Tesla may not be a pure auto company; With battery and solar energy embedded, it is electric cars, solar panels, and energy storage in one company. Does that mean it should be worth $50 b? Sure it was priced similar exactly a year ago.
One year market return isn't there. Yet in the last five years, it has marched forward in a way that has left some wondering, and a few more with aspirations.
How long can it go is in the story that is to unfold. You cannot sell less than 75,000 vehicles and say, you are worth $50 b, like it did in 2017. And you cannot sell about 100,000 vehicles and say, you are worth $50 b again, like it is now.
Of course, value of a firm has not much to do about its past. It is the future cash flows and growth that matter more. And then there are expectations of the rate of return to be earned based upon those cash flows. In present value terms, that is the intrinsic worth of the business underlying the stock. How many are willing to take the pain to assess this without much of a bias?
But for Tesla it is even more challenging: It has never earned operating profits so far; not even when we capitalize its large research and development spends. From 2009 to 2017, Tesla incurred cumulative operating losses of $2 b after adjusting for R&D costs. Positive net earnings have been out of reach so far. It had operating capital of $17 b as of December 2017. What it means is that this $17 b is not making any cash for its business. Consider this as the opportunity cost for the existing shareholders.
It also had $13 b of debt as of December 2017. When a business cannot earn consistent cash flows sufficient to service its debt, it has no business asking more from lenders. Funnily, it did; Tesla raised $1.8 b in August 2017; it had to offer higher yields of 5.30% making it sort of a junk bond offering.
And now we find that Moody's has downgraded the corporate bond rating to B3, which means that it is speculative with high credit risk. Its junior notes maturing 2025 have been downgraded to Caa1, which means that they are of poor quality with very high credit risk.
Who are we going to blame? There is Tesla as business, there is its charismatic CEO, and then you have the lenders. If you believe in caveat emptor, like I do, your pick has to be the lenders. Look, lending is a serious business; I mean it is a skilled investing decision. You got to be able to receive back with profits what you have lent.
Here's the summary of Tesla's cash flows for the last three years.
A casual look, and you will find that only positive cash flows are from financing. And here are its contractual obligations leading up to the next five years and later.
How Tesla is planning to come good on these obligations is the focus point of both the shareholders and lenders. Raising more debt? $500 m is not going to be enough, never mind the crazy rationale behind it.
Tesla needs operating cash flows, and more of them for many years ahead, consistently. In the absence of it, there is no question of raising debt for it simply cannot afford it. It is surprising that both Musk and lenders did not grasp it. If there is some hope about the business as it should be for any entrepreneurship, the only recourse is raising equity. Musk and company might want to resist dilution, but it has become a survival issue now. Dilute the equity, and focus on Model 3 ramp up.
With so much debt maturing in the coming years and along with other business commitments, it is a tricky math though. It is also a bit tricky to figure out at what price to issue equity, if at all.
Is there still hope of hitting $700 b in market capitalization for Tesla? Well, only time will tell. In the mean time let's accept that hope is a powerful tool. So let's hope for the best.
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