On Tuesday Tesla's (TSLA) share price plunged by 10%, triggering Nasdaq's short-sale circuit breakers after the company lowered future guidance for the short and medium term. The company's recent SEC filing stated that the company would increase its production rate at a slower pace because it would rather focus on quality than quantity.
"As our main focus is on quality, we have methodically increased our Model S production at a rate slower than we had earlier anticipated."
In addition, the company's filing also noted some challenges met by the company due to the suppliers:
Certain suppliers have experienced delays in meeting our demand and we continue to focus on supplier capabilities and constraints.
In addition to the 255 Model S vehicles already produced, the company plans to produce and deliver another 300 in the next quarter and ramp the production up to 400 per week starting next year. So far, only 132 sedans were delivered to the people that ordered them many months ago. Many people might get tired of waiting and eventually cancel their reservations even though they won't be able to get their deposits back. If the company meets its production goals in 2013, producing 400 vehicles per week would result in 20,000 vehicles annually, which is higher than the 8,000 cars Tesla needs to sell in order to generate positive cash flow.
The company listed a number of other issues including "the consequent allocation of all manufacturing and labor overhead costs across a smaller number of vehicles, manufacturing inefficiencies, higher costs for initial parts, and the delay of development services revenue from Daimler." It looks like the company has a number of issues to deal with before running out of cash.
The company doesn't have much experience in manufacturing and it will eventually learn to become more efficient; however, it needs to achieve this sooner rather than later. Producing a good quality car is very difficult and it took major car companies like Ford (F) and GM (GM) many years to master. Cars come with many moving parts and producing a car from scratch isn't an easy task. Tesla has made a lot of progress in the last year and the company will have to keep making progress. So far, the company has collected $133 million in deposits from the people who have put a reservation on one of the cars.
The company cut its revenue guidance from $600 million to $400-440 million. Since the company was founded, it has lost $865 million. This is a large number considering that the company's market cap is just below $3 billion. The company will issue 5 million more shares in order to raise more cash for the operations. Last month, the company's CEO Elon Musk said that the next 6 months would be very crucial for the company's very survival. The end of 2012 and beginning of 2013 were to determine whether the company would generate the positive cash flow much needed for continuing its operations. Now it looks like the time for the positive cash flow might be pushed back.
At least Tesla's problem is in the supply side rather than the demand side. It is easier for companies to fix problems in the supply side than in the demand side, because they have more control in their production rate than the decision making process of consumers.
On top of the company's already existing problems, the company also has to start repaying the $465 million loan it took from the government a few years ago. The US Energy Department demanded that Tesla Motors come up with an early repayment schedule by October 31. If the company becomes profitable, it will have to repay the loan faster than the original 10-year repayment plan. Currently, the company has cash of only $210 million, which isn't enough to provide cushion in case something goes terribly wrong.
Currently, there is a huge short interest in Tesla. Many of the company's shares are heavily shorted and a possible upside in the company might result in a massive short covering. Given the huge number of shares shorted, if the company was able to generate positive cash flow, the short covering alone could add 15-20% in the company's market value.
I was just getting tempted to buy some shares of Tesla but the company's latest SEC filing scared me off for the time being. Tesla's recent plunge might or might not be a good buying opportunity, and only the time will tell which case is true. Tesla is a lot like Nokia. Either of the companies could either go bankrupt or see their share price double, or even triple within a short time. There is a lot of risk involved in both companies and both companies are priced in a way that reflects the risk. I personally choose to stay away from Tesla until early next year; however, those who believe in the company's turnaround story could use opportunities like the one on Tuesday as a good chance to buy. In addition, I don't suggest shorting this stock because it is already heavily shorted. For shorts, upside is limited but downside is huge with this company.
Disclosure: I am long F. I don't plan on initiating a position in TSLA until at least early 2013.