Tesla’s Growth Story Needs a New Charge

(Bloomberg Opinion) -- Tesla Inc.'s stock is back in its $260-$270 hot-zone again Thursday, falling on news that a key supplier is taking things down a notch.

Panasonic Corp. and Tesla are reportedly “tempering expansion plans” at the Gigafactory, the giant facility in Nevada that produces battery packs for the electric vehicle-maker. Panasonic supplies batteries and has invested heavily in the plant, with capacity there now close to 35 gigawatt-hours , according to Benchmark Mineral Intelligence, an analytics firm specializing in the battery supply chain. That's the amount Panasonic was targeting for fiscal 2019 and is enough for about 450,000 to 500,000 Model 3s a year.

That 500,000-vehicle figure has been a bit of a sore point for Tesla this year. CEO Elon Musk drew the ire of the Securities and Exchange Commission for tweeting in February that the company would make roughly that number of vehicles this year, a claim he quickly walked back. He ended up in a lower Manhattan courtroom last week as a federal judge and attorneys argued about whether he should face contempt charges for that tweet (the judge instructed both sides to negotiate first.)

That's really just a sideshow, though. The big recent news concerns Tesla's first-quarter sales numbers, which were shockingly bad but also clarified why the company appeared to be going all-out in the first quarter to boost sales and slash costs.

The news concerning Panasonic, which will reportedly now “study” additional investment, adds a further data point. Tesla will continue to make investments as needed at the Nevada plant and says it may be able to wring more from existing equipment, according to Bloomberg News. The company recently reaffirmed its delivery target for the full year.

Taken on its own, talk of higher productivity would normally be encouraging. However, in the context of Tesla's deep cost cuts, the big reduction in 2018's capex budget, and those first-quarter sales and production figures, it can also be viewed as one more example of dissonance with high growth expectations. Moderation can be a drawback, rather than a plus, when a stock has dropped by almost a fifth in a matter of months, even as its earnings multiple has somehow virtually doubled to 90 times:

This also brings to mind another metric worth examining when first-quarter results drop in a few weeks: working capital.

Tesla's working capital has turned sharply negative over the past two years, effectively providing an important source of cash flow from its own suppliers (see this column from a year ago). Of the $2.1 billion swing in Tesla's working capital since the end of 2016, more than two-thirds relates to a big increase in accounts payable.

Negative working capital can be a nice source of free short-term financing. But it comes with risks, especially if sales take a hit and/or suppliers tighten their terms. Tesla's likely first-quarter loss and it having to pay out $920 million for a maturing convertible bond put the spotlight on its cash balance. When reporting sales, Tesla made a point of saying it had “sufficient cash” at the end of the quarter. With the spread on Tesla's 2025 bonds having widened again to almost 600 basis points, close to the peak reached last month, that's understandable.

One gigawatt-hour is enough energy to supply one billion watts for one hour.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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