Tesla Cashflow Projection
It’s looking like there are only four possible outcomes to Tesla’s current situation:
- One of the powder kegs I laid out in my Telsa Short Thesis blows up, causing investors to rush for the exits and pushing Elon Musk in to a margin call
- Tesla files for bankruptcy (whether that’s due to the executive team throwing in towel or some creditors forcing the issue)
- Tesla runs out of cash and misses a payroll
- Tesla, despite the odds, pulls out of the downward spiral they seem to be in
We have little visibility into the timing for options 1,2, and 4. Option 3, however, lends itself to some analysis.
It seems everybody knows that Tesla’s quarter-end cash position was highly window-dressed. The $3.7B number doesn’t seem believable at all when Tesla is paying for small asset purchases with stock.
I decided to see just how bad things might be. Given Tesla’s “creative” accounting, the hard part is putting together trustworthy assumptions. I’ve built a cashflow model using any source I could find that wasn’t a Tesla financial statement. It’s going to be a rough number, for sure, but I think I can get into the ballpark.
Let’s start with assumptions.
Sales Assumptions
Trip Chowdry, a big Tesla bull, slashed his Q1’19 unit sales estimates over the weekend, suggesting that Tesla was going to underperform by 40%. Another analyst, Anton Wahlman, countered that Trip was too pessimistic—the shortfall would only be 33%. I’m using Anton’s more “optimistic” numbers here.
Here are Anton’s worldwide unit sales estimates:
In order to convert these unit sales numbers into cash flow, I made assumptions about the cash contribution of each unit sold. The impact of inventory changes will be handled in the next section. Here, I’ll just try to capture the net cash contribution if Telsa replaced each car sold with a newly built one.
As Tesla told DB, the $35k Model 3 only contributes “$1500 cash profit”. Based on that, I’ve swagged the average net cash contribution to be:
- Average Model 3: $5,000
- Average Model S: $10,000
- Average Model X: $10,000
All together, these numbers net out to $110M / month in cash contribution from sales in Q1. You can judge the reasonableness of these numbers for yourself, given that Chowdry estimated the average selling price of the Model 3 to be $50k and the S and X to be $90k.
Obviously, the actual cash contribution was higher than average before the price drops announced on 2/28. For simplicity, I’ve used Chowdry’s numbers, assuming he modeled the prices changes (if not, things only get worse).
I also assumed this run rate remains constant into Q2, which may be generous.
Cashflow Assumptions
- -$23M / month in retail leases due
- Forbes reports $1.2B in lease payments due between “now and 2023”
- Assuming 48 months remaining, $1.2B / 48 = $25M / month
- Assume paid on the first of each month
- -$110M in payroll due every 2 weeks from 1/3/19 to 3/1/19
- 40,000 employees before recent 3 rounds of layoffs
- Assume an effective 5% reduction in workforce via layoffs
- Assume average salary, including taxes $75,000 / year
- -$65M in payroll due every 2 weeks, starting 3/15/19
- Assume 15% reduction in total workforce
- Reduction in average salary down to $50,000 / year
- Cashflow from Financing
- -$920M repayment of 2019 CV
- -$47.4M coupon payment for 2025 CV (Feb, Aug)
- -$8.6M coupon payment for 2021 CV (Mar, Sep)
- -$11.6M coupon payment for 2022 CV (Mar, Sep)
- $0 impact from ABL financing increase, as it was likely a non-cash amendment to counter reduced inventory values
- +$200M increase in line of credit as part of ABL financing increase
- -$182M repayment of Solar City debt, originally payable Dec ’18
- -$41M / month in other interest expense
- Tesla reported $663M in interest expense for FY2018
- The bond payments I found only covered $175M of interest in 2018, leaving $488M in expense for other debt
- Cashflow from Investments
- Cashflow from Operations
Results
Since Tesla’s starting cash balance for Q1 is highly suspect, I modeled 5 scenarios between Tesla’s stated balance of $3.7B and FT Alphaville’s estimate of $1.7B.
Here are their estimated cash curves:
The results range from Tesla running out of cash on 3/1/19 (which we know didn’t happen) and having as much as $1.2B at the end of May (which seems unlikely, given how panicked Tesla seems about cash).
What we can see:
- Assuming unit sales hold up, the next big make-or-break point will be in April 2019, when the $182M Solar City debt repayment is due
- Even if the $3.7B number is accurate, Tesla will have under $1B in cash by the middle of Q2
- Unless Tesla had at least $3.2B at the start of Q1, it won’t survive the $522M bond repayment due in November 2019
- Even then, it’s skating by with less than $200M in cash
One other thing to note: At first blush, a sales miss doesn’t look deadly. Cashflow from sales is modeled to “only” contribute $110M / month—not that much given the numbers we’re discussing. But that is assuming Telsa runs a Just-In-Time (JIT) inventory system, meaning they are able to scale production up and down with sales.
However, Tesla has made volume promises to various suppliers (see the Contractual Obligations section of their 10-K).
This is Tesla’s greatest strategic weakness. They cannot respond to slowing demand (whether driven by industry-wide or company-specific factors) by reducing their production rate because they have promised not to.
If sales slow and Tesla slows production, they default on their vendor agreements and end up in bankruptcy. If sales slow and Tesla doesn’t slow production, they bury all their cash in unsold inventory, fail to make payroll, and…end up in bankruptcy.
Tesla could survive a near-term sales shock if they could access the capital markets and raise funds. If they were going to, they would have.
Historically-bullish analysts are already projecting a 33% to 40% reduction in volume. Tesla is stuck threading the needle between producing enough to keep their vendors happy but not so much as to run out of cash. The projections show a high probability that Tesla will not be able to keep this high wire act up through the end of Q2. If anything goes wrong, then the show ends much sooner.
Looking Ahead
It’s clear that Tesla is facing an existential cash crunch. I’ve put together a schedule of “opportunities to fail” between now and the end of May:
- 3/14 - Payroll
- Payroll is due Friday, but usually hits accounts Thursday
- @Ex_Tesla reports that payroll is due every two weeks, on Friday
- 3/14 - Model Y reveal
- 3/15 - $11.6M coupon payment on 2022 CV
- 3/28 - Payroll
- 4/1 - April lease payments
- 4/1? - $182M Solar City debt repayable
- I haven’t been able to find an exact date, but most bonds seem due on the 1st
- 4/2 - Inside EV’s March sales score card
- 4/11 - Payroll
- 4/25 - Payroll
- 5/1 - May lease payments
- 5/1 - Q1 earnings announcement
- 5/9 - Payroll
- 5/23 - Payroll
Of course, these are just dates that could catalyze a crisis. Tesla could run out of cash at any time or not at all. A powder keg could blow without warning. Creditors and/or the executives could force a bankruptcy tomorrow. Or Elon could really be a genius leading Tesla into the future via a paradigm of “creative chaos”. No promises.
What do you think? Did I miss anything?
Disclaimer: Perseid Capital is short Tesla via puts.
Edits:
- 3/13/19 - Added 3/28 payroll to Looking Ahead
- 3/14/19 - Increased cashflow from revenue to $110M from $96M
- Original amount was in error
- No change to commentary or conclusions