Tesla's Debt And Cash Flow Issues Are Overblown

About: Tesla, Inc. (TSLA)
by: CM Market Insights

Tesla's recent $2.7 billion capital raise solves many balance sheet questions.

The company can now focus on operational issues and its core business.

Debt and cash flow levels seem reasonable in the short term to fund the company.

Tesla (TSLA) recently announced a staggering offering of both convertible debentures and common shares worth more than $2 billion. Tesla closed on its $2.7 billion capital raise by issuing $1.84 billion of convertible notes and rest being common stock. The underwriters exercised full options for both the common shares and notes. To this point Tesla had not had to utilize the outside capital markets for funding since August 2017, the longest point between raises since the company was taken public in 2010. The market has responded to this transaction noting that this was a necessary move for the company in order to alleviate fears of short-term cash flow issues and solvency. The raise is not necessarily a surprise at this point, but it does lend some concerns to the company taking on additional debt and subjecting shareholders to dilution of their shares. In this article we will take a look at the debt situation for the company and what this new raise means for Tesla going forward.

How The Company Got Here

One of the more notable reasons that Tesla has needed to go to the markets for a capital raise was the decline in their automotive revenue. In April, as part of the company's Q1 2019 earnings release, it was announced that vehicle sales were reported at $6.32 billion, which was down 41% from the previous In addition Tesla reported a loss of $702.1 million for the quarter ended March 31, 2019. There had been some early warning guidance provided by the company that Q1 2019 would be negatively impacted by certain factors, including the reduction of a government tax credit, but the market did expect such poor financial results. Revenue was anticipated to be $5.19 billion and came in at only $4.54 billion. (Source: Tesla misses big on first-quarter earnings as demand fell for its electric cars)

Source: CNBC

The net loss recorded this quarter was the largest quarterly loss since the company posted a similar loss of $717.7M in Q2 2018. From a cash flow perspective the company used $1.593 billion of cash in the quarter. Tesla has been clearly quite busy by investing in capital and product development and has been challenged by slowing sales. As well, the company is undergoing a new build of a battery factory and car assembly plant in China which will be capital intensive, in addition to other capital-rich endeavors. The company ended Q1 2019 with an unrestricted cash balance of almost $2.2 billion. Tesla's losses combined with their aggressive growth plan and capital deployment has resulted in the debt environment presented below.

Long-Term Debt Picture

It's worth looking into the current state of Tesla's long-term debt and how the new raise will impact the company in both the short and long term. Tesla's long-term debt obligations as of March 31, 2019, are presented below:

Source: Tesla Q1 2019 10-Q

Although the unpaid principal balance of approximately $10.3 billion may seem staggering, many of the convertible senior notes have very favorable interest rates and terms attached. The more sizable notes are all long term with the exception of the 1.625% $565.9M senior notes that are due in 2019. The convertible debentures that are going to be issued will carry an interest rate of 2% which is comparable to many of the debt tranches shown above. The raise should increase the long-term debt position of the company to more than $11 billion.

It also should be noted that Tesla made a convertible bond payment of $920 million in the quarter which is reflected in the cash and debt figures above. The state of the company's obligations relating to debt and leases within the next year amount to approximately $1.7 billion. This should be manageable for Tesla considering the cash injection of $2.7 billion just received and the $2.2 billion cash on hand as at March 31, 2019. This does not even consider the fact that the company could actually generate positive cash flow from operations which occurred in the prior year. Operating cash flow (discussed in depth below) is going to be imperative as to how fast Tesla's cash balances are depleted or padded. It's therefore worth looking at historical cash flow from operations, as discussed below, to determine state of the company's debt repayment and cash position.

Cash Flow Considerations

This raise was clearly needed for cash flow purposes and it puts an end to any questions of ability to raise capital within the short term. With the raise finalized, Tesla can begin to focus on its operational efforts both in the U.S. market and internationally.

Tesla's net cash used from operating activities for Q1 2019 amount to almost $640M. The breakdown from their statement of cash flows is presented below.

Tesla's cash flow from operations has been quite volatile over the prior three years which is to be expected. The company has lost as much as $639M (current March 31, 2019, quarter ended) and has generated as much as $1.93 billion in Q3 2018. Cash flow from operations for the last four quarters is as follows:

Tesla Sales Source: Yahoo Finance

Clearly, if operations persist similar to that of Q1 2019, cash will deteriorate quite quickly. However, an operating cash flow position similar to that of Q2 2018 - Q4 2018 would be easily sustainable given the current cash on hand for Tesla. A look at operating cash flow annually for the last four years is as follows:

Source: Yahoo Finance

The annual cash flow from operations figures also would not seem to pose a threat to the cash or debt repayment position of the company. When other notes become due post 2019, Tesla will have evaluate its position basic on its operating results and planned capital expenditures.

Management and Market Reassurance

Source: CNN

With the raise being fully subscribed, there's still confidence from the external market. In addition, Elon Musk also committed personal cash to the offering. "Mr. Elon Musk, our Chief Executive Officer, has indicated his preliminary interest in purchasing up to 102,880 shares of our common stock for a purchase price of approximately $25.0 million in this common stock offering at the public offering price. (Source: Tesla Prospectus Supplement) Optimistically, investors will take Musk's personal investment, as well as the fully subscribed raise, as a positive vote of confidence for the company.


Tesla is not going anywhere in the short term and there's not a current solvency issue as some critics have alluded to. Despite increasing competition and some sizable losses, they have had little issues raising capital when needed. It's always concerning when losses are posted and cash is burned, but high growth companies need to raise in order to survive. Tesla shares have recently bounced off their recent 52-week low, but as conversations relating to the China trade war continue, their share price almost will certainly be subject to volatility. The fact that Tesla made this raise was a necessary move, however the success of the company was not predicated upon it occurring. The company will continue to grow and evolve and there's a good chance that we have not seen the last capital raise by Tesla, and that's OK.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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: This article is for information purposes only. Please do your own research and due diligence and consult a financial advisor and/or tax professional if necessary before making any investment decisions.