Tesla Headed for Financial Crunch?

By · July 26, 2012

Model S

Tesla's critical triumph at last month's Model S media event has recently been overshadowed by some unsettling news. Two weeks ago, the company announced that it would be forced to slash its quarterly production target for the Model S from 1,000 units to 500. CEO Elon Musk nevertheless promised that the electric vehicle start-up would remain on track to reach its goal of 5,000 Model S deliveries by the end of the financial year.

Then came speculation from analysts that previous forecasts for Tesla's financial health may have been a bit rosy. Quarterly losses for the company had been expected to increase due in part to the cost preparing its Fremont, Calif., factory for serial production of the Model S, but as the company neared the release of its 2Q reporting, word began to circulate that these losses may be higher than expected.

Several analysts switched their outlook on Tesla from "buy" to "sell", and in a rather scathing article posted at AltEnergyStocks last week, contributing editor John Peterson declared that the company was about to enter "the valley of death." His reasoning:

"At March 31st Tesla had $123 million in working capital and $154 million in stockholders equity. Unless it slashed spending during the second quarter, its June 30 financial statements should show working capital and stockholders equity of roughly $65 and $85 million, respectively...Tesla is entering the most cash intensive period in its business history where it will have to make cars instead of talking about them. Unless management acts quickly, Tesla will run out of cash this quarter."

At the time, Peterson's doomsday words may have seemed like more naysaying, or purely alarmist, aimed at a company that was guaranteed from the start to attract its fair share of disbelievers. Peterson, himself a veteran of the lead-acid battery industry, has in recent years been an outspoken critic of electric vehicles.

Then came Tesla's most recent shareholder letter and the accompanying response from analysts. All of a sudden, Peterson's speculation that Tesla may soon be running out of cash doesn't seem so crazy anymore.

Increasing Costs, Revenue Slow to Materialize

In its Q2 2012 financial report, delivered on Wednesday, Tesla reported revenue of $27 million and a loss of $106 million (up from $89 million the previous quarter.) Tesla says it has $266 million in cash to draw from, including money left over from its Department of Energy loan.

Wunderlich Securities analyst Theodore O'Neill―who has in the past has been full of praise for Tesla―after touring its facilities, recently drove the Model S and reported that the production delays stem from "issues involving the interior and range."

If true, the range claim would be puzzling given that the EPA has already rated the car's range at 265 miles.

"I don't think they'll make 5,000 cars this year," said O'Neill in a research note this week. "They are going to have to raise more cash, and the fact that they haven't gotten the interior right is a problem."

If Tesla is able to ramp up production on the Model S despite its recent difficulties and reach its goal of 5,000 sales by year's end, the company projects that it will take in total revenues of $560-$600 million for the remainder of the year. In order to meet that goal, the company will have to increase its weekly output from its current level of 10 cars per week to at least 375 per week by October.

If it's not able to do that, Tesla may face the prospect of entering another round of financing―something it may not have foreseen when it opted against seeking another low-interest loan from the federal government last fall.

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