After yesterday's close Tesla Motors (TSLA) released its second quarter results and reported a $105.6 million GAAP net loss for the quarter. On June 30th, its stockholders equity was $62.2 million and its estimated working capital balance was $26 million. During the second quarter stockholders equity fell by $91.6 million and working capital fell by $97.4 million. They expect similar results in the current quarter.
As I listened to the conference call this morning, I couldn't help but think about the barnstorming aviators of the early 20th century planning their next spectacular death-defying feat. "We'll go into a vertical dive at 10,000 feet, start our pull out at 500 and clear the treetops by inches. It'll be epic!" It sounds more elegant and businesslike to be "optimizing for our cash low point," even if it means that "in order for us to not raise any funding, we would probably spend at a suboptimal rate on future programs," but I guess that's somehow better than seeking additional capital in the "very near future."
Let's get real here. The spread between the assets and liabilities on Tesla's balance sheet is preposterous. The company is levered to the hilt with $777 million in assets and $715 million in debts, which leaves $62 million for stockholders, but only if everything goes perfectly. If there's a problem, its $3 billion market capitalization could vaporize in a femtosecond.
For the visually inclined, the following graph tracks Tesla's total assets, total debt, stockholders equity and working capital over the last eight calendar quarters. Sub-prime mortgage loans to busboys seem reasonable in comparison.
Since many investors have a hard time wrapping their minds around gross financial statement figures, the next graph takes everything down to per share values and shows the relationship between the financial statement realities and stock market absurdities.
The white space between the blue stock price line at the top of the graph and the green and red stockholders' equity and working capital lines on the bottom of the graph is nothing but blue sky, the premium an investor has to pay for the questionable privilege of betting that Tesla has properly calculated its cash trajectory and can clear the trees by inches instead of plowing into them at terminal velocity.
I've been representing small public companies for decades and know first hand that balance sheets matter. Creditors that want to be paid get uncomfortable as working capital and equity approach zero. Experienced manufacturing managers know that product launches almost never go flawlessly, the process can't be rushed and responsible businessmen must have an adequate cushion for the unexpected but entirely predictable delays, difficulties and screw-ups.
A123 Systems (AONE) walked the high wire without a net and its stockholders got crushed when a simple calibration error on a welding machine gave rise to over $50 million in warranty liabilities. Tesla may be able to execute its aggressive production ramp flawlessly and pull out of a death defying fiscal dive at the predicted cash low point. It will be a thrilling spectacle for children of all ages but I'm not willing to give 50:1 odds that Tesla will pull it off without a hitch and deliver 5,000 EVs per quarter when all of the other EV manufacturers combined are having a hard time getting to 7,500 units a year.
It was abundantly clear to me that Tesla will almost certainly raise additional capital this quarter. It will be fascinating to see how new investors evaluate the relative risks and possible rewards of its business model.