By CHARLEY GRANT at The Wall Street Journal
Visions of a future dominated by electric cars have long powered Tesla Motors’ stock price. Sooner or later, the reality of corporate finance is likely to intervene.
Tesla’s offer to acquire solar-energy company SolarCity brings this issue to the forefront.
Though details on the financial benefits of the proposed tie-up are scant, Tesla CEO Elon Musk was his usual bold self on a conference call with analysts on Wednesday. He said the proposed deal could help Tesla become the world’s first company with a trillion-dollar market capitalization. That would require a more than 30-fold increase from today’s value.
Yet that boast may not be the most jarring one Mr. Musk has offered of late. Powered by the new Model 3 mass-market sedan, Tesla aims to deliver 500,000 vehicles in 2018, Mr. Musk said last month. That target is two years ahead of the previous goal. Tesla forecasts 80,000 to 90,000 deliveries this year.
In a world of slow growth and cautious corporate management teams, bold ambition is a central part of Tesla’s appeal to investors. But reaching for the stars has proven expensive.
Tesla’s core business has burned more than $3 billion in cash over the past six quarters. Capital needs are expected to further intensify over the coming years. No surprise there; automobile manufacturing is a low-return, capital-intensive business.
THE WALL STREET JOURNAL
*Q2-Q4 2016 projected
Tesla's free cash flow
2Q 2015$-565 million
The SolarCity transaction could further pressure Tesla’s financial profile. Mr. Musk said Wednesday that Tesla would be willing to provide a bridge loan to SolarCity before the deal closes if needed, although he thought such a scenario to be unlikely.
Still, even the possibility of such a loan should raise eyebrows. Mr. Musk said he expects SolarCity to be cash-flow positive within three to six months. That could be the case in a given quarter, but analysts at Barclays forecast 2016 free cash flow at negative-$1.8 billion. As for Tesla, Barclays expects the auto maker to burn $2.1 billion without much improvement over the coming two years. The combined company could burn as much as $3.4 billion in 2018, before factoring in the financial impact of the merger.
Tesla has issued equity or convertible debt in every year since 2010, most recently last month. Further stock issuance will be needed to close the SolarCity deal, and if Barclays’s math is correct, the coming years won’t be any different.
Continuing dependence on capital markets access hasn’t hurt Tesla shares yet. An easy-money investing environment and pioneering products helped. But competition is intensifying. General Motors is set to begin selling the Chevrolet Bolt, an electric car with 200 miles of driving range, later this year. Volkswagen said last week that it plans to develop about 30 different electric models over the next 10 years, with the goal of electric cars accounting for one-quarter of total company sales. Other major manufacturers also have signaled an increased focus in this area.
True, these companies don’t carry the same type of brand cachet with electric-car enthusiasts. But the big auto makers have much more financial resources at their disposal to compete on price, should they choose to. And Tesla won’t be able to justify its valuation over the long term without becoming a major presence in the mass market.
All this would be manageable for investors, were Tesla not valued as though its ambitions have already been achieved. The shares trade at more than 120 times forward adjusted earnings, according to FactSet.
Incessant cash burn and looming competition is hardly a trillion-dollar formula.