When will Tesla (NASDAQ: TSLA) make a profit?
As of right now, it looks like never at the rate it’s going…
Will This New Plan Work?
Let me ask you a simple question: Would you lend your hard-earned money to Elon Musk?
Journalists, traders, and entrepreneurs all hang onto Musk’s every word, but would you?
Tesla has just over $3 billion in cash, but it’s burning through about $1 billion each quarter as it embarks on one of the most daunting gambits in automotive history: Taking the production of its mass-produced sedan from practically zero to over 400,000 in little over a year.
Despite its somewhat checkered track record, investors still keep running back.
The electric car maker’s share price has surged about 1,000% over the past few years, making it more valuable than GM (NYSE: GM) and Ford (NYSE: F) even though Tesla has yet to make an annual profit.
Tesla plans to issue $1.5 billion in bonds to bolster its balance sheet “during this period of rapid scaling with the launch of the Model 3,” the company’s pivotal mass-market vehicle.
That’s all very exciting for the future, but the financial realities of Tesla aren’t as optimistic. The company has lost more than $700 million over the past year, with a deepening negative cash flow.
In an attempt to counter its obvious expense and cash flow problem, Tesla’s debt will be classified as “junk,” implying a higher risk that lenders won’t get their money back — at least in the short term.
Bond investors view the corporate world through a much soberer and more pessimistic lens.
Before jumping in, they ask: What are the odds that I won’t get paid back?
In the long term, Tesla may seem like a better bet than automakers in gasoline and diesel powered vehicles.
But for rating agencies, which provide opinions to bond investors, the opposite is true.
Uncertainty around how long it will take electric vehicles (EVs) to gain meaningful market share is why bond investors will likely charge Tesla more money to borrow than traditional carmakers.
Some experts say that Tesla’s cash flow will remain negative well through 2019.
Previously, Tesla has been raising money to pay its extensive bills through a combination of equity offerings and convertible bonds, which eventually convert into shares.
In March, the company raised $1.4 billion through a convertible debt offering.
However, following Tesla’s statement where it introduced more “junk bond” offerings, the S&P reaffirmed its negative outlook for the automaker and assigned a “B-” rating for the bond issuing — deep into junk credit territory.
The S&P also maintained its “B-” long-term corporate credit outlook on Tesla.
The index had this to say about the electric car maker in regard to the bond offerings, as well:
We could lower our ratings on Tesla if execution issues related to the Model 3 launch later this year or the ongoing expansion of its Models S and X production lead to significant cost overruns.
But there’s still a very high risk that Tesla will run out of money, causing it to run back to the equity markets while everyone prays it isn’t too late.
Pushing Unethical Practices for Elusive Profits
Reports were released this month, stating that Musk has promised, yet again, that his company would deliver the new Model 3 to its almost-half-million waiting customers. And he guaranteed that his employees would go through “production hell” in order to do so… AGAIN.
The electric car manufacturer’s last bout of production hyper stress — in the months leading up to the September 2015 delivery of the Model X — brought long hours, mandatory overtime and an 11% in missed work time due to injuries that employees sustained on the job.
Injuries reported by workers rose about 5%, well beyond industry averages, according to an analysis of federal statistics.
Production workers say they’re concerned about the potential for more injuries and mental burnout for under the average autoworker’s wage.
Tesla executives say they have made their share of mistakes and aren’t eager to repeat them.
The company claims to have reengineered its work flow, making the Model 3 easier to assemble.
Tesla is facing a crucial test this year and into the next: Turning out at least four times more vehicles than ever before while pursuing a still elusive profit.
It’s placed an enormous bet on this lower-cost Model 3 sedan to expand and revive the nascent EV market.
Tesla has been spending, on average, $100 million a week on capital expenses, and most of that goes toward manufacturing costs for the Model 3, according to CFO Deepak Ahuja.
With 455,000 orders for the Model 3, the company already has a months-long backlog for building its new sedans.
Some deliveries began in July, but new orders won’t be filled for another 12 to 18 months.
Yet, despite its “simpler” build and back-ordered delivery schedule, this has not quelled Tesla’s production workers.
Back in February, several workers began to speak publicly about injuries they’d sustained while working long hours in order to meet deadlines and have even begun organizing a union.
Last month, a group wrote an open letter to the Tesla board of directors, asking for more emphasis on worker safety:
One of the most serious issues concerns our health and safety. Accidents happen every day. Severe incidents frequently impact morale and cause delays in production.
An analysis for Tesla factory employees by Worksafe (a Bay Area nonprofit affiliated with unions that advocate for healthier work places) found the Tesla factory floor was less safe than the average automobile factory.
Back in 2015, the company had a total recordable incidence rate (a uniform measure of workplace injuries) that was nearly one-third higher than the auto industry average.
And it doesn’t seem like those statistics have improved much since then.
Tesla workers also spent more than twice as much time as the average autoworker out of work, on restricted duty, or transferred from their normal tasks because of injuries.
Company officials just chalked that up as part of the “growing pains” associated with producing a new vehicle model.
Branton Phillips, 53, started working at Tesla in March 2014. The next year, the whole factory was consumed with Model X work, he said.
During one stretch, Phillips said he worked 13 days straight and that it was not unusual for others to work 21 days straight.
Supervisors would roll out boxes of energy drinks and candy bars to fuel factory workers during their laborious 12-hour shifts.
Hai Nguyen, 38, said the Model X brought long hours and repetitive stress injuries from bolting rivets onto packs due to the lack of efficiency and suboptimal production lines.
Colleagues who complained about injuries could face consequences, Nguyen said: “I worked with pain, but I didn’t let anyone know. I didn’t want to get fired.”
Few changes have been seen in Tesla’s work culture; it still remains a numbers company.
Musk said last month, as he delivered the first Model 3s, that the high-stress production would last for at least six months, if not more.
He praised his workers and joked: “I look forward to working alongside you through our journey through hell.”
Workers remain proud of the company’s mission, but they want their voices to be heard as production ramps up again: “We’re building cars for the future with the work process of the past.”
But the likelihood of overexerting factory workers in order to finally get the profit’s Tesla has been craving is highly unlikely.
The Bottom Line
It’s sink-or-swim time for Tesla.
It appears as if the electric car company has placed too much weight on the impending success of its latest mass-produced Model 3 sedan.
Unfortunately, many experts have already condemned the project as a failure and also as not enough to award Tesla the profits that have been eluding it for so long.
That’s all for now.
Until next time,
John Peterson
Pro Trader Today