of normalcy. Tesla stopped selling the $3,000 “Full Self Driving” feature that doesn’t yet exist. Musk effectively named a No. 2, promoting Jerome Guillen to president of automotive operations. Tesla appointed an independent board chair in Robyn Denholm, and a hard-hitting general counsel, Dane Butswinkas, to replace Musk’s personal divorce lawyer in the role. Oracle Corp.'s Larry Ellison and Walgreens Boots Alliance Inc.’s Kathleen Wilson-Thompson joined the board as independent directors.
“We believe the narrative will continue to change from ‘Tesla will never make money’ to ‘Tesla can be sustainably profitable,’” said Baird analyst Ben Kallo.
Tesla’s troubles aren’t over. The flood of new cars are putting a strain on its sales, service, and Supercharger infrastructure. The company is building new plants, launching products and running its budget thin enough that a big blow to the economy or another bungled vehicle roll-out could be calamitous. But Tesla starts 2019 in considerably better condition than it was in a year ago.
©2019 Bloomberg L.P.