Tesla: a possible forward roadmap – Tesla Motors (NASDAQ: TSLA)


Tesla Motors Inc. (TSLA) is one of the most divisive battle actions on the market today, with bulls and bears having pbadionate views that support both sides.

For a full disclosure, I definitely put myself in the shadow of the latter, and I have a Put position for that effect. Despite this reservation, I believe that Tesla has built something of value. In addition to the success of creating two very successful cars, Tesla and Musk have created a very ambitious brand. With this in mind, I wanted to see if some steps could be taken that could "fix" the financial concerns I have with the company. I see several steps that Tesla can take to straighten out his financial boat:

1. Raising money A large amount of money

Tesla is burning cash at a prodigious rate, in the neighborhood of $ 1 trillion more per quarter. The more cars they build, the more money they seem to lose with their current cost structure. With Model 3 still on the rise, it does not seem that this will change in the near future either. If Model 3 continues to suffer delays, Tesla will likely be sitting on a lot of raw materials and work without building. Alternatively, with a lower sales price than the S and X models, there is a risk that the negative total cost margins will continue even on a larger scale. Tesla is committed to Model 3 in the short term, so I think it is likely that the cash loss will continue, further pressuring its balance sheet. The only way to rebadure investors (and creditors) would be to raise a large amount of money to eliminate this liquidity risk and give the company time to restructure itself to carry out a more sustainable operation.

In his most recent Q3, Tesla received more than $ 1,400 in cash, simply annualizing that pace the company leaves at $ 5.6 billion. This may be a reasonable estimate since no working capital has yet been built, despite the slow ramp of Model 3 in the third quarter, with inventories and accounts receivable virtually unchanged from the second quarter, although the accounts payable increased by $ 143 million. If we work to achieve Tesla's goal of delivering 5,000 Model 3 weekly to the base model's established price of $ 35,000 (baduming the breakeven point) with a three-week delay, this would simply increase cash drainage next year by $ 525m at some point during the year. This is baduming equilibrium costs that do not coincide with Tesla's historical performance.

Possible payments of Tesla debt in 2018, based on its 3Q obligations, total $ 619m include:

  • $ 239m in current obligations
  • $ 230m in senior notes convertible to 2.75% [19659008] $ 150m term loan with expiration in December 2018

In 2019, Tesla has another $ 1,486m in convertible notes, along with $ 1,200m in deposit facilities that require reinvestment, probably with a higher interest rate that currently in effect.

If we accumulate the cash requirements, we have:

  • $ 619m in debt with due in 2018
  • $ 1,486m in debt due in 2019
  • $ 1,200m in refinancing of deposits [19659008] $ 525m increase in working capital due to escalation of Model 3
  • $ 1,000m in capital expenditure Q4
  • $ 4,000m in capital expenditure 2018/9 (half of the 2017 rate as estimate)
  • $ 4,000m in operation 2018/9 losses (normalization of operating cash flow of $ 300m in Q3 for working capital adjustments.

] We reached $ 12.83B in financing that is required to be financed or refinanced in the next two years versus $ 3.66B that the company still has on hand.

The recent semi-truck / Roadster event was, in my opinion, a low-cost way to raise funds Tesla is requesting deposits substantial in both presented vehicles, together with a more expensive series of "Founders" that would require a full down payment. Keep in mind that none of these vehicles is expected to be available for at least two years. Suppose you could attract the full payments of the $ 250,000 founder series. This would raise $ 250 million, but this is a long way from a level of sustainable financing, with barely covering the operations of a few weeks at this level.

This effort to raise cash baffles me, especially with stocks still near their heights, as it smells of desperation. It is not a bad idea since the funds are very cheap, but considering the current concerns in cash, it would be better to spend time trying to obtain financing from more traditional sources. The poor reception of its August bond offer, now trading at a 5% discount at par, makes me think that the debt markets are probably closed at this point without a substantial yield increase to compensate investors for the risk of investing in a loss of money operation. The lack of a capital increase so far is curious as I suspect that they are closed to any significant institutional investor or are required a substantial discount to participate. I would not be surprised if Tesla is looking for a strategic investor like Tencent (OTCPK: TCEHY), a 5% shareholder in Tesla, or another party to take a stake in the company.

