Taking A Closer Look At Tesla’s Cash Position (NASDAQ:TSLA)

Tesla, Inc. (NASDAQ:TSLA) has made drastic staff cuts over the past month, maybe as high as 20% of the workforce. In the Q1 earnings call, Elon Musk stated that the plan to develop a $25,000 car, sometimes referred to as the Model 2 and code-named “Redwood,” on an entirely new platform has been modified. The new plan is to develop cars that can be produced on existing production lines, more quickly and with lower CAPEX. The one-piece “giga-casting” process that Tesla claimed would reduce manufacturing costs has apparently been abandoned.

In a surprise move last week, Elon Musk removed the head of the Supercharger network and the entire department of 500 employees. The 40-person marketing team was also disbanded. Layoffs continued this week.

The severity and timing of the cuts have led to speculation that Tesla has a liquidity problem, even though the quarter-end balance sheet showed cash and short-term investments of almost $27 billion.

It is worth reading the SA article by contributor James Foord, who made the case for a potential capital raise in an article published shortly after the Q1 earnings release.

In this article, I take a slightly different approach. I look at Tesla’s balance sheet and try to figure out what the cash position might be at other times during the quarter, and how much of a problem cash flow might be for Tesla. I should note that Tesla’s latest 10-Q does not provide enough information to evaluate future cash flows accurately, so the numbers are my best estimate using the information available.

Quick Ratio

A common method of assessing a company’s short-term liquidity is the “Quick ratio.” This is defined as liquid assets (those assets that can be quickly converted into cash) divided by current liabilities.

At the end of Q1, Tesla’s liquid assets were (in billions):

• Cash $11.805
• Short-term investments $15.058
• Accounts receivable $3.887
• Total $30.750*

Current liabilities were $29.453 billion, the quick ratio was 30.75/29.453 = 1.04, very close to the 1.00 usually considered acceptable.

*There is also Bitcoin, valued at $184 million on the balance sheet but worth approximately $800 million at current prices. It could be converted to cash but is not included in current assets.

The Quick Ratio should be a warning sign that a company may be facing liquidity issues. It is not necessarily an immediate harbinger of doom, we must dig deeper into the 10-Q to get a better picture of the true cash position.

Self-financing auto business

The automobile manufacturing business is, to some extent, self-financing. A major manufacturer can order parts from a supplier on terms that allow up to 90 days for payment. During those 90 days, with today’s “just in time” management processes, materials can be assembled into a car, delivered, and sold to a customer before the manufacturer must pay for the parts.

Tesla is particularly adept at managing its business to show the maximum amount of cash on its balance sheet at the end of each quarter when financial statements are issued to the public.

Customers are asked to pay for their cars before they are delivered, so there is cash on the balance sheet at the quarter end for cars that haven’t even been delivered.

Suppliers are paid after the quarter end, so the balance sheet, which is a snapshot of the financial status of the company at the close of the quarter, shows the maximum cash that is in the company’s bank accounts at any time during the quarter.

During Tesla’s growth period, the company has been able to maintain a healthy quarter-end cash balance by having its customers and suppliers finance its growth.

When the company stops growing, the cash stops flowing

However, when the growth stops, the cash flow dries up.

In Q4, 2023, Tesla would have ordered enough raw materials to build 494,000 cars. The bills for those materials had to be paid using the proceeds from the sale of 387,000 cars in Q1,2024.

To make matters worse, Tesla did not tailor its production to match demand during the quarter. The factories continued to pump out cars for most of the quarter, and approximately 42,000 cars were added to inventory. Finished goods inventory rose by $1.6 billion during the quarter.

It should not come as a surprise that in Q1, 2024 Tesla burned through $2.2 billion in cash.

Tesla’s cash pile is only a snapshot of its financial position at the quarter end

At the end of Q1,2024, Tesla held cash and short-term investments amounting to $26.863 billion, compared to $29.084 billion in the previous quarter.

It appears that Tesla did not significantly reduce the raw material orders during the quarter. Raw material inventory was slightly higher than Q4 and accounts payable stood at $14.725 billion, also slightly higher than Q4.

In addition to accounts payable, the balance sheet contains a line item noted as “Accrued liabilities and other,” amounting to $9.243 billion. That line item includes sales taxes that were collected on the sale of cars and must be submitted to the appropriate governments soon after the end of the quarter. It also includes unpaid payroll expenses, which are due early in the quarter. Those two items amount to $3.069 billion, due early in the new quarter.

There is also $2.6 billion of accrued payables for goods and services received that have not been invoiced.

