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Tesla’s numbers don’t add up

A recent post in the Wall Street Journal highlighted some of the shortcomings of Tesla Motors, the darling tech startup which has continued to gain traction as its stock soars sky-high.  However, as this article and others point out, there are some deep concerns investors should be aware of in terms of long term sustainable growth.

Highlights:

  • Precipitous cash burn rate for multiple capital intensive initiatives, increasing operating expenses.
  • Model 3 will be competing with other major established manufacturers, and other electric vehicles with similar technology have struggled.
  • Tesla is depended on Li-ion technology, which has potential technology and future supply issues.
  • Tesla Powerwall is simply not competitive in today’s market with cheap reliable electricity.

First and foremost is the issue of cash flow.  With its stock near all-time highs, this summer Tesla was able to secure $750M revolving credit agreements with several banks, which should give it some more flexibility for near-term goals.  It will likely need to tap these finances as costs continue to rise.  2015 Q1 results showed Tesla ending the quarter with $1.5B left on its balance sheets, compared to $2.3B in September of last year.  For its most recent quarter filing this burn rate continued unabated when Tesla showed it had just over $1B of cash and equivalents remaining.  This volcanic burn rate is combined with a number of incredibly capital intensive initiatives.  Tesla is planning on releasing its new Model X later this year and is ramping up development of its upcoming Model 3.  Car production, let alone car development, requires ample cash flow to survive.  Tack on the new residential and commercial storage products announced this year along with the building of the Gigafactory, a new battery factory, and Tesla (and its investors) are leveraging a hefty bet that its new cars will be a hit.  Even with the new Model X selling well by the end of the year, Tesla will continue to burn through cash and will more than likely need to secure additional financing.  With its stock continuing to climb, it is very likely Tesla will look to tap additional funds by issuing additional shares.  This dilution, depending on the size, will most likely have mixed reactions from investors.  Up until now investors have been betting on Tesla based on its ability to deliver an innovative product.  Now investors are starting to take a hard look at the numbers and are anxious for stability, especially for life beyond Models S and X.

Model 3

Announced a little over a year ago, the Model 3 is Tesla’s continuation of the product line and philosophy of starting with luxury cars and moving to more affordable mass market vehicles.  This new model is expected to be priced starting at $35,000 before subsidies, which puts it in competition with the BMW 3 series and Audi A4.  This poses a challenge for Tesla, as they begin to enter a lower price market they also are entering an increasingly crowded one.  Not only do consumers have a wide range of choices, they also tend to be brand loyal and nearly all major car manufacturers are in the process of releasing all electric cars.  In the case of the Nissan Leaf, sales were and continue to be sluggish.  Issues with battery degradation, range, and performance in cold weather climates have hampered sales.  Tesla will have to contend with these same issues as they expand, using the same battery technology as the Leaf.  Furthermore consumers who once had to deal with $4/gallon gas can now fill up for a little over half that.  Oil prices have continued to plunge as output stays steady, and Goldman Sachs and others are predicting continued depressed oil prices into 2016 and longer.  This adds to the decreased attractiveness of electric cars as consumers are still anxious about a vehicle which is still lacking in many categories.

Battery Technology

Tesla states their new Gigafactory would reduce production costs by 30% for their cars and Powerwall products.  The important distinction here is the reduction of production costs rather than an increase in efficiency.  Tesla is making a huge bet by committing itself to the current Lithium Ion battery technology which is in a continual state of refinement and development.  As new Li-ion technology comes on-line, Tesla will need to continually update its manufacturing process.  More concerning is the current world supply of Lithium keeping up with demand.  Lithium is also used in batteries for consumer electronic devices and in a number of other industrial products, such as lubricants.  As Lithium becomes more scarce, increasingly inaccessible sources will need to be tapped, increasing the price of Lithium.  This in turn will increase the price of batteries, which already accounts for a considerable portion of the production costs of Tesla’s cars.  Another reality is Li-ion batteries have a predefined life.  After a number of charging cycles they will no longer hold a charge.  No amount of maintenance can bring them back to life aside from a complete replacement which carries considerable costs.  By contrast, a conventional car can be incrementally repaired depending on the fault, i.e. a damaged head gasket can be replaced without replacing the entire engine.

Tesla Powerwall

Already there has been considerable criticism for the Tesla Powerwall since it was announced. It is worth noting first the device and concept itself is not novel.  Companies have developed similar solutions for residential homes which are partially or fully off the grid, or for other “green” applications tied with a solar/alternative energy source.  The problem is these systems never caught on – they remain a niche market for a simple reason: they are not economically viable and their capacity is limited.  Even with hefty state and federal subsidies, the residential application for this technology will be looked over in favor of cheap and reliable utility power.  Forbes Magazine calculated using the Tesla Powerwall in conjunction with solar panels would incur a cost of $0.30/kWh, compared to an average of $0.125/kWh for U.S. consumers.  This is a steep price gap which will not be filled anytime soon.  Furthermore, the current capacity of the Powerwall, 7kw and 10kw, cannot meet the demand of current U.S. homes even as they become more efficient.  With a typical residential AC unit, fridge, and other large appliances running, it is possible to drain a Powerwall within a matter of 2-3 hours.  Add in electric ranges, dryers, and heaters, and the Powerwall would drain even more quickly.  The Powerwall also has to contend with converting the stored DC electricity into household-usable AC electricity, a conversion which significantly reduces efficiency.  Add in the predefined life cycle, and the Powerwall will remain a toy for the environmentally-conscious rich.  Homeowners will be much better served upgrading their appliances for more energy efficient models and utilizing new energy efficient lighting technology such as LED.

Battery recycling, infrastructure, and alternatives

All of Tesla’s products have one thing in common – they all depend on Li-ion battery technology.  Although Li-ion batteries use less toxic materials than previous rechargeable battery technologies, a comprehensive strategy for recycling batteries needs to be developed, especially in light of a potential Lithium shortage.  Furthermore, the cost of infrastructure is enormous and often overlooked.  Building new charging stations and installing chargers in homes costs thousands of dollars.  The automotive industry would be better off adopting technologies which use existing infrastructure and can be retrofitted onto existing vehicles.  Biofuels can begin to fill this gap and are a cheaper, more reliable, and environmentally renewable technology.  In essence what Li-ion technology in electric cars is trying to replace is the gas tank, which is an obviously more complicated solution that what exists today.  As history has shown with the prospect of Hydrogen cars, technology is limited not only by costs of energy but also the method of storing that energy.  Unfortunately for applications like vehicles, gas is still a more efficient, cheaper, and more stable way to store energy than Li-ion batteries and will be for the foreseeable future.

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