Tesla’s Worsening Cash-Flow Signals More Troubles Ahead

Tesla Weekly Chart

Investors are trying to decide whether Tesla’s (NASDAQ:) latest move to shore up its balance-sheet by raising more than $2 billion from the capital markets is good or bad news for the shares. The stock has had a rocky ride so far this year, plunging almost 15% in the past month alone.

One the one hand, the issuance of debt and convertible shares show that the electric car-maker is in trouble as the CEO Elon Musk’s talk of being cash-sufficient this year by selling more cars proved to be a big miscalculation. But if you’re an optimist and see the glass half-full, then Musk’s going back to the public market and getting a bailout is an indication that markets are still open for the cash-strapped Tesla even after its car deliveries plunged and the environment became more challenging.

Tesla stock was trading 4.3% higher at $244.10 at yesterday’s close, to sell $1.35 billion in convertible notes and about $650 million in shares. Most of the offering will come in the form of convertible bonds due 2024. The securities are being marketed with a coupon of between 1.5% to 2%, with the conversion premium going as high as 32.5%, according to Bloomberg News.

But this positive reaction to Musk’s new round of funding doesn’t make sense to us. Here is a CEO who has consistently proved that investors shouldn’t believe what he is telling them. From the Model 3 production exaggerated numbers to his tweet that he isn’t going back to capital markets again — everything points to Musk not being someone to trust, and to us, it seems that this is not the time to start betting on the company’s shares.

Musk’s Misplaced Priorities

In fact, the company’s showed that Tesla’s cash situation is deteriorating fast. For the quarter that ended in March, Tesla posted a $702 million net loss as vehicle deliveries fell 31% from the Q4.Tesla ended the period with just $2.2 billion cash on hand, while its accounts payable exceeded more than $3 billion.

Musk is pitching that raising additional funding isn’t a bad idea, especially when he is busy adding to the list of grand projects that will one day make the company cash rich. is to develop a fleet of autonomous robotaxis.

This may all look good in Musk’s storybook, but investors shouldn’t forget that he has yet to figure out how to make his electric-car venture profitable for the mass market. The prospects of that happening this year had excited investors initially and pushed Tesla’s stock to about $378 in December.

But as the year goes by, we don’t see that turnaround coming anytime soon and nor does Musk. After releasing the first-quarter earnings report last month, he now expects Tesla to be “approximately cash-flow neutral,’’ against his earlier projection to make Tesla cash-flow positive after the first quarter. This change of heart comes as he spares cash to ramp up production for the robotaxi fleet, his new spin to win investors.

Bottom Line

We don’t see Tesla’s troubles ending even if the company gets the funding it’s seeking from the market. The best it will do is to help the company to pay its bills, including the $566 million in convertible bonds that mature in November. With the company’s small cash reserves, its CEO’s misplaced priorities, and demand for its flagship electric car falling, this is not the time to get excited about Tesla stock. In fact, it’s the time to make its CEO accountable for his promises.

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