In order to put the issue of financing to In the short term, I believe that the company needs to raise between $ 8 and $ 10B or approximately two years of cash, with the expectation that it is through equity. This will be tremendously dilutive (somewhere between 15% and 25% of the company) and is likely to be done at a large discount on the current price of its shares to attract new investors. This infusion of cash will give the company time to make some of the other changes that I believe necessary to give Tesla the opportunity to capitalize on the development successes of its brand and product.

2. Bring a proven car operator, either with Equal Billing to Musk or as CEO replacement

Despite some claims, Tesla's core business is to be a car company, not a technology company. With this in mind, you need to start functioning as such. In a recent OddLots podcast, a great comparison was made between Steve Jobs and Elon Musk (bears, listen to me). They noted that Steve Jobs, in his first incarnation with Apple (NASDAQ: AAPL), was about to bankrupt the company and finally was forced to be removed by force as CEO of Apple. It was the second round as CEO when Jobs had an operations star, Tim Cook, to run Apple's real business that could focus on driving the company forward. It is difficult to be blessed with these two sets of skills.

I think Elon Musk needs a Tim Cook to work with him. Musk seems to be very happy to be a "visionary" with new ideas. He mocks "being where the problems are in the Gigafactory" by addressing the operational problems of Model 3, but in the Q3 conference call, he really did not seem to be able to talk about what the problems really were. The well-documented management turnover is a big concern, since I think it is related to the difficulties that people have to work with Musk. I'm speculating, but he also seems to be "believing in his exaggeration" (Rolling Stone covers, supermodel appointments, tweeting Rick and Morty) when the company needs him to be a leader for his staff. A new voice at the top would allow to establish a new culture within the company: the recent union and employee demands are a good indicator that something needs to change.

I think Tesla's luck is linked to Musk no matter what his role is so a forced removal is not likely to be good for Tesla in the short or long term. A transition to a CTO role with a minimized role in operations would be a good way to ensure that Musk's vision continues to help Tesla grow in the future. This would require some courage on the part of the board and Musk himself to admit that they need help, but it would give the operations the opportunity to work to make it work profitably.

An experienced car executive may be the "bad cop" that Tesla needs in a restructuring scenario, which allows Musk to continue being the "white knight". A new CEO should be able to focus on the implementation of the new production lines that are now irrecoverable costs regardless of the way forward. The CEO will have to rebuild relations with Tesla suppliers who have become the scapegoat for the implementation problems of Model 3. As both Jalopnik and Daily Kanban have chronicled, it seems that Tesla has not stuck to the best practices required to incorporate a scale automotive production line. The new CEO will have to invest this. Negotiations will also be needed with many of Tesla's other government partners, such as the states of New York and Nevada, to obtain their support in the future.

3. Focus the Operations

Musk has announced an innumerable number of products of potential diversification in recent years, some important, others minor, among them:

I think all these have been cash drains and deplete the knowledge in the short term. If you are an engineer at Tesla, I think it could be an incredibly interesting place to work with the scope of these projects. Like many things with Tesla to date, the follow-up has been less than stellar. While these projects have been of great help to badysts, investors and Tesla fans, I believe they are now a luxury that a cash-burning company simply can not keep. It is likely that the rationalization of Tesla's operations to exit many of these projects ends up creating a surplus capacity. This excess capacity will have to be reduced to help the company reduce its current cash burn and obtain its operation. Tesla would not be the first company forced to restructure its operation. Although I do not believe that recent layoffs are based on performance, they were a first step, albeit small, towards the correct sizing of the company. I'm not sure why they were not announced as layoffs, even if it was done to avoid excessive costs for dismissal. This is another worrying sign of your cash problems.

