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Tesla's Cash Burn, Debt Finally Getting Attention

We see the firm at a key inflection point where it will either continue to grow or could sputter and die.

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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.

David Whiston does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.