Tesla’s money burning problem


Elon Musk isn’t quite a household name, but he’s not far from it. The man who put a car into space has a net worth of around $20 billion, which he generated through numerous successful business ventures, including cofounding PayPal, which was sold to eBay for $1.5 billion in 2002. One of his most prolific ventures since then is Tesla, Inc, an automotive and energy-storage company, who seek to be at the forefront of the transition to sustainable transport. However, while investors are currently optimistic, the future remains uncertain for the green tech-giant.

Despite pulling in record revenues of $11.8 billion in 2017, the company still made a record loss of $2.3 billion that year. This is not uncommon for Tesla, as they have been running at a loss for the last seven years, and the company’s losses have only been increasing, as in February the company announced its biggest quarterly loss ever, of $675.4 million in the three months to December. Yet still the company not only survives, but thrives, continuously expanding its operations and innovating in the industry. How do they achieve this feat? One word, cash.

As long as Tesla has a pile of cash it can draw from, it will be able to make debt repayments and stave off bankruptcy. But Mr Musk’s pile of cash is getting smaller, and sceptics doubt it will prove large enough to see them through 2018. Credit rating agency Moody’s and investment bank Jefferies predicted that Tesla would have to raise as much as $3 billion from investors by the end of 2018, a claim Musk dismissed, tweeting “Tesla will be profitable & cash flow+ in Q3 & Q4, so obv no need to raise money.”

More hopeful observers point out that around the first deliveries of the Model S and Model X vehicles, Tesla’s negative cash flow peaked, before drastically falling in the quarters after. The Model 3 began deliveries in the last two quarters of 2017, when Tesla saw record negative cash flows, suggesting that the pattern may repeat and that there may be a turnaround in the company’s income. The ­­explanation for this pattern is that in the run up to the launch of a new car Tesla sinks huge amounts of cash into expanding its manufacturing capacity, which begins to pay for itself when cars start being produced.

Musk has surmounted larger obstacles in the past, and compared to the position Tesla found itself in immediately after the financial crisis in 2008, when Musk struck a deal on Christmas Eve to avoid bankruptcy, generating the cash he needs now should be child’s play. Tesla has set high targets of 5000 Model S cars coming off the production line per week by the end of this year, which if achieved could see the company turning a profit in the final quarters of 2018.

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