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Bank of America Merrill Lynch Analyist: TSLA Promised Model 3 Targets Only Possible With Billions Of Dollars Extra Cash

Like any publicly traded company, there are a whole host of different views on Wall Street to California Automaker Tesla Motors [NASDAQ:TSLA]. Some investors and analysts are the eternal optimists, bullishly advocating for the purchase of every available Tesla share in the hope that Tesla CEO Elon Musk is about to unveil yet another product that will send TSLA stock skyward. Others are more bearish, warning the company is terribly short on cash, can’t fulfill its promises, and will ultimately require massive investment or acquisition to survive.

Tesla has big goals for Model 3 -- but what will it do to company stock prices?

Tesla has big goals for Model 3 — but what will it do to company stock prices?

Fans and advocates of the company cheer when stock prices rise, and bemoan the understanding of analysts who place TSLA’s true value as being far less than its elevated share price would suggest. And to date — at least in most cases — many in the electric car world have got used to excusing the disparity between Tesla’s bottom line and its share price as being a consequence of its Silicon Valley roots, where entire companies are born, raised and die on the fulfillment of a promise.

Yet while Tesla is more Silicon Valley than Detroit and more like a giant iPad than anything else on the road today, it still faces some of the practical challenges that every other automaker out there has to face: how to make and sell cars in high enough quantities to turn a profit while simultaneously ensuring its cars are reliable, well-made, packed with featured, and competitively priced.

Tesla's goal of making a profit by the end of the year is unlikely now.

Tesla’s goal of making a profit by the end of the year is unlikely now.

After its limited-production two-seat Roadster, its flagship Model S luxury sedan and its high-tech Model X crossover SUV, Tesla is pinning all of its hopes on the upcoming, recently-revealed Tesla Model 3. A car which Tesla hopes will catapult it from niche to mainstream market in one fell swoop, Tesla promises Model 3 will go on sale at the end of next year priced from $35,000 before incentives, travel 215 miles per charge and have a sub 7-second 0-60 time. It will also feature some of Tesla’s flagship technologies as standard (although you’ll have to pay to activate them), including Supercharger compatibility and Autopilot functionality.

Already, more than 380,000 people around the world have put down $1,000 each to reserve their place in the queue to buy Model 3, far more than Tesla anticipated. Consequently, the California automaker has dramatically changed its production timeline for Model 3, pushing its original corporate goal of producing half a million cars by 2020 forward by two years to 2018.

That planned production change may be good news for Tesla fans, but, says Senior Auto Industry Analyst for Bank of America Merrill Lynch John Murphy, it will also take billions of dollars of additional investment. Although Tesla may be able to find the funds from venture capital or additional stock sales, he suggested on a recent episode of Autoline, investor return on investment would stay low for many years to come.

“The idea that they’re making 50,000-100,000 cars per year… and have a target of 500,000 in 2018 now they pulled that forward two years. That’s interesting,” he said.  If you poured billions and billions and billions of dollars of capital into it, maybe you could ultimately get there…You might not make a lot of profit and you will have subpar returns.

Expanding the Fremont facility will be expensive.

Expanding the Fremont facility will be expensive.

“It’s hard to put a lot of value on a company that’s burning through a lot of cash,” he concluded.

It’s worth noting at this point that Murphy has been a long time bear on Tesla stock, consistently valuing it far lower than many on Wall Street. But as Murphy pointed out during his Autoline appearance, Tesla’s original plan of reaching profitability by the end of this year now seem scuppered by Tesla’s own Model 3 success.

Why? Simply put, the unexpected success of Model 3 pre-orders has caused Tesla to accelerate its expansion plans. And that means spending more money for 2016 through at least 2018 which, in Wall Street speak, means its Capital Expenditure goes up. Unless it can make up for that increased spending through improved investment, Tesla’s original goal of making a profit by the end of the year becomes almost impossibly hard.

Naturally, Murphy is making his assertions using his extensive experience of the traditional automotive market. In that context, a company bringing a new car to market traditionally takes four or five years to bring a brand-new car to market, complete with millions — or even billions — of dollars of investment. Shorten the time frame that you have, and you have to increase your expenditure proportionally.

