Tesla Motors…the new Apple?

We love entrepreneurial spirit.

It makes the world’s economy tick.

It always has and always will.

But we know a neat marketing trick when we see one.

As the Financial Times reports:

Tesla fans continued to deluge the electric car maker with pre-orders for its new lower-cost Model 3 over the weekend, raising questions about the company’s ability to ramp up manufacturing to meet demand.

‘Elon Musk, Tesla’s chairman and co-founder, said on Sunday that it had received 276,000 orders worldwide for its $35,000 Model 3 by the end of Saturday, more than 18 months before the first deliveries will be made. If all those orders turned into actual purchases, Tesla would be in line for about $10bn in revenues from the Model 3, which will have a range of more than 215 miles.

That’s just the thing…if all those orders turn into sales. Because, as the FT notes, in order to get on the waiting list, each prospective buyer…

had to put down a refundable deposit of $1,000 to reserve their Model 3, which is scheduled to begin shipping by the end of 2017.

276,000 reservations at US$1,000 a pop equates to US$276 mln.

What do you think Tesla Motors Inc. [NASDAQ:TSLA] will do with this money?

There’s a reasonable bet that this cash injection is simply collateral for loans that Tesla will need to take out in order to fund its US$5 billion Gigafactory, which the company needs to produce batteries for its cars and Powerwall home battery storage system.

The idea of debt isn’t new to Tesla in recent years. According to the company’s latest balance sheet, it has short term borrowings of US$659 mln., and long term borrowings of US$2 billion.

And it made a loss last year of US$888.7 mln.

Granted, analysts expect the tech company to make a profit this year of US$181 mln., but there’s no way Tesla can fund its growth plans, including building the Gigafactory, or increasing car production, without incurring more debt.

Aside from the fact that Tesla hasn’t built the Gigafactory yet, there’s the issue of production volume.

As the FT reveals:

Today, however, Tesla’s production is far lower, at about 50,000 cars a year, and Jack Nerad, executive market analyst for Kelley Blue Book, said Tesla has a history of missing its delivery targets.

‘“With car manufacturing you can’t just turn on a spigot,” Mr Nerad said. “You’re making predictions several years in advance and lining up volumes with suppliers. You can ramp up to a certain extent but it’s not like you could double production versus what you originally figured on.”

In our humble view, the problem isn’t so much about whether the company can keep up with production, it’s about how much of the US$276 mln. Tesla will have left after giddy fans realise they either don’t want, or can’t afford, the Model 3 electric car.

But let’s be kind. Let’s suppose that every one of the folks who has placed a US$1,000 deposit goes ahead and buys the US$35,000 car. And let’s suppose that Tesla is able to ramp up production so that it makes each one of those cars within the first year of launch.

Tesla’s total revenue (not including an options or upgrades taken by buyers) would be US$9.7 billion.

Based on analyst forecasts for next year, which don’t include sales of the Model 3, Tesla’s profit margin would be around 2.1%.

So, after selling US$9.7 billion-worth of cars, profits would be US$203 mln.

Of course, that also doesn’t factor in any amortised cost of building the Gigafactory or increasing factory capacity. Assuming a straight line 10-year amortisation, the launch of the Model 3 would plunge Tesla back into the red — assuming it ever got out of the red.

We hate to say it, as we genuinely do love entrepreneurial spirit, but, despite the high share price, Tesla as a business has ‘Zombie’ written all over it.

Over the weekend, the mainstream press has compared Tesla to Apple Inc [NASDAQ:AAPL]. They’ve noted the people queuing up outside the Tesla stores in order to pay their US$1,000 deposit. (Although we’re not sure why they didn’t just do so online. There’s certainly the whiff of a ‘rent-a-crowd’ element to the hype.)

The analysis has suggested that this is all Apple-esque. But it’s not really comparable to Apple at all.

One difference is straightforward. When Apple ‘fanboys’ queue to get the latest iPhone, they too have to hand over around US$1,000. However, they get to walk away right then and there with their purchase.

They don’t have to pay US$1,000 today and then wait for nearly two years to get their new smartphone.

The second key difference is obvious when you look at the Apple income statement.

Apple has made a profit each year since 2002. And when it did launch new and ground-breaking products, such as the iPhone and iPad, Apple continued to make a profit, without skipping a beat.

In 2002, Apple’s net income was US$65 mln. By 2007, it was US$3.5 billion. By 2012, it was US$41.7 billion. And in 2015, it was US$53.4 billion.

As for debt, until three years ago, Apple didn’t have any debt to speak of. In fact, the company has only gone into debt over the past three years as a way to pay dividends to shareholders, without having to repatriate overseas profits to the US.

It’s cheaper for Apple to borrow money to pay dividends, than it is to pay tax on foreign profits.

When we talk about Tesla being a zombie company, we mean that, if almost any other tech company did what Tesla is doing, the market and investors would see through it.

But, for now, Tesla seems to be immune. When sales growth is slowing, and losses are accelerating, the company comes up with a neat way of creating excitement around its product.

As far as hype goes, it’s working. But if you took the plunge over the weekend and plopped down a $1,000 deposit for a car that you won’t receive until the end of 2017 at the earliest, we’d strongly recommend checking out the fine print and kindly asking Tesla if they wouldn’t mind refunding your deposit.


Ed note: The above article was originally published in Port Phillip Insider.

Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005. He is the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service, Markets & Money.

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