How Risky Is Tesla Motors Inc.?

By Markets

Image source: Tesla Motors.

Continue Reading Below

Tesla Motors (NASDAQ: TSLA) isn't like other automakers: It wants to own significantly more of its supply chain and sales channel. In addition to manufacturing electric vehicles, Tesla is constructing a $5 billion battery factory to supply its vehicles and energy storage products -- and may even start making solar panels through its proposed SolarCity acquisition. The company is also building out a global network of supercharger stations, company-owned dealerships, and service centers.

While it's difficult to pinpoint an exact figure for the financing Tesla would need to meet its obligations outside of core vehicle manufacturing, it's clear that the company's current financial standing and its plan to deliver 79,000 vehicles and generate an estimated $8.1 billion in revenue this year, won't come close to cutting it.

Tesla recently noted in a regulatory filing that it ended the second quarter with nearly $3.3 billion cash, which will cover its funding needs through the end of the year. If conditions permit, Tesla said that it would seek to raise an undisclosed amount of additional capital before the end of the year, to support the high up-front costs associated with bringing its highly anticipated Model 3 to market.

Assuming no hiccups, Tesla will begin chipping away at the roughly 400,000 Model 3 reservations in its backlog in late 2017, when the first vehicles are expected to start rolling off the production line. At a $40,000 average selling price -- $5,000 above the Model 3's starting price -- this backlog would be worth $16 billion. While this sum would help support Tesla's various financing needs, the challenge will be delivering a high enough volume of Model 3's to cover the company's increasingly demanding overhead.

Essentially, the pace of Model 3 deliveries directly corresponds to the longer term risk that Tesla faces; The faster that Tesla can deliver Model 3s and recognize their corresponding revenue, the lower the risk of it running into serious financial trouble.

Continue Reading Below

A quantum leap in volume

Tesla's 79,000-vehicle delivery target this year, consisting of Model S and X orders, represents a 56% year-over-year increase. During the first half of this year, Tesla delivered slightly more than 29,000 vehicles, which fell short of expectations. In order to meet its annual deliveries goal, Tesla will have to increase its second half deliveries by more than 70% year over year. It's a tall order, considering Tesla has missed its annual delivery targets for the last two years.

Come 2018, Tesla plans to deliver 500,000 vehicles to fulfill its Model 3 order backlog and ongoing Model S and X orders. To go from 79,000 vehicles delivered annually to over 500,000 vehicles in less than three years, Tesla and its suppliers will have to execute flawlessly. Between then and now, Tesla is tasked with significantly expanding its vehicle manufacturing capacity to reliably produce a high volume of vehicles, completing its $5 billion Gigafactory on budget and schedule, and ensuring that its suppliers are ready to handle a massive ramp up in volume.

If one of these areas falls short, the Model 3's delivery volumes and Tesla's finances are likely suffer.

A matter of economics

Tesla's desire to own more of its supply chain and its entire sales channel means that the company is taking on additional financial responsibilities outside of manufacturing vehicles. Without the necessary delivery volume to spread its fixed costs across more vehicles, the economics driving Tesla's business will quickly deteriorate. This, in turn, could threaten Tesla's ability to source any funding it may need.

However, after learning from the mistakes it made designing the Model X, which presented significant manufacturing challenges and delayed its initial delivery date by almost two years, Tesla claims it has designed the Model 3 to be more easily manufactured. The other encouraging factor to consider is that by the time the Model 3 begins production, the Model S and X will be fully mature product lines that shouldn't require major process improvements. In other words, the company will be able to dedicate more resources to delivering the Model 3 at scale without manufacturing defects.

It's too early to say whether Tesla's more capital-intensive approach is better or worse than those of traditional automakers. For now, what Tesla is aiming to accomplish isn't impossible, but it's likely to require impeccable timing and more funding.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Steve Heller owns shares of SolarCity and Tesla Motors. The Motley Fool owns shares of and recommends SolarCity and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.