There is no doubt that Tesla (TSLA) is a market darling. It has one of the most innovative products in recent memory and a charismatic leader. The product also has that elusive "sizzle" that all salesmen want for a product they're selling. The stock has performed well (although it's been trending modestly lower to slightly); it's risen about 100 points in the last three years.
But lately, it's stumbled. Within the last month, CEO Elon Musk tweeted that he had secured financing to take the company private but the company later said that wouldn't be happening. Now we've learned that the Chief Accounting Officer Dave Morton left after just four weeks. While he stated there were no issues with the company's finances, the markets are selling the stock.
And then we have the bonds, which are trading lower. The question on bond holder's lips is very simple: "Am I going to get paid?" Despite Tesla's great story and product, bond holders have legitimate concerns.
First, the good news. Tesla is a money-making machine. Gross revenue has increased between 26.5% and 75% on a year-to-year basis for the last four years. Those are great numbers, especially for a car company. But that's where the good news stops.
The company has yet to earn a profit - the net margin has printed between -3% and -21% for the last five years. And the EBITDA/gross revenue percentage has been between -8% and 6% over the last five years. That would concern any fixed-income investor. Most concerning, however, is the increasing cash burn rate. That number has increased every year, totaling $36.7 million at the end of 2017. It seems the bigger they become, the more cash they need, which could potentially lead to a concerning cycle.
To get cash, Tesla is relying exclusively on the bond market. According to their annual cash flow statement, for 2014-2017, they generated net negative cash from operations. The company also spent heavily on investments for 2013-2017, further draining working capital. As a result, Tesla issued $8.2 billion in bonds between 2013-2017. In fact, the company issued a net total of $15.1 billion in debt between 2013; refunding $6.8 billion over the same time.
The good news is that the company has ample room on their balance sheet for debt. In 2013, the debt/asset ratio was 24%. In 2017, it was 33%. Theoretically, they could continue to issue debt to raise cash to fund operations for the near and potentially intermediate future.
But just because they can doesn't mean they should - or that the market won't treat the company harshly for continuing to rely on debt to finance operations. Bond investors are a stodgy bunch, who are usually a bit more financially sophisticated than equity investors. Right now, they're looking beyond the sales figures and cutting-edge product and asking, "When will Tesla arrive at a position where they are self-funding operations and controlling their cash burn rate?" Right now, the answers aren't good, which means we should expect Tesla bonds to continue to underperform for the foreseeable future.