This week saw final quarter figures from electric car giant Tesla with a tripling of full year losses to a staggering $889 million. Despite the fact that fourth-quarter figures were worse than expected shares in the company rose by 6% as ever confident entrepreneurs Elon Musk mapped out his plans for the future. However, while investors still seem to be enjoying a love affair with Tesla there are concerns that the company will need additional funding sooner rather than later.
When you consider that annual revenues at Tesla increased by 27% to just over $4 billion this does not look like a company in trouble? Indeed the company is expected to hit its capacity of 1000 cars a week during 2016 which would lead to a significant increase in sales. With the new Tesla Model 3 creating a significant backlog of orders there are high hopes that sales will perhaps increase quicker than many are forecasting. There will be manufacturing challenges, no doubt issues and problems along the way, but if Tesla can convert the majority of current Tesla Model 3 orders into sales then this would strengthen the balance sheet somewhat.
Unlike many entrepreneurs Elon Musk has certainly put his money where his mouth is with a paper loss over the last 12 months of around $2 billion on his personal shareholding.
Research and development
While sales increased significantly over the last 12 months there was an even bigger jump in research and development costs – increasing by 50% to $718 million. This seems to be the figure that critics of the company are focusing upon but when you bear in mind investment in the enormous Gigafactory, and the cost of developing the new Tesla Model 3, surely this increase in research and development costs was to be expected?
It is also worth noting that Tesla was actually cash flow positive to the tune of $179 million in the final quarter of the company’s financial year. The company also expects to be profitable in 2016 although we wait with anticipation to see how long this will last because we have seen profitable quarters in the past followed by significant losses.
Will Tesla run out of cash?
It is difficult to see why the company would even come close to running out of cash in the short to medium term with $3.2 billion in the bank after raising $1.7 billion in May. Even though there will be significant investment required by the company in the short to medium term let’s not forget that the recent acquisition of Elon Musk’s sister company SolarCity was an all-share affair. There was no significant cash outflow associated with the transaction. Indeed the company has major plans for the solar powered systems of this company which in many places will dovetail well with Tesla’s main operation.
Interestingly a number of analysts have stepped forward to suggest that Tesla should maximise the current love affair which the stock market seems to have with the company with one huge fund-raising exercise to see the company through to constant profitability. It is doubtful this will happen but the fact that some analysts are even suggesting the future is bright and investors are extremely positive should be given as much credence as those offering a more downbeat review of the company.