‘Math Doesn’t Lie’: Musk Can’t Dodge Tesla Cash Woes Any Longer

(Bloomberg) -- Elon Musk said he was through asking Wall Street for money.

In spite of what the Tesla Inc. analysts said, Musk has in the past year insisted Model 3 production was finally on track, positive cash flow was just a quarter away and the haters would pay dearly for suggesting it had trouble paying its bills. He even famously tweeted that Tesla was done with public capital markets altogether.

So what did Musk tell investors last week after Tesla reported yet another quarter of disappointing earnings? His cash-strapped, electric-car company just might need to ask Wall Street for more money.

It's a striking turnabout for Tesla's chief executive officer, who's never been one to back down from his critics. Musk noted additional capital makes sense in light of his ambitious new plan to develop a fleet of autonomous robotaxis (not to mention forays into insurance, chip-making, and even “sentient” leaf blowers). But in some ways, it's a tacit admission that for all the brash talk and easy confidence Musk has exuded about Tesla's future, he still hasn't figured out how to profitably mass-produce its cars.

“Musk and Tesla looked in the mirror and realized they needed to change their tune a little on the capital raise because the math doesn't lie,” says Dan Ives, an analyst at Wedbush Securities. “Based on the profitability trajectory and what we saw in the first quarter, the writing is on the wall.”

So for Ives and many other analysts like him, the more pertinent question now isn't whether Tesla will tap the markets for fresh capital. It is who's going to be willing to provide the financing — and how expensive will it be.

In response to a question about the need to secure more funding, Musk acknowledged on last week's earnings call that “there is merit to the idea of raising capital at this point.” That came after Tesla reported a record decline in deliveries, which combined with Tesla's biggest-ever debt payment, depleted its cash reserve to a three-year low of $2.2 billion.

A Tesla spokesman declined to comment and referred Bloomberg News to its first-quarter letter to shareholders. In it, Tesla said operating cash flow minus capital expenses “should be positive in every quarter including Q2.”

Two days before the earnings announcement, Musk himself dialed back Tesla's positive cash-flow goal. He now expects the company to be “approximately cash-flow neutral” as it builds up a fleet of self-driving vehicles that will make their way into the robotaxi service. Once enabled, Musk expects Tesla will be “extremely” cash-flow positive.

In the past, debt and equity investors alike have been enthusiastic buyers of whatever Tesla was selling — despite its spotty earnings record. In the company's 16-year history, it's only turned a profit in four quarters on an adjusted net income basis.

That's unlikely to be the case now.

With Tesla's unsecured debt at 85 cents on the dollar and yielding north of 8 percent, borrowing money from the bond market would be too onerous, according to Joel Levington, an analyst at Bloomberg Intelligence. In the first quarter, the company reported free cash flow of negative $920 million.

“They shouldn't be issuing high coupon debt because don't have cash in first place to pay it off,” he says. “That's not mathematically sound or prudent.”

Levington says Tesla is likely to sell more stock, take out a secured term loan or borrow money from a bank. While issuing equity could dilute per-share earnings for existing holders, a $2 billion infusion would help put Tesla's liquidity fears to rest, and could ultimately support the stock price.

Others also see selling more equity as the most likely option. Morgan Stanley's Adam Jonas expects Tesla to raise $2.5 billion issuing new stock in the third quarter, while Brian Johnson of Barclays is modeling $700 million in the second quarter. Wedbush's Ives is calling for at least $3 billion, likely in equity, to support Tesla's capital expenses and debt repayment.

The stock has taken a beating this year, falling 30 percent as the broader market rose to records. On Wednesday, Tesla's shares fell 2.3 percent to $233.16, the lowest since January 2017.

CreditSights' Hitin Anand is more sanguine about Tesla's prospects. He points to the fact that the company boosted its asset-backed credit line by a half-billion dollars to $2.45 billion last month, a sign Tesla is growing and expanding its inventory to meet increasing demand. He's also relatively optimistic the company can earn enough to pay for a new unsecured debt offering, which he estimates would cost closer to 9 percent in interest.

“That will be the holy grail — if they can get into a rhythm of growing and having capital access to the unsecured market,” he says. “That's how the business becomes sustainable.”

Ives isn't so sure. Musk's ever-growing list of projects — spaceships, solar panels, tunnels, flamethrowers, lawn blowers, robotaxis — being pursued by Tesla and the other companies he runs could continue to distract from his automotive ambitions.

“If there's a fire in a house, you focus on putting it out and making sure it's safe,” he says. “You don't focus on putting an addition on that house while the fire is going on. That continues to be our issue.”

--With assistance from Dana Hull and Craig Trudell.

To contact the editor responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Michael Tsang