Tesla Motors (TSLA) not only beat earnings forecasts when it reported on Wednesday night, but offered very, let’s call it ambitious production goals. That will require lots of cash–something that makes Barclays analyst Brian Johnson and team wary. They explain why:
With its ambitious plans that will require an incremental fundraising (as we predicted), we view Tesla as more of a cash-hungry start-up unicorn than a traditional public company. And we are seeing more talk that start-ups are facing ‘down rounds’ as they seek growth capital. With Tesla likely to come to the market for a capital raise near-term, its worth asking whether it deserves an up round or a down round. Recall the prior offering was last Aug. at $242/share, and Tesla closed the next day at $255…
We give credit for marketing/vision, but see challenges in execution and finance:
1. No shortage of manufacturing challenges: While we appreciate Teslas desire to become a best-in-class manufacturer, up until now it has seen no shortage of manufacturing challenges not only for the X, but also for the S. And while Tesla should ultimately ramp on volumes, it will likely come with a lot of headwinds, challenges, delay and inefficiencies even Elon Musk himself has admitted to these challenges in manufacturing in the past!
2. How profitable can Tesla be on the 3? Even if we assume that all the Model 3 orders will convert to revenue, we are challenged to see the Model 3 reach its gross margin targets. Simply, its unclear to us that Tesla can reach its battery cost targets especially given the accelerated timeline. Plus there will be an incredible amount of content (which obviously comes with a cost) in the vehicle and Tesla is looking to increase vertical integration a risky and expensive proposition.
3. Cash burn and soft margins will last for an extended period of time: With Tesla to be in a growth mode for likely at least the next ten years, expect suppressed margins and challenged cash flows during that period.
Shares of Tesla Motors have risen 0.4% to $212.38 at 11:47 a.m. today.