Tesla CEO Elon Musk claims he won’t be returning to the markets anytime soon. As Model 3 production finally ramps up, he says the company can put itself comfortably into the black just by selling cars.
“Tesla will be profitable & cash flow+ in Q3 & Q4,” Musk tweeted on Apr. 12, “so obv[iously] no need to raise money.”
Wall Street disagrees. On May 17, analysts at Goldman Sachs joined their counterparts at the investment bank Jefferies and the credit-ratings firm Moody’s to argue that Tesla is facing a deep financial hole if it wants to keep expanding. At the moment, Tesla has around $4 billion on hand thanks to big debt and equity financings in the last two years. Goldman says the electric-car maker will need at least $10 billion if it plans to build vehicle and battery factories in China and start producing the Model Y (the upcoming electric crossover vehicle) as expected.
The disagreement over where that money will come from centers on whether the Model 3 will be the cash cow Tesla expects in 2018. Despite original projections of 20,000 cars per week, the company is barely rolling out more than 2,500 per week right now. The slow trickle of new Model 3s is starving the company of cash, while adding pressure on its ability to raise money in the future. But Tesla says it expects to be producing 5,000 Model 3s per week around June.
Goldman says that’s not enough. It argues even hitting this milestone (which it views as optimistic) still leaves Tesla fumbling under the sofa cushions for loose change. Red-hot Model 3 sales would cover $5 billion or so of the expenses to develop products like the Model Y and the Tesla Semi truck. Goldman says Tesla would need to come up with another $5 billion in new financing to pay for all the new facilities it expects to build.
Any financing shortfall could lead Tesla back to the bond market. But the company already has about $7.8 billion in debt. Investors are already skittish, driving yields on the debt further into junk territory and pushing down the price of the bonds.
Goldman has a sell rating on Tesla shares, with a six-month stock price target of $195. The bank is predicting manufacturing delays, slimmer margins due to competition, and rising labor and commodity costs. All that adds up to negative cash flow continuing through 2020, its analysts say, directly contradicting Musk’s prediction from earlier this year.
While the markets may be getting antsy, it should be said that after more than a decade of losing money, Musk at least is finally warming to the idea of Tesla earning more than it spends. In an April employee memo obtained by Jalopnik, Musk wrote: “A fair criticism leveled at Tesla by outside critics is that you’re not a real company unless you generate a profit, meaning simply that revenue exceeds costs. It didn’t make sense to do that until reaching economies of scale, but now we are there.”