The biggest argument bears have about Tesla is that it consumes too much money, as investment in its Gigafactory battery plant in Nevada and other expansion projects led to nearly $2 billion in negative free cash flow over the 12 months ending in March. The fear stoked is that at some point the bond market will give up on Tesla, refuse to buy the new bonds, and the shares will go into a tailspin. The company’s relatively low bond rating — Standard & Poor’s rates its debt B-, which is below investment grade — feeds the argument.
“In our opinion, the direction of Tesla’s share price will be dominated by (a) its pace of cash consumption, (b) the excellence and excitement of its products and (c) the openness of capital markets to fund the company’s plan,” Jonas wrote last week.
The solution is to wean Tesla off of its near-term dependence on the capital markets by turning at least modestly profitable, which Goldman Sachs projects will happen by next year. Tesla has done something like this before, making $574 million of operating cash flow in the middle two quarters of 2016. Whether they can soon do it again depends on how many Model 3’s Musk’s company can sell. Tesla’s $834 million R&D budget was spread over just $7 billion in sales.
That should become a much less painful bite when, or if, the company demonstrates it can manufacture cars rapidly enough to meet pent-up demand, letting Tesla continue to invest in mobility while still showing the markets that a long-running payoff on its Tesla investment is just around the corner. But it could mean Musk has to go slower on other expansions, something he might not be willing to do.
— By Tim Mullaney, special to CNBC.com
