Yesterday, TSLA shares were up by 11% after reporting an in-line quarter the night before. This was in a market that was down slightly.
The company modified its full-year guidance for production from 50,000 – 55,000 units to 50,000 – 52,000 units. With 4Q15 almost half over, investors took this new guidance as relatively reliable. But the key factor is that the guidance, while down, was not the 45,000 – 50,000 that Wall Street had been fearing.
Wild gyrations are a fact of life for highly speculative stocks like TSLA (I own a small position). That’s not the interesting part. After all, what sustains the sky-high valuation of the stock is not the current results is the dream that one day the company will be selling millions of units and earning billions.
What is an important investment lesson is the reason that a production difference of around 5,000 cars in a quarter, which sounds like a small amount, should make such a difference to investors.
It’s all about cash burn, or the question of how long a company that ‘s using more cash than it’s taking in can sustain itself without turning cash flow positive. This also happens to be one of the few things in a “dream” stock that’s important and that we can know for sure.
In the TSLA case, the firm realized–at the start of 2015, in my view–that the multi-billion dollar bond offering it made in 2014 wouldn’t be enough to sustain it until it began to generate more cash than it used. Contact with investment bankers resulted in a spate of glowing reports being issued by brokerage house analysts–and then a $750 million stock offering. What investors has been panicking about a few weeks ago (and may begin to worry about again; who knows?) is that this extra three-quarters of a billion dollars might not be enough.
If we figure that a fully loaded Tesla retails for $100,000 ( figure I just plucked out of the air), a shortfall of 4,000 cars translates into a cash shortfall of $400 million. So, “Poof!,” half the cash cushion created by the recent equity offering is gone. (I’m assuming that everything else for TSLA remains the same, which is probably too pessimistic. But the exact dollar amount isn’t the point.)
Arguably, TSLA could simply issue more stock or bonds to raise extra cash. However, if TSLA were actually seen to be needing a loan, the terms it could expect to get would probably not be as favorable as before. Another offering so soon after the last equity raising would also risk shattering the investor “dream” of the inevitability of TSLA’s success.
TSLA now expects to turn cash flow positive during 1Q16. This does not imply that it will be cash flow positive for the entire quarter, or for the quarter as a whole. Instead, it means that it will begin taking in more money than it spends by March 31st at the latest. We’ll know more when Tesla reports 4Q15.