A day after its stock briefly fell into bear market, Tesla started the production of its much-awaited Model 3 on Friday.
The week’s 13% share-price decline as of Friday morning brings the company’s financial position into question. However, Tesla had plenty of cash on hand initially—more than $4 billion as of March 31.
In the first quarter, Tesla’s free cash outflow was $622 million. As the company delivered fewer cars in the second quarter than in the first, chances are likely that the figures may worsen in future. On Friday, Tesla said that about 3,500 cars were in transit to customers at the end of June, their lowest tally in five quarters.
Tesla has a $7 billion in long-term debt outstanding. However, accounts payable of the firm have risen to nearly $1.5 billion.
Matters are unlikely to improve in the short term after Model 3 is launched. The company said that in the first quarter it expected an additional $1.5 billion on capital spending before the Model 3 began production.
Analysts at Guggenheim Securities, predict that gross margins on the Model 3 will be negative at the start of the launch. It has a $430 price target on the stock. Their estimates predict that the gross margin won’t turn positive until the middle of next year, Tesla reported an automotive gross margin of 27.4% in the first quarter.
Tesla has not had any difficulty accessing the capital markets. Since 2010, the company had been issuing equity or convertible debt. Its shares have gone up by 40% this year.
However, Tesla needs to raise several billion dollars to meet its goals. It needs a $1 billion cash balance to raise nearly $3 billion approximately over the next year. At current prices, that amounts to roughly 6% of the total equity value. The more the shares slip, the greater the potential dilution of existing owners.
Tesla’s balance sheet and the increasingly crowded electric-car field indicate that this is a moment the company can’t afford to waste.
