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Tesla Will Face A Cash Crunch Without A Capital Raise In The Next 90 Days

Nov. 03, 2017 1:58 PM ETTesla, Inc. (TSLA)407 Comments


  • Tesla's about face on Model 3 will have severe consequences.
  • Tesla is facing a cash and credit crunch within the next 90 days.
  • We expect a capital raise to be difficult and expect the stock to plummet.

Tesla's (NASDAQ:TSLA) Q3 conference call was surreal and one for the ages. There is so much ground to cover that it is tough to summarize the meeting in a single article. Instead of covering all that is wrong with Tesla, we will focus on a single item – Tesla’s need for cash.

Tesla’s narrative is that it does not need further cash to ramp Model 3. The company, in its Q3 release says:

“Between cash on hand, future cash flows and available lines of credit, we believe that we are well capitalized to accommodate the revised ramp of Model 3 production to 5,000 per week.”

While the management denied the need to raise cash soon, the company has been perennially wrong in forecasting its cash needs. We believe, as we demonstrate below, the reality couldn’t be further from the truth.

The P&L

Let us start with a review of the business with the P&L (image below).

There are several key items to note in this context:

  • The ongoing deterioration of gross margins is alarming. Tesla is now claiming 18% gross margins as opposed to a corporate goal of 30%-plus gross margins.
  • However, even the 18% gross margin number is not credible. The reality is that, by offering high and unsustainable resale value guarantees, the company is claiming high gross margins. But such tactics go only so far. The company has to give back these gross margins when the older cars come back to Tesla for resale. Tesla includes these costs in the service business. Note that the losses in service business have increased greatly over time. In Q3, the service business gross margin was negative 20%. Adjusting for the service business, Tesla gross margin dips below 15%.
  • We have repeatedly pointed to the heavy discounting that Tesla uses to move

This article was written by

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