Tesla in Need of More Capital… Again By Sean Emory Founder/CIO Avory & Co. *We have no position in Tesla.
We are back with another capital raise from Tesla Inc (NASDAQ:TSLA). This time Tesla is looking to raise $1.15 billion through equity and convertible debt. This is not of any shock to me as I have been very vocal of Tesla’s financial position. Their current capital structure and cash burn is very poor. Below highlights their current fiscal position.
The company currently generates roughly $7B in annual revenue, of which none of it hits the bottom line. In 2016, Tesla reported a free cash flow line of -$1.4B, slightly better than the -$2.1B burn in 2015, but worse than the 2014 -$1.0B free cash flow line. I completely understand their desire to grow and invest capital in their growth objectives.This is normal for high growth companies, however this is very risky for a company in a highly cyclical industry such as automotive. Some may argue it is a technology company, and I agree to a point but the fact is they sell cars.
Their current fiscal position is actually very UNcommon. Tesla is a representative of the Nasdaq 100, a well regarded group of high growth businesses. Tesla is only 1 of 5 companies, or just under 5% of constituents who have negative free cash flow, and a current cash position below their current short and long term debt obligations. I must admit, they are seeing strong revenue growth, and strong revenue growth can buy companies time.
So how has Tesla been able to navigate through their cycle of burning cash, raising capital, and repeat? The company has been one of the biggest beneficiaries of the elongated economic cycle. Below I show how we are now approximately 93 months into the current economic expansion, making it the 3rd longest since 1927. We are fast approaching the expansion in the 1970’s which lasted 106 months, and nearly 2 years away from topping the longest expansion ever.
So I hate to be a pessimist. Especially when we are talking about a really cool car manufacture, and a brilliant CEO. However, time has been a tailwind to Tesla, the potential of higher rates will impact their future interest payments, cash is burning, and their payments on debt are just right around the corner (see below).
Elon Musk likes to swing for the fences. I hope he hits it out of the park, but I have my doubts.