Why isn't Tesla broke?

the purpose of this video is to understand the interesting financial situation Tesla's in and learn more about how a company's cash flow works in the process Tesla is burning money in 2017 their business has produced a net loss of more than 2.2 billion dollars with a revenue of around 12 billion dollars that's a lot of money it's more than an 18 percent loss margin for comparison Apple was operating their business at a 21 percent profit margin but nevermind Apple even compared to its peers that's still a rough showing for Tesla this kind of behavior hasn't been a one-time thing either it's how they've run their business for years how can a company that's been losing money for years even exists the answer is cash the reason that Tesla still exists is that while Tesla is losing money they are never running out of cash when you make a profit you make money congratulations you usually also get to fill up your cash bucket when you make a loss you usually will take from your cash bucket now here's the catch your cash may never ever go to zero ever the definition of bankruptcy is not making a loss your bankrupt when you are out of cash in fact you can comfortably run your business at a loss for a while if you have enough cash in your pocket but when you are out of cash your business is dead dead dead dead dead so when we ask the question when is Tesla running out of money what we really mean is when is Tesla running out of cash there are three main pipes connected to a company's cash reserves each of these pipes has the power to give cash or take cash depending on a situation your business is in the first one is operations this is the cash your core business produces the cash you get from selling whatever you sell minus the cash you lose from paying whoever you have to pay if you are a mature business with a decent profit margin then operations is the number one pipe that fills up your cash pile Tesla's operations still lose cash and here's why every time they sell a car or battery or a solar roof they are paid by their customers in cash and sometimes they even get the cash before they sell anything and that cash is more than a cost Tesla to make these products if you bought a one hundred thousand dollar Tesla in 2017 it will have cost Tesla only seventy eight thousand dollars to make but operations is more than just making your product it's running shops charging stations doing research and development those are the costs that turn Tesla's gross profits into net losses and even more important turn making cash into losing cash in 2017 Tesla had to take only around sixty million dollars of their cash pile in order to run their operations given that these operations have produced a net loss of over 2.2 billion dollars on paper 60 million dollars in cash is actually not that much then there is investments factories headquarters equipment all these things cost cash it's all the cash that in the books is not lost to costs but transformed into other assets a bit like this for Tesla this pipe has been the cash eater because gigafactory in 2017 investments claimed over 4.4 billion dollars in cash last pipe financing this pipe is all the cash you get from lenders or investors in the form of loans or investments when you take a loan or raise an investment this pipe gives when you have to pay back your loan or dividends to your shareholders this pipe takes four Tesla this pipe has been the big giver in 2017 it provided Tesla with just over 4.4 billion dollars in cash an amount of money that might ring a bell the art of good financial management is to keep these three pipes and balanced when you take too much cash too often your business is broke when you produce too much cash your business is inefficient or perceived as running out of ideas for Apple these pipes currently look something like this they have been producing way too much cash over the past decade what shareholders would have loved to see is this Apple having plenty of new ideas about how to invest 200 plus billion dollars into the future but instead we got this Apple returning hundreds of billions of dollars to their shareholders in the form of dividends and stock buybacks so we have one company producing more cash than they know what to do with and another that has more ideas than they are making cash for are you thinking what I'm thinking yeah unfortunately these two gentlemen don't think the same thing this is Tesla's life line as long as lenders and investors are willing to fill Tesla's cash they will march on should they decide to cut it though Tesla is truly doomed what would it take for them to stop a pouring cash down that pipe lenders are a simple folk they give you a specific amount of cash for a fixed amount of time to get it back with a specific amount of interest simple they mainly concern themselves with two numbers first how likely are you to repay them and second what yearly interest should I charge the higher the first number the lower the second one and vice versa Tesla has raised 3.2 billion dollars in debt in 2017 alone very likely not the last time and that's okay because all Tesla needs to do to keep borrowing money is keep this number stable and lenders will keep giving at affordable rates so how is this number determined by so-called CRA s or credit rating agencies these rating agencies come up with ratings of specific companies through a beautiful simple transparent process which always works Tesla is currently rated at a b2 / b3 depending on the class of that according to Moody's pretty much a math grade for a company that is so hyped because one Tesla is losing money and to Tesla already has a total amount of debt of ten point four billion dollars for almost 90 percent of their revenue that's high although compared to their peers surprisingly okay God for it really has a debt problem as for Tesla if they can keep growing at their current rate and eventually turn losses into profits they will be fine then I can finally start to rebalance their pipes that very same rationale is why investors keep investing the most common way for young companies and startups to fill up their cash pile is by creating new shares in your company and then selling them to interested investors this process is called a capital race and if you want to understand the exact mechanics of how it works I can only recommend this video by a younger me exactly scratch Tesla went public in 2010 raising 226 million dollars by selling new shares to stock market investors that money didn't last them very long Hestia has raised almost another 4.6 billion dollars in cash from investors through more capital raises swapping cash for newly printed shares is a great deal for Tesla because first since their share price is quite high Tesla needs to print only very few shares for a lot of cash which means that - there isn't a lot of delusion for existing shareholders and three equity cash is free cash for Tesla since you never have to pay a bag and Tesla currently doesn't pay dividends either the reason investors are doing this deal is because just like lenders they believe in this if things go well lenders will get their money back plus interest and investors will harvest the fruits of success but if things go wrong investors will lose everything why lenders grab whatever assets are left that's the deal and it's a deal they're both willing to make as long as there is Tesla's sales story a few years ago Tesla sold no cars in 2017 they sold and shipped over 100,000 cars in 2018 they will sell and ship however many cars they can from their pile of currently over 600,000 pre-orders and since Tesla is making a gross profit on each car they sell selling more is exactly what they need to do to become profitable overall the carrot is right there but to catch it they need to deliver produce more get and for that purpose they are investing so barring a catastrophe like an exploding Giga factory or you know musk actually deciding to revert all together and finally live on Mars Tesla's cash pipe is not running dry anytime soon and even then it might not the packets will be filled with outside cash as long as there's the promise that one day sales can take over and I might just make it Tesla has proven its market and with the highest customer satisfaction in the industry they have proven their product the vision is big and so are the costs but nothing is more powerful than the right idea at the right time and hustla has landed this sweet spot many say it's an iPhone moment when people saw the future and there was no stopping it and that's why Tesla won't be running out of money [Music]

