Tuesday, June 19, 2018

Tesla: Speculation on cash burn and Model 3 costs

To me, one huge interest of mine in terms of Tesla is looking into their cash burn and if they can actually become cash flow positive in the near future. I came across two articles that look at this topic from two different angles.

The first angle is how much does a Model 3 cost to build. Via Quartz German engineers estimate that the cost is $28,000. Some interesting facts from the story:

1. The engineers were working on behalf of the German auto industry. This, to me, implies that all the German automakers view Tesla as a serious threat.



2. The breakdown of the $28,000 was $18,000 for materials and $10,000 for labor and production. This breakdown should provide some useful targets to hit.

3. Though that makes it seem like Tesla should be making a profit at some point, Erik Gordon (a professor at the University of Michigan's Ross School of Business) points out that this doesn't cover the cost of future capital expenditures. Basically, they might get to the point of becoming profitable on the Model 3, but they'll still need to raise cash in the future to cover expansion needs.

4. Erik Gordon does appear to have issues with the $10,000 estimate for labor and production, believing it to be too low.

The second angle is how will Tesla deal with it's cash requirements. Via the Business Insider the writer tries to figure out what Elon Musk means when he constantly states that he won't need to raise additional money. The writer also notes that there is a belief that Tesla needs at least $10 billion in cash. Here's the quote to key in on:

If you really want to overthink matters, you could simply recall the confidence with which Musk and his executives spoke of the China expansion last week. It sounds like a done deal. And I think it sounds like a done deal precisely because Tesla is lining up the financing as part of a substantial investment round from a Chinese player. 

To me, this is an interesting angle. The Chinese want to go electric due to their environmental issues so why not invest in Tesla? Of course, to me, this still implies that Musk is not being totally honest. As always, how Tesla deals with cash for the rest of the year will be a heavily speculated issue.

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