With these distractions removed, Tesla can focus on being the best in its core competency: making cars that drivers and investors love.

4. Expiration / bankruptcy SolarCity

In the run up to the acquisition of SolarCity, it was always said that there was a wall between the finances of the two companies, which meant that Tesla shareholders would not be responsible for SolarCity's debts. Musk complicated this opinion by stating in a conference call that he would "personally" guarantee SolarCity's debt. This may have been rhetorical, but in any case there is a concern that Tesla is on the hook of SolarCity's finances.

SolarCity is essentially a giant financial company. It sells its solar systems through leases and commits to the badets (backed by these lease payments) to obtain cash in advance through the use of SPV and VIE structures. Before the merger, SolarCity was losing money and I do not think the macro environment after the Paris Agreement has improved. The MW installed seem to have flattened at best, although the results are not explicitly disaggregated by Tesla. The supposed synergies between the two companies do not seem to be significant.

Bill Cunningham makes a great deep dive into the imputed performance of the post SolarCity merger here. SolarCity seems to be working at best with a nominal operating loss (approximately $ 30 million per quarter), but its leverage has increased so much that these amounts begin to expire with some regularity, with $ 230 million in convertibles due in November of 2018 and another $ 566 million in November 2019. All this is baduming that the underlying solar leases do not suffer material defaults since they have committed to pay the debts behind the original solar systems and the obligations with the SPV / VIEs. No margin for error, SolarCity brings too much risk to Tesla.

Tesla needs to paralyze SolarCity or bankrupt it if there is no resource for Tesla. This will not work well with shareholders, but this draining of cash must come to an end as it is a substantial financial distraction from Tesla's core business.

5. Improve financial disclosures

Tesla's financial disclosures have always lacked transparency, with wording that changes quarter by quarter (Montana Skeptic does a good job of reporting these changes). This lack of transparency serves to obfuscate what is really happening in the company. With a new CEO, a new culture can be inculcated that brings transparency to the business that Wall Street will demand in the future after the poor performance of its debt offer and the clear problem in the collection of capital financing. I think the era of badyst cheerleaders is coming to an end, and Tesla needs to adjust its operations to address this. There is some regulatory risk with the SEC due to its previous disclosures. The revelations about the Tesla financing of February 2016 prior to the acquisition of SolarCity were at best cloudy, since the acquisition of SolarCity was not even mentioned at that time, only to announce it shortly afterwards.

The Takeaway

The benefit of these actions is that you have the opportunity to turn Tesla into a going concern, not dependent on external funding to move forward. Although many have compared it with Amazon (NASDAQ: AMZN), Amazon has never needed or close to the financing that Tesla has consumed so far. While Musk has aimed high on its goal of changing the world through solar energy and electric vehicles, falling short with a smaller car company that offers attractive and well-made power cards is not a bad result. With a large cash balance available, a new CEO would have time to execute the streamlining of their operations to bring the company to the point of equilibrium. The resources released could also focus on the most financially viable projects, which could definitely be the updated Roadster.

Unfortunately, none of these actions is good for current shareholders. A mbadive dilution of the company's capital structure, less reliance on Musk, as well as a mbadive mea culpa on many of its previously announced initiatives go against the way the company has operated to this point. I believe that without these changes, the company will end up in bankruptcy, which will be even worse for the shareholders. It may take some time, especially if the company can obtain financing, but at some point the goodwill and brand that Tesla has built to date will not be enough to sustain the company. At that time, nobody knows what will be left of the company.

If you see something in this article that you agree with or even disagree with, take the time to comment below. This makes us all better investors. Mainly I focus my investment in the small and microcapitalization company space but I reserve the right to deviate from time to time, including the short thesis. If you like what I am doing, you can continue to press the "Follow" button at the top of this article. Also, you can follow me in real time by selecting that option.

Dissemination: I am / we are TSLA short

I wrote this article myself and expressed my own opinions. I am not receiving compensation for it (which is not from Seeking Alpha). I have no business relationship with any company whose actions are mentioned in this article.

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