Tesla's Cash Burn, Debt Finally Getting Attention

David Whiston: Tesla's stock has set a new 52-week low recently and is off 35% from its all-time high and down over 20% this year. There are many headwinds facing the firm right now, especially around Model 3 production cadence, a recent Model X fatal crash in California, and GM and Waymo's progress in autonomous vehicles suggesting Tesla is not the technological leader in this emerging field. Tesla is also burning cash and has a lot of debt; we've been concerned about this for a long time and it is finally getting attention. The company finished 2017 with $7.2 billion in recourse debt and last year had an adjusted free cash burn of about $3 billion. Moody's cut its credit rating last week further into junk territory, and Tesla's 5.3% 2025 bonds issued last summer at what we thought was a very low rate are now trading at an effective yield of nearly 8%.

We don't care a whole lot about every quarter's Model 3 delivery rate. We are more focused on the long-term direction of production moving up or not, and for now we see no reason to think Model 3 production is crippled. We do care quite a bit about Tesla's lack of cash flow and debt levels. The problem with investing and balance sheets is it's usually too late for investors once they realize the balance sheet is a problem, because as long as the stock is going up and money is cheap, debt maturities never seem to matter. With the Fed raising rates and President Trump's trade rhetoric and anti-tech stance hurting the market, now is a good time to consider Tesla's debt profile for the next few years.

The company has many busted convertible bonds making up its $7.2 billion of recourse debt with a $230 million bond inherited from SolarCity due this November with a strike price of nearly $561 per share; a $920 million convertible in March 2019 with a strike price of about $360; another $566 million SolarCity convertible bond due in November 2019 with a strike of about $760 per share; a $1.1 billion revolver balance maturing in June 2020; and another $1.38 billion March 2021 busted convertible with a strike price of about $360. Tesla had $3.4 billion of cash at year end, and we expect a several billion dollar burn this year, so more capital raises are nearly guaranteed; but if the capital markets close to them, then the recent plunge in the stock price will look trivial compared to what will happen then.

Tesla could right the ship or this could be the beginning of the end, it's too early to know for sure. We've always felt the value of this stock today is based on what the company will look like 10-20 years from now--not how many Model 3s get delivered in one quarter. We think to buy the stock you have to believe in the vision of Elon Musk because the stock is basically a very long dated call option on Elon Musk. We think Elon is amazing but even he needs massive amounts of other people's money to fund his product expansion which includes a lot more Model 3s, a semi truck, a Model Y crossover, a new roadster, and possibly a pickup truck someday.

The company is in a key phase of growth where it will either keep growing or sputter and perhaps die. If the market goes from treating Tesla as a firm with a rock star CEO who can do no wrong to a firm that is capital intensive, burning billions a year, and about to have a lot more EV competition, we would not want to own the stock in that outcome.