May 3, 2018

Breakingviews: Tesla – Push the Button

by Breakingviews.

Tesla is speeding toward capital-raise crunch time. The electric-car maker on Wednesday reported a loss of $710 million in the first three months of the year. It also experienced a slew of other problems, including annoying a regulator after disclosing information about a fatal crash and losing more key staff.

Elon Musk’s big challenges are ones he has set himself. First, he charged his employees with boosting production of the Model 3 sedan to 5,000 units a month by the end of June – having reduced the goal three times last fall and winter. The company often misses production targets, most recently at the end of the first quarter. And Wednesday’s earnings brief included a warning about how “prior experience has demonstrated the difficulty of accurately forecasting specific production rates at specific points in time.”

That could have been boilerplate language for Tesla for at least two years. Missing those targets imperils Musk’s other main goal of being profitable in the third and fourth quarters this year – excluding the very real cost of stock-based compensation.

If Tesla stays in the red, it’ll keep burning cash. Some $750 million went into the incinerator last quarter. Musk is pushing staff to rein in spending and in a recently leaked email said any outlays of more than $1 million would need his approval. But at last quarter’s rate, the company will halve its remaining cash in six months.

That could put Musk in the uncomfortable position of having to raise money from stock or bond investors while they’re more skeptical about Tesla’s outlook, and his leadership. There are already signs he’s not quite as beloved: only 73 percent of so-called disinterested shareholders backed his bumper 10-year bonus plan at a special meeting last month. That’s quite a low approval rating for executive pay.

It would be better to go cap in hand to the markets now, after a near-20 percent rally in the past month that erased half of its decline since late February. Otherwise Musk risks being hostage to more bad news.

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