Crunch time for Tesla as Musk tries to bed down production

Tesla will produce its first-quarter earnings report in early May. As the pioneer of luxury electric cars, and the likely first mass-market electric vehicle producer (with its Model 3), Tesla is normally the subject of a lot of interest, however this quarter’s report will be much more anticipated than perhaps any other.

The reasons are varied, but all have a common theme: Tesla is close to several important inflection points.

Firstly, the company’s future is now inextricably linked to the success or failure of the Model 3.

Tesla has garnered an unheard-of 450,000 customer reservations and has geared up on an enormous scale to produce the Model 3, and yet has struggled to actually produce cars at a high rate, with its recent production update claiming a one-week production record of 2,030 Model 3s (versus prior forecasts of 5,000 and even 10,000 per week).

Despite its charismatic founder Elon Musk’s ambitious plans, industry analysts are sceptical about Tesla’s ability to manufacture cars on a large scale. Elon possibly shares that point of view, as he’s back to sleeping on the giga-factory floor and directly supervising production.

Secondly, there are worries about whether the production rate is sustainable.

Personnel were shifted off the Model S and Model X production lines to build Model 3s (and both Model S and Model X suffered falls in production in the quarter), probably impacting the older models, and despite Elon saying that Tesla would achieve above 2,000 production for the following week, some industry analysts thought it could just be a burst rate, with a subsequent slump as the focus subsided.

In the contrary corner, Global Equities Research analyst Trip Chowdhry estimated on April 7^ththat a production rate of over 2,500 was achieved for the week, and the Bloomberg VIN tracker showed an uptick.

Thirdly, investors will be examining Tesla’s cash burn and reserves carefully. Despite Elon saying that no cash raisings were needed this year, Tesla likely has some large bills coming due for capital costs of all the production plant.

If operations doesn’t start producing cash (read: get production up and profitable) and delays continue, it will have to either issue bonds or dilute shareholder equity. Tesla has been losing cash at around $200-250m per quarter, an estimated $1.6bn in equipment purchases will soon have to be paid.

Tesla doesn’t have to repay any significant debt principal until November (with even more due in March), but with $1.8bn due over the next 18 months it’s almost certain Tesla will need more funding.

With over $3.3bn in cash along with other short-term financing available, will Tesla have enough cash to fund its capital expenditures, operations, and debt repayment?

Unfortunately, $3.3bn doesn’t go very far when you are burning through cash at its current rate. 2017 ended with Tesla inking a $3.5bn negative cash flow.

A reasonable guess at Model 3 2018 numbers might yield an extra $9bn of revenue, perhaps $2bn of operating cashflow, which whilst very welcome, won’t reverse the cash burn (but would make an equity or debt raise feasible).

A critical quarter for Tesla indeed.