Tesla's 'Confidence Game' And $2.4 Billion Balance Sheet Hole

Aug. 02, 2018 12:21 PM ETTesla, Inc. (TSLA)F474 Comments61 Likes
Anton Wahlman profile picture
Anton Wahlman
6.97K Followers

Summary

  • The only really important thing about Tesla’s financial situation is its balance sheet. Current liabilities are $9.1 billion, and current assets are $6.7 billion.
  • That’s a $2.4 billion deficit. How on earth will the company bridge this without an equity raise?
  • July Model 3 sales were only 14,250 cars, according to Inside EVs. Tesla said 11,166 were “in transit to customers” at the beginning of the quarter.
  • So, July was off to a very bad start, with inventories growing, seeing as Model 3 production exceeded sales. Liquidity must have gotten even worse in July.
  • Tesla’s explanation as to why it claims to not need to raise more equity is unsatisfactory. There is a “Confidence Game” going on, and I explain what it is.
  • Members of my private investing community, Auto Insight For Wall St., receive real-time trade alerts on this idea and many more. Learn more today >>

Tesla (NASDAQ:TSLA) traded up close to 10% in the after-market following Wednesday's 2Q report, with the main variable, in my opinion, being the fact that CEO Elon Musk was kind and upbeat on the conference call, apologizing to those analysts he cut off the last time - as opposed to the nightmare that was the conference call from three months ago. However, all of that newfound persona masked something far more serious that was essentially not covered on the conference call, at least to any significant or meaningful extent, if I heard it right.

And that is the balance sheet. Let me point to the simple fact that it looks like Tesla could be interpreted as de facto insolvent as of the end of the June quarter.

Per Tesla's balance sheet:

  • Current liabilities: $9.1 billion
  • Current assets: $6.7 billion

That's a negative $2.4 billion.

But wait, there's more. Looking beyond the current liabilities, we have long-term debt of $9.5 billion.

Tesla's cash is $2.2 billion, but it also has $942 million customer deposits that are in the middle of going out the window as the Model 3 deliveries are underway in meaningful volume, finally. So, you really have to subtract those deposit monies from the $2.2 billion, yielding $1.3 billion net, in terms of unrestricted cash.

This $1.3 billion is going to feed, in the very near term, $3 billion in accounts payable and $1.8 billion in accrued liabilities. That's $4.8 billion just for starters. Basically, that puts Tesla $3.5 billion in the hole - even before it begins to pay off its short-term financial debts.

To be fair, Tesla will try to offset that with the help of $3.3 billion in inventory and $570 million in accounts receivable. That's $3.87 billion, yielding a tiny $370 million net, which is a rounding error in terms of what's needed for an organization of this size to operate with any breathing room.

Prepaid expenses and deferred revenue, you ask? $422 million vs. $576 million, which in the big scheme of things nets out close to zero.

And that's all before having to pay off the $2.1 billion in the current portion of debt and capital leases. In other words, having $9.1 billion in current liabilities, whereas the current assets are only $6.7 billion, is a real and acute problem with less than zero room for error.

This one chart really describes my argument with a full visual and brutally illustrates the working capital deficit Tesla is facing in the near term:

Source: Quantrarian1

As for the $3.3 billion in inventory, by the way, how much of that is it possible to realize at face value? Take a look at those widely reported (with pictures and videos) Model 3 cars rotting away under the sun in the California desert, when they were instead supposed to be delivered to customers many weeks ago already. Is there a discount factor to be taken here, you think?

On the conference call, management said that they were not worried about their cash balances. Simple balance sheet math tells us that they are running very low right now. We know that no company typically gives the end-of-month balance sheet numbers, but somehow, I don't believe management when it says that one month after quarter-end, things are looking just fine. One would certainly like to see the books as they stand, right now, one month after.

Bolstering this conclusion is the anemic Model 3 delivery number we got a few hours before the earnings call from the universally agreed upon - by bulls and bears alike - source of all things electric car sales statistics, Inside EVs. It put July month Model 3 deliveries at only 14,250 units.

Now, consider that, on July 2, Tesla reported it had 11,166 Model 3 units "in transit to customers." Must be a very long Silk Road kind of transit route, for 14,250 is barely 3,000 more than 11,166.

That's in a month (July) when Tesla said it produced 5,000 Model 3 units per week, so let's call that 20,000 Model 3 units. Skabooshka on Twitter, who supposedly has a way of tracking every unit that leaves the Tesla factory gate, has Tesla's July month Model 3 production at 15,938, if I have added up all of his daily tweets correctly. Close enough to Tesla's implied 20,000 number, for the purposes of this conclusion.

So, even if you use the lower of those numbers - 15,938 as opposed to 20,000 - that would tell us that Tesla's Model 3 inventories rose in July. 15,938 sure is a larger number than 14,250. The broader point is that it wasn't supposed to be even close, as Tesla's Model 3 inventories were supposed to fall meaningfully in July - deliveries being greater than production.

Clearly, there is some impediment to delivering these cars in a reasonably speedy manner - or delivering them at all. Again, look at those lots in the California desert and ask yourselves how long those cars are sitting there and why.

What this means is that at least on the cash generation front, the third quarter is not off to a good start. Tesla plainly made more Model 3 cars in July than it sold (minimum of 15,538, perhaps closer to 20,000, compared to sales of 14,250). U.S. sales of combined Model S and Model X were a mere 2,525 units (again, according to Inside EVs), down 18% from July last year.

A cash flow negative July month means Tesla has ever-more wood to chop in August and September, just to keep even. It is no surprise that Tesla didn't show its end-of-July cash cards, if the purpose was to soothe the market's immediate fears about failing liquidity.

This is where "hope and pray" and "show confidence" comes in.

