A Tesla Inc. Model 3 electric vehicle is displayed during the California Air Resources Board (CARB) 50th Anniversary Technology Symposium and Showcase in Riverside, California, U.S. (Photographer: Dania Maxwell/Bloomberg)

Musk Drama Obscures Hints of Progress on Tesla’s Crucial Model 3

(Bloomberg) -- The end of Elon Musk’s go-private-or-not saga with Tesla Inc. leaves investors back where the drama began: waiting to see if he can make more Model 3 sedans.

Signs of progress on this front may have softened the blow of the chief executive officer electing to stay public after all. Production of the all-important Model 3 sedan might have steadily exceeded 5,000 a week for much of this month, according to Bloomberg’s tracker of Tesla-registered and owner-reported vehicle identification numbers.

Musk Drama Obscures Hints of Progress on Tesla’s Crucial Model 3

Estimates from the experimental tool -- which can fluctuate from week to week based on the company submitting new VINs in batches -- suggests the carmaker may even have cleared the 6,000-a-week target set for late August. Tesla shares traded down 1.6 percent to $317.77 as of 3:45 p.m. Monday, paring a decline of as much as 4.3 percent earlier.

Musk faces huge pressure to show progress with the Model 3 after his 17-day dalliance with buying out some shareholders drew regulatory scrutiny and investor lawsuits. Ramping up production to the levels the company has forecast is pivotal to generating the profit and cash flow that the CEO has projected for this quarter. It also would ease concerns about Musk’s leadership and Tesla’s precarious cash position.

“This was a big distraction over the past two weeks for all stakeholders, and now it’s time to make cars, deliver cars that make people happy, build a good product, and generate some cash flow,” Ben Kallo, an analyst at Robert W. Baird & Co., said Monday on Bloomberg Television. He rates Tesla the equivalent of a buy with a $411 price target.

The Bloomberg Model 3 Tracker underestimated Tesla’s reported production for the first quarter by about 5 percent and was roughly 2 percent below second-quarter results. The nature of the VIN data makes weekly figures more volatile. In the case of a sudden surge or slowdown, the model will be slow to react.

While the tracker’s weekly estimates shouldn’t be relied on to judge any single week’s production against Musk’s milestones, it does show with some confidence that, so far in the third quarter, Tesla has been consistently making between 4,000 to 6,000 Model 3s a week. That suggests the company could be on its way to meeting its third-quarter forecast for output of 50,000 to 55,000 units, or roughly 4,200 a week at the higher end of the guidance.

‘Closely Watched’

Musk, 47, pursued going private after months of bristling over how intensely the market and media were following Model 3 production. He wrote in a letter to shareholders at the beginning of the month saying that it was “fair to say that no production ramp of any other product has been as closely watched and debated.”
Tesla’s skeptics -- including the short sellers that have so irked the CEO -- had reason to be concerned over whether the carmaker could get the Model 3 going. The company ended June with just $2.2 billion in cash. Accounts payable -- a measure of short-term debts to creditors or suppliers -- was more than $3 billion.

“At the end of the day, being public or being private, we think they would have had to show profitability, and that their production can get free cash flow-generating territory, so they can be self funded,” James Albertine, a Consumer Edge Research analyst with a hold rating and $311 price target, said on Bloomberg Television. Tesla “really has to stand on its own financially, regardless of the public-versus-private debate.”

Capital Concerns

With questions as to whether Musk truly had the “funding secured” to take Tesla off the market now moot, analysts are going back to raising questions about another familiar topic: whether a capital raise will soon be necessary.

Tesla has about $2 billion of debt maturing through 2020, and about $1.2 billion of that are convertible bonds due in November and March. As things stand, the company would have to repay those obligations because its stock is trading below the price at which the bonds can convert into equity. Musk also has touted plans to build new plants in China and Europe, and to bring a new crossover and semi truck to market in the coming years.

“They still need capital for the Model Y and the semi,” said Hitin Anand, a CreditSights analyst. “There’s no running away from that.”

Tesla’s credit agreement leaves open the possibility for Tesla to use its lone car-assembly plant in Fremont, California, as collateral, which could back more borrowing, Bloomberg Intelligence analyst Joel Levington wrote on Monday. The company could also pledge its brand, which has been valued at about $4 billion, he said.

Musk has repeatedly said -- including early this month -- that there’s no need for Tesla to raise more money this year, as he expects the company to generate positive free cash flow in the third and fourth quarters. But analysts remain unconvinced.

“He’s taking a big gamble given how late we are in the credit cycle and the economic cycle,” CreditSights’s Anand said. “You need to secure the safety net.”

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