March 14, 2019 / 9:25 PM / 6 months ago

Breakingviews - Elon Musk’s balancing act requires capital support

A Tesla model S car with an electric vehicle charging station is displayed during a media preview day at the Frankfurt Motor Show (IAA) September 10, 2013. REUTERS/Kai Pfaffenbach

NEW YORK (Reuters Breakingviews) - Elon Musk’s balancing act requires some capital support. On Thursday evening the chief executive plans to unveil Tesla’s latest vehicle, the Model Y SUV. But it could steal sales from the Model 3 sedan, whacking Tesla’s earnings when it can least afford it. It’s a fresh complication as Musk fights with the Securities and Exchange Commission and flip-flops over store closures. A cash injection could help smooth the ride.

Tesla has perhaps $2.8 billion in greenbacks after paying off convertible bonds that came due this month. That’s a slim cushion considering that restructuring charges and falling U.S. demand for the Model 3 has the company careering toward a first-quarter loss.

Musk sought to kickstart sales last month by announcing a lower-priced $35,000 version of the Model 3, but it won’t roll off the factory floor in significant quantities for weeks – assuming he actually delivers this time on his production promise. And with a gross cash profit of just $1,500 a vehicle initially, as Tesla told analysts at Deutsche Bank, the company will lose money on each sale for a while.

Many potential Model 3 buyers might choose to wait for the new SUV, too. But as the vehicle isn’t likely to go into production until the end of this year, that could aggravate quarterly losses and send Tesla’s cash pile down toward the $1.5 billion or so generally assumed necessary to keep the lights on.

Moreover, Musk has had to backtrack on his decision to shutter many Tesla stores – just one month after crowing about opening 27 new ones. On Sunday the company said it would “keep significantly more” of them open, partly reversing February’s sticker-price reductions to pay for the move. It all reeks of making strategy on the fly.

A stronger balance sheet would not solve all these issues. And raising new debt or common stock while Musk digs in for a fight with the SEC over his tweets might be hard. Tesla could, though, sell a stake in its self-driving unit – just as General Motors has and Ford Motor, Uber Technologies and Waymo are considering. A 20 percent chunk – assuming Musk could find a buyer - could bring in $2 billion, based on Morgan Stanley estimates. That would help make for a smoother ride.


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