We have already established that simply from viewing Tesla's balance sheet and looking at the $2.4 billion difference between current liabilities ($9.1 billion) and current assets ($6.7 billion), Tesla may soon be unable to function as an organization, barring major cash generation of some sort.

Management painted a picture of the Model 3 ramp being able to generate such positive cash flows, so as to make up this $2.4 billion shortfall in time for the outflows to mature, and then fund the company from there. I will leave the finer debate as to why I think that looks completely unrealistic for another article. For now, I think bulls and bears alike can agree that Tesla needs to achieve heroic financial targets for 3Q, 4Q, and beyond, in order to cross this $2.4 billion current liability deficit chasm.

Given all of that, it was fascinating to hear what was by far the most important question on the conference call, this time from James Albertine of Consumer Edge. He asked if Tesla had any notice from a regulator that would prevent the company from raising equity. This was essentially the same question that Chris Irons ("Quoth The Raven") has posed in his recent podcast and SA article.

CEO Musk's answer was, in short, "No." Let's hope that there was no Bill Clinton-style "It depends on what the definition of 'is' is" going on here. You can ask around, but my impression is that market participants took this answer to mean that there is no current ongoing SEC inquiry into Tesla's books. If Tesla, upon reflection, decides that it defined the question and answer differently, it ought to file an 8-K with a clarification to that effect, as soon as possible.

Indeed, that was the one really important question during the entire conference call, and unless there was a misunderstanding between management and the audience, we now have to put that question and suspicion to bed. The SEC is not, to Tesla's knowledge, investigating the company in any material or meaningful way - or so the market participants interpreted the company's answer to the question.

There was one other good question asked on the call, and that was from Tim Higgins of The Wall Street Journal. It was about whether Tesla still maintains its guidance of one million cars made in 2020. CEO Musk almost immediately backtracked, suggesting that 750,000 was more realistic. Duh!

Remember, it was CEO Musk who said this on the conference call exactly one year ago:

"But what people should absolutely have zero concern about is that Tesla will achieve a 10,000 unit production week by the end of next year."

- Elon Musk, August 2, 2017

Source: Tesla Q2 2017 Earnings Call

Well, people who had more than zero concern about that statement one year ago are on track to be proven very much right.

But back to achieving that 750,000 number for 2020 for a moment. The discussion was a little bit hard to hear, and the transcript is not yet available when I write this, but I think this much was indeed clear: Musk said that getting close to that 750,000 number will require the Shanghai factory to be up and running. At some point, I think he said something about it contributing 100,000 to 200,000 units to the 2020 number. In any case, there was to be some material contribution in 2020.

This is where things clearly went off the rails. Obviously, there will be no 100,000 Teslas built in China by the end of 2020. They haven't even started building a factory yet! Factories take at a very minimum two years to build, and more likely, closer to 3-4 in this case. Chances are they won't build 100,000 even in 2021, perhaps more like 2022 - but 2020 is in any case out of the question.

Also, don't wake up President Trump and his Twitter finger if you can avoid it. Tesla said it's working with local Chinese banks to move this production to China. Today, Tesla supplies China from the U.S., and it expects to do so even more so when it starts exporting the Model 3 from the U.S. to China in only a few months from now.

The White House Press Secretary Sarah Huckabee even addressed the matter from the podium. It clearly seems that The White House already feels insulted to hear the suggestion of Tesla planning a factory in China. Remember, this was a company which had a 9% layoff, of mainly U.S. employees, less than two months ago. "Fire American workers to pay for a new factory in China" is hardly music to President Trump's ear.

Remember how Trump attacked Ford (F) for that Mexican factory - already underway in 2016 - which it abandoned right after Trump's election? That was Mexico, not China, and there was already sunk cost into the ground. It may make more sense for Tesla to consider a factory in Wisconsin or Indiana instead, lest it starts a war with that one other major Twitter Titan who swings all the regulatory sticks.

"How about a special tax on electric cars, to favor American-made oil instead?" - I can see President Trump fuming about this right now.

In any case, Tesla's balance sheet being underwater and seemingly running on fumes (at best) does not match Tesla management's outward display of confidence. This is "The Confidence Game", and Elon Musk himself addressed this kind of situation seven years ago, in an interview at The National Press Club on September 30, 2011.

Listen to Elon Musk answer the question at the 52:35 mark. It's about a company - in this case Solyndra - displaying weakness even though it was on the brink of bankruptcy. He explains very clearly that if management doesn't lie about the company's dire financial condition, the situation would become a self-fulfilling prophecy. It only takes 30 seconds to hear him explain it, but it's most enlightening in describing how Musk thinks about what a CEO needs to say when a company is on the brink of insolvency.

And that's the lesson in hearing management speak at the Tesla 2Q report. For some reason, the company doesn't want to raise equity, even though all the bulls on the stock say that it would be as easy as snapping one's fingers. Yet, the math behind the company's liquidity prospects doesn't add up, barring a miracle.

So, something has to give. Either Tesla will raise money, despite disavowing itself of any such need - or there is some reason Tesla can't raise money. And unless he was playing word games, the CEO just basically said that there is no such impediment to raising equity, at least not from the SEC or equivalent.

There are lots of other issues from the quarter to point out and examine - and the 10-Q filing is probably approximately only a week or so away - but that additional analysis will have to wait for another article.

This article was written by

Anton Wahlman profile picture
6.97K Followers
I am a former sell-side analyst -- UBS 1996-2002, Needham 2002-2006 and ThinkEquity 2006-2008. These days I review automobiles and other technology products, as well as analyze the automotive and technology industries, and coming up with long/short ideas. I also continue to write (less frequently) on macroeconomics and politics.
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Disclosure: I am/we are short TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.

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