When will Tesla run out of cash?

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Trust me.
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Tesla insists it won’t run out of money, but banks and analysts are nervously watching as the electric carmaker burns through its $4.2 billion cash pile. Some say Tesla won’t generate enough revenue to replenish its hoard before it will be forced to raise extra cash from investors, yet again.

In March, investment bank Jefferies and credit rating firm Moody’s predicted (paywall) the company would be forced back to (perhaps less forgiving) investors later this year to raise as much as $3 billion to cover for lagging Model 3 production, and even more during the second half of 2019. “Tesla’s current liquidity position… will not be sufficient to address these cash needs going forward,” wrote Moody’s in a note in late March. Moody’s downgrade pushed Tesla’s corporate debt deeper into junk-bond territory (B3), while lowering its outlook from stable to negative. The electric car company, which has a market cap of around $50 billion, has raised some $38 billion in debt and equity since 2008.

Tesla CEO Elon Musk is much more sanguine. “Tesla will be profitable & cash flow+ in Q3 & Q4,” Musk tweeted on Apr. 12, “so obv[iously] no need to raise money.”

Whether that’s true will become much more clear after today’s (May 2) quarterly earnings release. Investors will be keen to know exactly how many Model 3s have been produced, and Tesla’s cash situation. Expect any reassurance from Musk’s April tweet to evaporate if things haven’t turned around dramatically.

A history of broken promises

The company’s sales, profit, and production predictions have consistently over-promised and under-delivered. In 2015, Tesla said it would be profitable the following year (subject to certain accounting tweaks). It was not. Tesla affirmed at the time it would not need outside capital for its $1.5 billion in planned capital expenditures. In the end, it raised $1.7 billion of new equity. Recently, production of the Model 3 has fallen woefully behind the company’s original projections.

Telsa produced 2,020 Model 3 vehicles in the last week of March, well short of the 2,500 per week it promised earlier this year (and nowhere close to the 20,000 Model 3’s originally forecasted to roll off assembly lines by now). The company’s shares have lost around 6% over the past year, but are up more than 400% over the past five years.

The reason why investors haven’t quit on Tesla in a big way may be because it has recovered from stumbles before: it nearly went bankrupt in 2008, and then struggled with chronic quality problems and production delays. And it has delivered on its most important promises from Musk’s “secret” master plan in 2006:

Build sports car
Use that money to build an affordable car
Use that money to build an even more affordable car
While doing above, also provide zero emission electric power generation options.

That more or less worked out. Tesla is now the world’s largest electric carmaker outside of China (home to BYD, which sells more cars overall). It sells the luxury Model S and X, and the $35,000 Model 3 (not to mention the forthcoming Tesla Semi). It boasts a multibillion-dollar battery and energy storage business, as well as a solar panel manufacturing and installation unit, following the acquisition of SolarCity last year (Musk was the chairman of SolarCity, founded by his cousins Peter and Lyndon Rive.)

Most importantly to Musk, who has made climate change the animating mission behind Tesla, the entire automotive industry is now embracing his terms. If Tesla vanishes tomorrow, major auto companies once dismissive of electric vehicles will soon be electrifying their fleets and phasing out the internal combustion engine. Volvo, BMW, GM, and Volkswagen have all announced plans to roll out all-electric lineups in the next decade or so.

It’s not clear if Tesla will be around to take the victory lap. Recent missteps with the Model 3 has raised the specter of bankruptcy yet again. Tesla only has about a year to prove the Model 3 can turn more than a decade of losses into a profit-making machine.

But Wall Street has been more than happy to provide the cash to reach profitability, even if that wasn’t Tesla’s original plan. In May 2016, former Tesla CFO Jason Wheeler told analysts that the capital requirements for the Model 3 would be steep, but “ideally I’d like to fund as much of that as possible with cash flow from operations.” Almost the opposite has occurred. As the price tag on the Model 3 assembly lines has risen dramatically, Tesla has returned to the markets again (and again) to plug holes in the balance sheet. It has raised $21 billion since Wheeler’s statement.

When will Tesla burn through its cash?

Tesla still has plenty of money, relatively speaking. Moody’s estimates that Tesla is holding $3.4 billion in cash, with another $800 million or so available through credit lines. That has bought the company time to ramp up the Model 3 production and, soon, devote to newer products such as the Model Y, a cross-over vehicle Tesla plans to start building by 2019. (This would finally allow Musk to fulfill his long-held hope of a model lineup that spells out “S3XY”—Ford reportedly blocked Tesla from using the Model E moniker.)

That makes pressure to ramp up Model 3 production higher than ever. After a series of costly mistakes, Musk has taken charge of manufacturing at the company’s Fremont, California, plant. His original vision of robots building cars faster than humans could has fallen flat. Instead of a “ten-fold improvement” in productivity, Musk got a mess. “We had this crazy, complex network of conveyor belts,” Musk told CBS News in a segment aired last month. “And it was not working, so we got rid of that whole thing.” Musk later tweeted that “excessive automation” was a mistake. Tesla is now rebuilding the assembly line.

Today’s burn rate will engulf almost all the company’s cash by end of the year. Last year, Tesla torched about $4 billion, mostly to accelerate Model 3 production while delivering just a fraction of the initial projected volumes to show for it. Next year is not expected to be much better. Moody’s estimates that Tesla’s cash burn will reach $2.6 billion (defined as cash from operations minus capital expenditures).

Tesla says it can fund this out of sales. Analysts scoff.

What’s more, each time the company returns to the market for money, investors grow more jittery. Tesla already owes $10 billion (paywall) in long-term and convertible debt. Interest payments loom: $230 million will come due in November, followed by $920 million in March next year. “Based on the current liquidity position and expected cash burn,” states Moody’s, “Tesla will need to access meaningful additional capital over the near term, and into 2019 as well.” Unless Tesla starts selling many more cars, it will have precious little headroom left by the end of the year.

Investors have reasons to worry. Tesla’s current financial outlays are unsustainable. There is little reason to believe this will change, except for Musk’s assurances that Model 3 production will follow an S-curve: a slow ramp leading to exponential growth.

But he already appeared to walk back his commitment during a February earnings call, saying “we could be positive cash flow… in the third quarter… but we think it makes sense to invest in the Model Y.” He also told investors that “if we were to just level off [production], we could be cashflow positive right now.” This is a common refrain for Tesla: we could be profitable, but it makes sense to invest in production instead.

That may be true. But “right now” always seems to be a few quarters into the future. As one former Tesla manager said (paywall), “If you didn’t know anything else about the company” aside from its recent financials, “you’d be like, ‘This company will go out of business.’” Many Wall Street investors are betting on just that.  There is nearly $10 billion worth of short positions on Tesla, the most in dollar terms for any US stock.

Musk has called such speculators “jerks who want us to die,” and took Wall Street analysts to task in April, arguing that forecasting Tesla’s future by extrapolating from its past was mistaken. “This has very frequently been why people have underestimated Tesla,” he told CBS.

Musk is right to claim Tesla is not like any other company. It is the only major US automaker built around electric vehicles. It is the first to transform itself into an energy company. It is the only one to emerge from Silicon Valley.

There’s a saying in the Valley: “You should never bet against Elon.” Yet Musk’s reputation for visionary moves does not free his company from the basic mathematics that has bankrupted many other forward-thinking companies before him. Bills must be paid. So far, investors have been willing to pay most of them. That will not last indefinitely. Every broken promise, and missed deadline, brings the day of reckoning closer for Tesla.