Tesla (NASDAQ: TSLA) may be the most discussed stock on the market. And at the beginning of 2019, the debate reached a pyre height. The company closed in 2018 with 90,700 deliveries in the fourth quarter, and is already planning a production expansion in the Chinese market.
Almost growth, Tesla has struggled to make as much money as it needs in the long run, and has not come anywhere near making $ 35,000 Model 3 as investors were promised. With billions in debt coming up next year, Tesla faces a future that is far from safe and investors have a lot to think about before buying the shares.
Tesla Growing Machine is in full swing
The upgrade of model S, model X and model 3 has driven a massive growth curve for Tesla, as you can see below. But sales growth does not mean that Tesla makes money. TSLA Revenue (TTM) data from YCharts
You can see that Tesla has burned through billions of dollars over the past five years, mainly to build up Gigafactory in Nevada and Fremont, California, factory. If Tesla stopped investing in growth, it could eventually generate positive free cash flow, but here is where the company's basic and continuing investments complicate the investment task.
Tesla does not make as much money as it hoped
When Tesla announced that it was 7% of its workforce, it was not the concerns that concerned investors. It was Elon Musk's admission that Tesla is not close to making the model 3 at a price that would allow a $ 35,000 version and / or a 25% gross margin that Musk has long projected. You can see below that the model 3 ramp has coincided with a drop in gross margins ̵[ads1]1; and despite the fact that Tesla sold only high, high-margin model 3s so far.
There is some cost related to ramping up production, which will keep margins down in the short term. But Tesla has admitted that it has been focused on the highest-priced model 3's, and has to cut costs to get anywhere near selling lower-priced models it has promised. So far, there is not much evidence that it can make money if prices fall.
Without a high gross margin, Tesla will not be able to generate enough money from operations to fund expansions in China or develop a model Y or a half car. And with debt over the company, it can face a cash cream that it tries to grow.
Debt is threatening
The margin and cash flow picture I have outlined above is important when you look at Tesla's debt. The company has $ 10.5 billion of debt (including short term), of which $ 920 million comes from March 1, 2019 in the form of a convertible note. There are mechanisms to convert this debt into stocks (which will dilute current shareholders), but Elon Musk has said that Tesla will pay $ 920 million of debt with cash.
Add $ 566 million of convertible debt maturing in November and Tesla must start generating positive cash flow soon or it will massively dilute the shareholders. But instead of cutting their plans, the company aims to invest $ 2 billion to $ 5 billion to expand in China.
Elon Musk has always managed to find ways to fund Tesla's growth, either through debt or stock markets, but ultimately he must prove that the company can make money or markets will cease financing the growing debt burden. The risk is that we have already reached the point of increasing debt yields, which makes it more expensive to take out more debt to finance future growth.
Impressed or scared?
Tesla's growth path has been astonishing, and it is incredibly impressive how the company has pushed electric cars forward. But it has not proven that it can make money in the long run by selling vehicles and has had to resort to redundancies not once, but twice over the past year to cut costs.
As a tap assembly, debt flows move closer, and Tesla must either be cash flow positive or find ways to finance operations, either through more debt or by issuing shares, diluting current shareholders. It is also not appealing if you are looking to buy Tesla stock today.
The ambition has got Musk far in the automotive industry. But at this point I believe that the company's inability to become a high-quality, low-cost producer, overrides any awe I have on the company's growth. Competitors such as Porsche BMW General Motors and Jaguar come for the Tesla EV market, and they come with high quality and infrastructure that Tesla can "t-fight. That's why I don't think Tesla is a share to buy and I would be selling right now.