Tesla – The Beginnings of a Downward Spiral?Quantquistador
Although not entirely new territory for the electric car maker, the last few weeks have been quite the roller coaster ride for Tesla. Short investors, currently in no small number, and many vocal commentators have been flagging the mighty cash flow challenges for the automobile pioneer over the past year.
More recently, headlines were rocked into the end of March 2018 by a fatal crash resulting from a test run of autopilot features of the Model X which led to the driver’s death. 1 Shares fell 22 percent in March. Investors shed Tesla positions, triggered by news of the fatal event combined with mounting concerns over shortfalls in Model 3 production and growing challenges when it comes to capital management.1
Taking these factors and more into account it is little surprise that Moody’s recently highlighted growing credit risk for the carmaker – updating the company credit outlook to “negative” alongside a B3 long term rating. Citing considerable credit risk in existence over the next 12 months the Moody’s research presents a case for concern – especially based on “significant variance from original expectations” when it comes to production.2
Persistence in Production Shortfalls – Credibility in Question?
Since launch of the Model 3 Tesla has significantly over-promised and under-delivered when it comes to quarterly production targets – a potentially devastating combination if persistent enough to erode investor confidence and constrain capital allocations, be it through equity or debt investments. Model 3 was targeted to be the car that introduced Tesla to the mass market and a failure to meet expectations under such a bright spotlight is no small matter. However, Moody’s highlights that if Tesla can begin to meet targets they might consider an upward credit revision. Specifically, the research highlights “Tesla’s ability to meet updated weekly production targets of 2,500 by the end of March and 5,000 by the end of June” will be critical to ongoing forecasts.2
However, as part of meeting future targets on time the company will need liquidity. This will prove challenging for the company. Moody’s forecasts that cash flow generation will likely remain negative through 2019 – with a far from promising current liquidity position and high expected cash burn rate for 2018 (upwards of $2 billion.) There are droves of debt instruments maturing within the next year that will eat into capital balances – including approximately $1.2 billion in convertible notes ($230 million due November 2018, $920 million due March 2019).2
Furthermore, high volatility in debt trading will make raising further funds tricky. For example, Tesla’s 5.3 percent bond, issued August 2017 and maturing in 2025, fell 4 percent in one day alone towards the end of March – falling a total of 8 percent for the month. 5
Challenges on Many Fronts
The company further suffers from a poor historical operating and financial track record to date – never delivering an annual profit in the 15 years since launch. Competition in the electric vehicle market is mounting in quality, volumes and pace. A further blow to the company, Moody’s highlights that Tesla has not managed to capture a sustainable technological advantage – with Tesla vehicle technologies closely matched by those available at competitors. The negative outlook increases the likelihood that Tesla will have to carry out a sizeable capital-raise – for paying off obligations, for meeting production targets, to remain liquid overall. Investor confidence is dropping off. With the straining conditions and the significant sell off in March it does seem difficult to conceive of how the company will raise the extra capital it requires.
Still in the Game?
Tesla shares may have fallen 29 per cent from 2017’s peak, wiping $17.7bn off market value. However, even at these levels Tesla is still valued at only a 15 per cent discount to General Motors, who sold nearly 100 times as many vehicles in 2017, producing pro-forma profits near $10bn. Compared against Tesla’s $1.96bn loss we might argue Tesla is very much still in the game. 3
Further, arguably taking the bull by the horns, in early April, chief executive Elon Musk announced he had personally taken over manufacturing responsibility at Tesla, tweeting, “My job as CEO is to focus on what’s most critical, which is currently Model 3 production,” later adding: “Uhh, hello, I need to build cars.” 4 Will this be enough to attract more investment? Or could recent declines represent a spiral downward for Tesla?
2 Moody’s Investor Service, 29th March 2018, Credit Opinion, Tesla, Inc.