Last week, Elon Musk sent out a company-wide email urging the employees to produce as many cars as possible and cut on unnecessary costs. This is to be done before the end of Q3 and Tesla's next fundraising round. What does he have in mind?
After continuously falling to deliver the sales targets in the last quarters, Musk says it's his last chance to impress investors before the next fundraising round. In his email, Musk asked Tesla (NASDAQ: Tesla Motors [TSLA]) employees to cut costs and boost the car production until the end of the quarter to make up for the missed targets and make the company look good in the eyes of investors.
“The simple reality of it is that we will be in a far better position to convince potential investors to bet on us if the headline is not ‘Tesla Loses Money Again,’ but rather ‘Tesla Defies All Expectations and Achieves Profitability,’” Musk wrote in the email, according to Bloomberg.
However, missed production targets are not the only Tesla's problem. Honestly, it looks like the company is being attacked on all fronts.
Tesla's stock has not been doing that well recently: at the last Friday's close, TSLA was down 14% year to date. Previously, the electric car manufacturer was able to keep the investors interested with the stories of Tesla's big plans and trade its stocks at soaring valuation heights. But now it seems like investors are not so sure anymore.
This email going public is not a good sign for Tesla, as artificially increasing production and sales rates may look like speculating on the Q3 earnings results to the investors. In addition to that, it indicates that Tesla is having hard times raising capital based on its current performance and is in a need to impress the investors with elevated production rates.
This year, Tesla hasn't lived up to its sales targets in the first 2 quarters, while it promised to outperform the last year's result of 50,568 vehicles sold and deliver around 80,000 cars this year. That's why pushing the production numbers in the third quarter could be the company's best bet to reach the target and get some positive cash flow.
Big money needs
Based on Tesla's recent news, Musk will need a lot of cash to finance all ambitious business plans he works on. First of all, Model 3 production date is around the corner and Tesla's ability to meet the production promises of the 370,000 pre-orders has already been questioned. Next to that, Tesla's Gigafactory is another huge investment as the company wants to build the factory that is nothing less than the biggest lithium-ion battery producer in the world (hence the name), costing over $5 billion to construct. Add to that the normal company expenses such as maintaining retail locations, international offices, charging locations and others.
If this doesn't look stressful enough to you, Tesla's acquisition of the SolarCity (NASDAQ: SCTY) made things even worse. Since Musk announced the acquisition of SolarCity managed by his cousins, Tesla's shares dropped by 15.8% while SolarCity's stock was down almost double of that, 30.8%. In addition to that, SolarCity has experienced major losses in the past years and currently holds over $3 billion in debt that Tesla needs to deal with. The deal raised multiple discussions and is currently awaiting the approval of the shareholders.
Interestingly, Tesla has already held an extensive funding round only a few months ago in May, when the company sold stocks for the value of around $1.7 billion. Yet now, Musk is looking for new ways to attract additional funding again as his aggressive business plans are getting more and more pricey. It might seem like Tesla is constantly pumping itself with additional funds but, in fact, it is only trying to compensate for the losses. According to Bloomberg, the company has burned over $2.2 billion last year as well as $568 million on an adjusted bases in the first 6 months of this year.
After Tesla Model 3 made a big appearance this year, receiving twice more pre-orders than expected, the issue of manufacturing on such a large scale is getting more and more pressing as the promised production date approaches.
“The third quarter will be our last chance to show investors that Tesla can be at least slightly positive cash flow and profitable before the Model 3 reaches full production," said Musk.
However, the latest survey analyzing the consumer demand in the automotive industry shows that Model 3 might not be as successful as Tesla hopes. Even though customers don't have anything against Tesla personally, according to Business Insider, they just don't want to buy sedans anymore. The latest Autodata report reveals that sedan sales declined by 12% last month whereas SUV and truck sales increased by 2%. More than that, sedan sales have been in a steady decline the past months.
That's why by the time Tesla's Model 3 reaches the market, it can face aggressive competition from the major car manufacturers who have taken note of the changing consumer demand. Such car giants as GM (NYSE: General Motors Company [GM]) and Volkswagen (XETRA: Volkswagen [VOW3]) both plan to roll out their versions of affordable electric cars featuring crossover and SUV models in the same (or lower) price segment with Tesla's Model 3. GM's electric Bolt crossover is expected to be out already by the end of this year and offered for approximately $37,000. As Tesla plans to deliver the first Model 3 vehicles to the owners only in 2018, it looks like the company may end up lagging behind the rivals.
Even though Tesla also offers an SUV model of its Model X car, with a price tag of about $100,000, it can hardly pose a serious competition to the affordable electric SUVs that are about to enter the market. Launching an affordable SUV car is also in Tesla's future plans, yet the customers will have to wait until the company is done with the production of the pre-ordered Model 3s, which is not to be expected soon. In other words, regardless of its brand power, Tesla might miss out on a big chunk of interested customers by offering a sedan vehicle that has been losing popularity among car owners.
It looks like Elon Musk has been losing the grip of his many 'revolutionary' projects lately and is now looking for ways to get his company back on track. Remember the last week's SpaceX rocket explosion?