Tesla Motors Case

The business outlook at Tesla Motors, Inc. (TSLA) is intriguing. While the electric vehicle manufacturer has reported operating losses in every year since its IPO, the company has certainly been exciting auto enthusiasts. Much of the recent interest in the company is due to the introduction of its lower-priced Model 3, a car that could boost the auto maker’s production output by five or even tenfold in the coming years.
As an investment, Tesla is an interesting selection, as well. While sales growth has been explosive, the company still isn’t making money. The stock also has a good amount of risk. It has a large amount of debt on its balance sheet, and has been burning through a significant amount of cash in order to fund R&D and expansion

This is largely due to the significant investments it has made in research and development for the transformative technology in its cars. It is also the result of the rapid expansion the company has experienced in just a handful of years. The cutting-edge auto maker posted revenues of just over $200 million in 2011, while reporting sales of over $4 billion last year. Tesla is also investing heavily for the construction of its Gigafactory in Nevada, which has already begun producing battery packs and will likely manufacture lithium cell batteries by year’s end. Because of these large cash outlays, Tesla has reported negative free cash flows and earnings for nearly every year since its IPO. As a result, Tesla has been forced to raise more debt and sell more shares.
High Debt Load: The company has a relatively high debt load. As of March 31, 2016, Tesla had nearly $2.5 billion of long-term debt and capital leases on its balance sheet, or roughly 72% of total capital. This compares to only $1.4 billion of cash on hand. Interest payments on this debt are fairly significant, and will likely continue to cut into earnings. If the company is unable to satisfy its debt obligations, because of insufficient cash flows, it may have to reduce or delay investments and capital expenditures, which could hamper future

Orders for this vehicle have been well above expectations, and strong sales of the car could drive significant top-line gains when it comes to market at the end of next year. While we look for a big jump in revenues this year, the company will likely still post operating losses for both this year and next. Costs will likely remain high, as well, and we expect more debt and equity offerings to pay for the oncoming production ramp. The equity remains volatile, so only investors who can bear some volatility and risk should consider a position here. Long-term prospects depend on the success of the Model 3, but we remain optimistic, assuming success of that vehicle, along with the company’s ability to lower costs, through its Gigafactory, and boost production capacity in a timely fashion. Subscribers interested in learning more about Tesla should check out our full-page report in The Value Line Investment