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Tesla Is Facing Debt Crisis And An Implosion Of Demand

Seeking Alpha

Tesla is seeing an implosion of demand – not just in US but also internationally. European Model 3 demand is below even bear expectations. The company has several major cash calls from maturing debt and organizational changes and does not have the cash to cover these. Without a capital raise or favorable vendor terms, Tesla faces solvency risk in Q1.

Fears of a cash crunch at Tesla (TSLA) are not new. Bears have raised these concerns in the past, and bulls have pooh-poohed them. The bear arguments were vindicated when CEO Elon Musk recently admitted that Tesla was within single-digit weeks of going bankrupt in 2018 as it struggled to ramp Model 3. Think about this: In one of the earnings calls in 2018, although there were no disclosures, Mr. Musk felt the Company may not survive until the next earnings call!

In the past, Tesla has been able to pull itself out of cash crunch situations through capital raises based on overly optimistic projections of Tesla’s prospects – and Tesla has largely failed to deliver on the investor expectation set during these raises. Management projections from the most recent quarter are also crumbling as we predicted in October. All of the major predictions from the previous article have come true. Per the article:

– In Q4, Tesla has introduced a lower priced Model 3 as demand for the higher priced version dried out.

– As US demand collapses, Tesla is starting earlier-than-expected shipments to Europe and China in Q1

-And, Tesla has laid off 7% of its employees. (note that Tesla is not disclosing the extent of contractor terminations and performance firings which will likely put the overall termination numbers much higher than 7%).

Unfortunately, for Tesla, the going is likely to get much worse. As they have done in 2018, Tesla management seems to be playing a game of chicken with investors on cash needs and capital raise. The Company continues to deny the need for a capital raise, although fundamentals point to exactly the opposite.

Elon Musk’s recent missive about the challenges that Tesla faces makes for an interesting read. After promising rosy future and sustained profitability about two months back, Mr. Musk did an about face and painted a dire picture of Tesla’s prospects. […]

The problem is that Mr. Musk’s narrative, as usual, is not credible.

Note that Model 3 has been in “production” for over a year now and has gone through many fixes and tweaks. The production line has also been improved considerably in the same time period. Most of the easy cost improvements in parts and manufacturing process have already been made. In the near term, it is extremely difficult to squeeze another 20% or so in costs necessary to make the $35K Model 3 profitable at a net profit level. The 7% workforce employee layoffs will help but will not a big difference as direct and indirect labor is only a small fraction of Model 3 cost structure. Our assessment is that the situation is much direr than the CEO is predicting, and the solutions being proposed do not come close to solving Tesla’s problems. If, as Mr. Musk says, “there isn’t any other way”, then Tesla will die.

Let us first consider the near-term challenges that Tesla faces.

Demand Has Evaporated

As Mr. Musk himself acknowledged, the US demand is low. However, the situation appears much more dire than indicated. Anecdotal evidence gathered by Tesla watchers suggests Q1 demand is running at less than 10% of the Q4 level. Even the largest volume Tesla sales center in Southern California is seeing zero sales on many days. Other sites are also showing very low demand.

European demand is far less than even bear expectations. Sum of all orders in the largest European markets is only about 16,000 units. This level of demand may not be sufficient to tide Tesla over for even a single quarter.

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