Tesla may need to raise more funds if Model 3 mass production is not going well

Tesla's delay in mass-producing its Model 3 sedan has increased the likelihood that Chief Executive Elon Musk will need to raise more money from Wall Street.

Given that bottlenecks in battery production have slowed the Model 3's mass production, Tesla may need more funds in 2018. Although Musk has raised more than $3 billion this year through the issuance of stocks, convertible bonds and other means, Tesla has burned through about $2.6 billion in cash in just two quarters.

Toni Sacconaghi, an analyst at investment firm Sanford C. Bernstein & Co., said in an investment report, "We are concerned that Tesla will need to raise funds again." He estimated that Tesla will burn more than $10 billion in cash from its inception to the end of this year, and it may be the largest listed company that has never generated profits or achieved positive cash flow.

So far, Musk's financing has been well received in the capital market. After eight rounds of financing in seven years, Tesla still issued $1.8 billion worth of bonds at extremely low interest rates in August this year. As of Thursday's close, Tesla's stock price has risen 40% this year.

However, Tesla's delay in mass production of Model 3 is a test of investors' patience. After delaying the production of Model 3 to 5,000 vehicles per week, Tesla's stock price hit a six-month low this weekend. Musk also avoided mentioning his promise three months ago: Model 3 production will reach 10,000 vehicles per week in 2018.

“Tesla is facing a harsh reality and the market is reflecting that,” said David Kudla, CEO of Mainstay Capital Management. “It raises the question: Can they get to positive cash flow? Is there hope for them?”

Although Tesla had $3.5 billion in cash reserves at the end of the third quarter, it is investing heavily in production lines and battery production.

Tesla expects capital expenditures of $1 billion in the fourth quarter, roughly the same as in the third quarter. Musk said in a conference call with analysts on Wednesday that total capital expenditures next year will remain roughly the same as this year.

Analysts at Cowen & Co. and CreditSights said Tesla could return to the capital markets as early as early next year. CreditSights senior analyst Hitin Anand said the timing of Tesla's return to the capital markets is important because investors may not buy into it if Model 3 production cannot be increased.

Production Hell

Musk did not mention the need for more funds during the earnings analyst conference call. Tesla Chief Financial Officer Deepak Ahuja said that the delay in Model 3 mass production will not have a big impact on the company's financial performance, because Tesla purchases parts and raw materials and pays for them a long time later. Musk said that as long as Tesla can get out of what he called "production hell" and increase Model 3 production to 5,000 per week by the first quarter of next year, the impact on the company's financial performance will be small.

But not everyone thinks Tesla needs more cash. Ben Kallo, an analyst at investment firm Robert W Baird & Co., believes that Tesla can increase Model 3 production without financing, and said that Tesla has been controlling spending on charging stations and customer service centers. Jamie Albertine, an analyst at market research firm Consumers Edge Research, also believes that Tesla no longer needs to raise more funds.

Kudla said that if Tesla eventually needs to raise more funds, it will cost more. "Tesla can raise funds, but the cost of financing will be much higher."

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.