Tesla has had a lot of money problems in 2018, among other issues they have to worry about like brand expansions, safety hazards with their cars, product recalls, not hitting production targets and etc. In the upcoming quarters, Tesla will be under a lot of pressure to prove that it can stay profitable and stay out of trouble with regulators as it speeds up Model 3 production, introduces new vehicles, and builds a factory in Shanghai.
An example of one of Teslas money problems happened when, thousands of customers lined up ready to buy a Model 3, which has a ,000 starting price.
A lot of these customers were disappointed because they couldnt get their model because Tesla keeps badly missing its production targets, and it is burning through cash as it does so. In March, Tesla issued the largest recall in its history. Hitting these targets matters for the Tesla. Reducing the reliance on negative working capital and getting a return on the money already spent on production lines relies on producing more cars.
When Moody’s rated the bond Tesla sold last August, it was assuming 300,000 Model 3 deliveries this year. The recall involved power-steering systems in 123,000 Model S sedans. Tesla said five bolts responsible for holding the power-steering motor in place could corrode, break, or come loose, which could result in the loss of power steering.
Teslas money problems have also affected their credit. Moody’s Investors Service downgraded Teslas Corporate Family Rating to B3 from B2, unsecured note rating to Caa1 from B3, and Speculative Grade Liquidity rating to SGL-4 from SGL-3.
This is giving the company a negative look to investors and customers, both current and potential. This is mainly because of concerns about the company’s ability to hit its production targets for the Model 3. The move hurt Tesla’s stock price and drew attention to the frequency with which the company has spent and raised money.
Adding to their financial problems, Tesla faces deadlines to pay more than $1 billion in bonds due over the year. Tesla has already lost $2.8 billion over the past year and a half. Not only that, but the losses are accelerating. The company has suffered a record loss during each of the past five quarters. Tesla has two big convertible debt issues coming due: A $920 million issue due next February, and a $1.38 billion issue due in early 2021. Both will convert to stock if Tesla’s share price gets above $360 and stays there for a while, but unless Musk’s plan to take Tesla private at $420 per share works out, that looks unlikely, at least for that first payment due next February.
And then there is Teslas biggest and most acute problem: its risky finances. Musk promises investors that Tesla is going to start making more cars and profits any day now, but thats wishful thinking. Tesla is not generating enough cash to pay back the mountain of debt that is coming due soon. Investors are losing faith in Musk and his company, and Wall Street is turning on him. Tesla could soon become a case study of what can happen when an entrepreneur, thinks the rules of the marketplace do not apply to him.
From January to June of this year, Tesla generated revenues of $7.4 billion, but it had an operating loss of $1.7 billion, burning through its cash on hand. It has $2.2 billion left, most of which will be needed to cover operating losses. Romit Shah, a research analyst at Nomura Instinet and once one of Teslas biggest boosters, reversed course last week, calling the company no longer investable.
About $1.7 billion of the companys long-term convertible debt is due in the next 14 months, meaning that the debt holders have the option of being repaid either in stock, at a specified price, or in cash. One chunk of the convertible debt, $230 million, is due in November. The conversion price is around $560 per share. If Teslas stock is not trading at more than $560 per share by then, the holders of those notes will most likely want cash. That puts enormous pressure on Tesla to get the stock price up quickly (its trading around $300 per share these days.)
Advance purchase reservations and deposits for them are still high. But that hasnt been enough to solve Teslas reoccurring financial reality: It isnt producing cars fast enough to meet demand, its operations are running at a loss, and it has huge debts coming due. The resulting pressure on the companys cash balance are not going away.
Teslas apparent money problems, there are a few options the company could pursue to help. Tesla could:
Sells parts of the company to new investors, like it did to Damiler and Toyota
Expand its credit lines, but this would go against Teslas profitability
None of these options are a sure fire way to solve all of Teslas financial problems but Tesla needs to start taking action now. Otherwise Tesla will continue facing more problems.