On Paper, Murphy has a point. Tesla isn’t like other major automakers, which tend to rely on the profits from high–volume mainstream models to fund the development of new vehicles or vehicle technologies. Tesla doesn’t have that luxury, because Model 3 is its high-volume mainstream model. General Motors, for example, has been able to direct some of the profits it makes on its high-volume, perpetually popular mid- and full-size pickups and SUVs to accelerate the development of the Chevrolet Bolt EV in double-quick time. Tesla doesn’t have those funds to draw on.

But we should also note here however that Tesla is unlike any other automaker in existence today. It has proven before, time and time again, that its small size means it can run rings around other companies when it comes to responding to vehicle faults, engineering challenges and recalls. Its software-centric design philosophy also means it’s possible for Tesla to continually innovate in ways just not possible with a traditional automaker.

It seems that Tesla needs long-term investors.

It seems that Tesla needs long-term investors.

So far, either by skill, judgement, or good luck, Tesla has managed to stay afloat. It continues to innovate and challenge the status quo. Yet it is facing challenges it has never faced before. Its Fremont facility, while already the heart of manufacturing for the firm, won’t be able to produce the half-million cars per year it did when it was the NUMMI plant under GM and Toyota’s joint control say industry insiders, simply because of all the modifications Tesla has made to the facility over the years.

Additional production facilities — something Tesla CEO Elon Musk has already discussed publicly — are essential if Tesla is to meet its 2018 goal of half a million cars per year. And if it can’t reach its Model 3 deadline, Tesla will have thousands of disgruntled Model 3 reservation holders to contend with too.

None of this does good to the company’s bottom line or its stock price. It needs either to offer more stock to fund its accelerated expansion plans, or find investors willing to wait a significant amount of time for a return on their investment.

That said, if any automaker can pull off the seemingly impossible, Tesla is certainly the lead contender. Yet as the recent Tesla secondary stock offering illustrates, Tesla is well aware of the challenges that face it and, we’d guess, knows that it needs more money in order to survive.

We’re on the fence regarding Tesla right now, neither a bull nor a bear. But we are eager to figure out how it plans to make good on its various promised and goals because like many in the electric car world, we’d like to see Tesla succeed.

And right now, we’re worried the math doesn’t add up.


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  • Martin Lacey

    Isn’t the recently announced stock offering intended to raise the capital required to ramp up Model 3 production and also to pay Elon Musk’s taxes?

    Assuming that’s correct, Tesla have all they need and can re-invest profit from initial model 3 production first to 24hr operation (probably 8, 16, 24 phases to get production gremlins sorted) and then tool up a second line (probably in a Chinese partner production center).

    I think a well known “Bear” rehashing the figures should be listened too, but not worried over.

  • owlafaye

    The many problems Tesla will face are not insurmountable. Elon Musk has the mind for this and I am sure he is surrounded by people and investors that are fully committed to this project. Attaining a 500,000 model 3 production goal is when the value of the company will increase dramatically. This isn’t some Tucker start-up scenario….this is one of the most revolutionary technologies to emerge ever. It is very threatening to the rest of the automotive world, so much so that conspiracies of attacks in the form of false rumors and the picayune accusations surrounding every little malfunction of a singular component on over 100,000 vehicles already produced is highly indicative of a company making history.

    Don’t bet against Elon Musk.

  • Chris O

    “right now, we’re worried the math doesn’t add up.”…totally unacceptable way to end an article that doesn’t explain at all why the math of Tesla’s financials wouldn’t add up.

    If Tesla really manages to sell some 400K units a year of a car that it expects to sell at an average of $42K with battery cost of ~$10K and dropping, leaving the US national average car price to build the rest of the car and I for one at first glance definitely don’t see any math that doesn’t add up.

    Also the article does not explain why moving production targets forward should increase the total amount of investments needed, instead mixing in the fact that investment and capital needs are moved forward as an “explanation”.

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