Channel: The Rest Of Us

Views: 1,787,086

Rating: 4.8042946 out of 5

Keywords: Tesla, Elon Musk, Cars, Finance, Cash, Cashflow, Profit, Balance Sheet

Id: BHS0H5AwGjU

Length: 9min 43sec (583 seconds)

Published: Sat Mar 17 2018

Reddit Comments

[u/frankjabloomfield]

Definitely stuff that fewer people understand/know than should be the case!

The big difference between net loss from operations and the net cash from ops is the consideration of depreciation and amortization which was $1.6b in 2017.

I do find it concerning that the net loss from ops exceeds the R&D costs though. Edit: in 2017

[u/KaizerShoze]

Very informative: TIL

[u/Cubicbill1]

Great vid. Learned quite a lot actually.

[u/Silverseren]

An interesting video from one of the people i'm subscribed to that looks at Tesla's funding model, how it's supported, and how it will look in the future. Along with some potential dangers about its model.

[u/Shauncore]

I don't think the author covered the equity capital raises and the future need for cash that well.

Tesla is certainly going to need more cash in future, sometime in the next 2-3 quarters and certainly by 2019 (if things remain the same and they don't suddenly figured out a cheap way to produce and then actually make 100,000 Model 3s over the next few months).

It seems that the narrator suggested Tesla is raising capital often through equity, which is slightly incorrect. Recently, Tesla has favored issuing debt over equity. Musk himself last year said they weren't really considering issuing new equity, but instead thinking about debt.

In February, they raised $546M in debt.

They issued $250M in new shares in 2017 (in which Musk bought 10% of it), but $750M in convertible notes (debt that can be converted to equity).

In 2016 they did issue a nice size of equity ($1.15B).

Tencent bought $1.8B in equity in 2017, but it's unclear if they bought the shares on the open market (which isn't a capital raise) or gave Tesla $1.8B directly (a capital raise).

If they are going to raise more cash soon, they are probably going to favor debt over equity. The problem being of course that every dollar of new debt is more expensive than the previous dollar. Tesla already is at junk grade level, a very sensitive rate where more debt added has a larger impact on borrowing costs. This is going to make it harder for them to payback debt.

Their debt to equity ratio has been rising due to all this new issuance:

2013 0.90

2014 2.06

2015 1.91

2016 1.26

2017 2.22

It's now gone up ~150% since 2013 and they still haven't turned profit positive. In fact, they have lost more money than ever their operating margin went from -9% to -13% from 2016 to 2017.

They need to probably suck it up and offer new equity (their shares trade at 4.5x price to sales - industry average is 0.6), and as the narrator mentioned, it's free capital (they don't have to pay anything back). I think though that they've been hesitant to disrupt the share price (issuing more shares in theory would hurt the price - more shares equals a smaller earnings per share).

This avoidance of equity disruption may be fine for now, but adding on debt impacts it in the long term potentially. Yes, it's nice as a shareholder to own X% in a company that's worth $50B in equity, but if their debt gets too out of hand and they struggle to operate, owning X% in a $0B company is less fun.

Here is a good snippet from BofA Merrill Lynch:

One of TSLA’s distinct advantages has been access to very low cost capital during its many rounds of fundraising. However, we believe it is unlikely that the next round is the company’s final time raising capital. With rates rising and long-dated views of any material cash flow generation (which theoretically should be discounted back), the cost of both debt and/or equity capital should rise over time for the company, especially in light of the recently acquired SolarCity business (which suffered from higher/rising cost of capital). Ultimately, despite a macro environment that will likely drive rates higher and lackluster financials, TSLA has, nevertheless, been able to convince investors to continue to supply very low cost capital, although we do not expect this to persist in perpetuity.

[u/OptimisticViolence]

As an investor who reads way too much FUD news this was a good balance to the other side. The only real uncertainty I had about Tesla’s long term massive success was cash drying up in the next year or two. Now I have a different perspective on that. Thanks for that ford ! Lol

[u/iconew]

The ? at 7:07 is Deepak (CFO)

[u/ManualOverrid]

Gawd Ford really has a debt problem. 😂

[u/rypols]

Awesome vid!