Tesla, the electric automobile company, has had a fascinating history in its short life as the first significant new American car producer in decades. The company has proven technology, exciting designs for its products and actual sales to show for its tremendous research and development efforts.
So, what’s the problem?
Of late, Tesla may have gotten itself into trouble in terms of overpromising on what it can deliver. It’s likely to face steep competition in the future from electric vehicles produced by other manufacturers as well as from conventional cars powered by cheap gas at the present moment.
This is in addition to problems the company has been having in meeting demand for its cars, quality control issues and safety problems with its new features.
The company has also pledged to purchase SolarCity, a solar panel installation company chaired and co-founded by Tesla CEO Elon Musk. However, it’s not clear whether the latter move would be in the company’s best interest or if this maneuver is intended to save SolarCity, which has been having its own financial troubles.
Nevertheless, one thing is clear; Tesla has a very high cash burn rate of half a billion dollars each quarter. Given cash generated by a recent stock offering, the firm has about one quarter’s worth of cash on hand.
Net debt for the company at the end of 2016 is predicted to be about $400 million. In the past, analysts have drastically underestimated how much cash the company has needed to keep expanding its production. In 2015, the company’s free cash flow deficit turned out to be five times greater than analysts’ anticipations at the beginning of the year.
Currently, the company is producing about 14,000 cars per quarter. But in the second half of 2016, Tesla will need to almost double this amount to meet forecasts for the year that it’s given to analysts.
Then, to continue to meet targets, it will need to multiply production numbers by six times in the next two years, a goal that’s looking increasingly unlikely in the wake of acknowledged shortfalls in the second quarter of this year and a fatal crash involving the autopilot feature of its flagship Model S.
The company has predicted a rosy outlook of positive cash flow by the end of 2016. But the last time Tesla had a positive quarter was in 2014, and the prospects of Tesla meeting its production targets for the year look shaky at best. Not to mention the fact that its estimated Tesla loses $4,000 on every vehicle it sells.
The potential for the company carrying significantly heavier debt by the first quarter of 2017 is growing. If the firm goes ahead with its SolarCity purchase, it will add $2.9 billion to that debt amount, and the number will only increase as SolarCity has its own substantial burn rate to contend with.
The fact that Tesla owns its dealerships outright has been a substantial cash drain for the company, compared with other automakers who let franchisees carry that burden.
As the company gears up to release its new Model 3, with an affordable $35,000 price tag, experts are warning that continuing quality-control problems will be far less tolerated by middle-class consumers, who will almost certainly drive the cars much harder and more often than upper-tier customers.
Even some of Tesla’s high-end buyers are complaining about their cars, and vaunted consumer advocacy publication Consumer Reports pulled its recommendation for the Model S in October of 2015, sending the car company’s stock into a dive.
Former General Motors Vice Chairman of Global Product Development Bob Lutz, a renowned car industry expert, has a negative outlook for the enterprise.
Tesla hasn’t had nearly as long a history as other car manufacturers in which to develop long-range testing programs and an accumulated knowledge base for its vehicles.
The autonomous self-driving features Tesla has developed and deployed thus far for its vehicles are an admitted “beta testing” program that’s far from complete or in advanced stages. So far, one person has been killed by the feature in a highly publicized accident that Tesla took nine days to reveal to the press.
It’s unclear if the company is taking the right approach to this technology versus, say, Apple, Google or traditional car manufacturers.
Other carmakers such as Audi, BMW, Chevrolet, Fiat, Ford, Honda, Kia, Mercedes, Nissan, Renault, Toyota and Volkswagen have all either begun to produce electric car models or have announced intentions to produce them within a short period of time.
With so many established players committing to produce competing vehicles, it’s hard to see how Tesla can ramp up fast enough to become a serious competitor to present large manufacturers.
All of this does not bode well for Tesla or for Elon Musk. Right now, the stock price of the company is at $192, in the upper ranges of the issue’s history, but if bad news for the company continues to multiply, this value is sure to fall precipitously.
Regards,
Ethan Warrick
Editor
Wealth Authority
