Tesla's risk-taking foretells need for capital

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It makes sense to raise capital to reduce risk, says Tesla CEO Elon Musk.
It makes sense to raise capital to reduce risk, says Tesla CEO Elon Musk.

Tesla CEO Elon Musk has repeatedly taken big risks since going public in 2010, but investors were spooked yesterday after he said the electric car company could get "close to the edge" as it burns cash ahead of its crucial Model 3 launch.

Facing yet another cash crunch, Tesla will likely be forced to head to Wall Street for more capital, analysts said. Shares tumbled 5.8% yesterday, their biggest intraday percentage fall in eight months.

Musk told investors after the company released its fourth-quarter results on Wednesday that the upcoming Model 3 sedan, the $35 000 mass-market vehicle on which the company's future profitability hinges, requires no additional outside funding as it readies for production this year.

"But we get very close to the edge," Musk said. "So we're considering a number of options but I think it probably makes sense to raise capital to reduce risk."

Tesla had $3.39 billion in cash and cash equivalents at the end of 2016, but most of that comes from a May stock offering, cash from its SolarCity acquisition and nearly $1 billion in draws on its credit facilities.

The company spent $448 million in cash on operating activities in the fourth quarter.

Tesla's Model 3 electric vehicle.
Tesla's Model 3 electric vehicle.

Tesla's warning of an expected $2 billion to $2.5 billion in capital expenditure in the first half of 2017 for the Model 3 leaves potentially less than a $1 billion cushion for Tesla, at a time of "high levels of execution risk", wrote Morgan Stanley analyst Adam Jonas.

Analysts estimated the company will seek $1 billion to $2.5 billion in capital in the near-term.

Tesla, which has had negative cash flow since 2014 and has posted a quarterly profit only twice since going public, has repeatedly gone to Wall Street for fresh capital.

"The automotive business is an extremely capital-intensive business and we keep seeing companies who are thinking of getting into it underestimate that," said Autotrader senior analyst Michelle Krebs, citing moves by Apple and Alphabet's Google to back off aggressive forays into the sector.

Individual model launches for established car companies do not carry the same hazards as for Tesla because the risk is less concentrated.

"No single launch is a 'bet the company' launch" for established automakers, said Michigan-based auto manufacturing consultant Michael Tracy, citing larger capital reserves. "If you're Tesla, every time you're stepping up to the plate, financially it's extremely risky."

Additionally, Musk's need for speed in getting the Model 3 in the hands of approximately 373 000 reservation holders after volume production begins in September means he "has to ramp up faster than any other automaker would want to do". Tracy said.

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