There are also lease payments, payroll, warranty expenses, and other miscellaneous expenses during the first month, so Tesla’s cash outflow in the first month of the quarter is likely to be in the region of $20 billion.

Tesla sales are usually heavily loaded to the back end of the quarter, revenue in the first month is likely to be about 20% of the full quarter revenue, maybe around $4 billion, and receipt of accounts receivable might bring in another $1 billion in cash.

At the end of the first month of the quarter, net outflows of cash might be around $15 billion. Tesla’s cash pile has probably shrunk to less than $12 billion.

Money is received before goods are delivered or services are performed

Tesla is also very adept at collecting cash before it delivers goods or performs services. Those items include (in billions):

• Deferred revenue (automotive) $3.500 (full self-driving, free supercharging, network costs, OTA software updates)
• Deferred revenue (Energy) $2.738 (prepayments based on contract terms)
• Warranty provisions $5.353
• Customer deposits $0.88
• Total $12,471.

Tesla’s seemingly huge cash balance comes from two sources:

• Suppliers who have not been paid for goods and services that have been delivered.
• Customers who have prepaid for goods and services that have not yet been delivered.

That’s fine while the business is thriving and the cash is flowing in, but in a serious downturn, it will be an extra drain on cash flow.

Likely negative cash flow in Q2

According to a Tesla Motors Club website that tracks Tesla’s European sales, Q2 sales in Europe are trending more than 20% lower than Q1.

China deliveries are also down versus last year, and there have been reports of inventory building up in overspill parking lots, and at the Fremont factory in the USA.

It appears that Tesla’s sales for Q2 will not exceed the sales for Q1, and revenue may be even lower because of price reductions and ongoing discounts on cars from inventory.

Accounts payable at the end of Q1 were higher than the previous quarter, indicating that Tesla did not cut back on orders to suppliers. Those payables must be discharged from the proceeds of Q2 sales. Tesla will be in a similar position in Q2 as they were in Q1. The effect of the layoffs will be offset by severance pay (restructuring charges) so the savings in labor costs will not have a major impact until Q3.

It is reasonable to assume that cash flow from operations will be negative in Q2, probably in the region of $2 to $3 billion.

Debt

Tesla’s debt consists almost entirely of asset-backed notes, backed by leased vehicles. There are no significant debt payments due in the short term except for those that are backed by leased vehicles, though it is unclear who is responsible for the resale value of those vehicles at the end of the lease. Upcoming debt repayments are not an issue.

Tesla has not used any of its $5 billion revolving credit facility, which provides a significant cushion against cash outflows. That cushion is available if needed.

Conclusion

Tesla is not running out of cash. However, negative cash flow is likely to continue at least through Q2 and possibly longer if the slump in sales continues.

The recent layoffs are more likely to be a response to falling sales and rising inventories. Tesla has been making more cars than it can sell, and price cuts have not generated the extra sales that were expected. Quite clearly, production cuts are needed to balance supply and demand, and those production cuts must be balanced by labor force cuts.

I don’t think Tesla has a liquidity problem at present, but that situation could turn around rapidly if Tesla cannot halt the decline of its automotive business, which generates most of the company’s revenue.

Capital expenditures and R&D costs may have to increase if Tesla is to fund its move into AI, robotaxis, ride-hailing, and robotics in addition to improving its product line with new, cheaper cars as promised on the Q1 earnings call.

These products may be a significant part of the future of the company, but all of them are a cash drain at present and will likely continue to be a cash drain for several years. The car business is what pays the bills today, and it appears to be rapidly declining.

The $27 billion cash balance gives an optimistic impression of a healthy balance sheet that is not representative of Tesla’s cash balance at other times during the quarter.

I believe there is a strong possibility that Tesla will go to the market for extra capital later in the year, maybe after the Robotaxi reveal day in August. The “Autonomy Day” presentation in 2019 was followed by a $2.3 billion capital raise. A share issue would probably have to be done at a significant discount to today’s share price and would indicate to the market that Tesla’s balance sheet is not as strong as it appears.

The company is seriously overpriced relative to its peers in the automotive industry, and a share issue may put further downward pressure on the share price. For that reason, I believe the shares should be rated as a sell.

However, there is always a risk involved in shorting Tesla shares, the price can move dramatically on news that later turns out to be less than it first appears. For example, the news of Elon Musk’s China visit and arrangement with Baidu (BIDU) for mapping software was misinterpreted by some investors as Chinese approval of full self-driving, pushing the share price up by $25 in one day.

I use long-dated put options to limit the risk.