Elon Musk is burning through cash and may need to raise more soon to produce the mass-market electric sedan Tesla Inc. is banking on to reach the mainstream consumer.
A capital raise would provide more cushion to the smallest and youngest publicly held U.S. automaker, which has huge expenditures planned ahead of introducing the Model 3 sedan in July. Tesla burned through cash in the fourth quarter and expects to spend as much as $2.5 billion in the first half of the year before fielding its first mass-market car.
"It's certainly clear that some kind of capital raise is coming," David Whiston, an auto analyst at Morningstar Inc., said by phone Thursday. "They might want to do it soon."
Tesla has been a serial spender under Musk, who's made it his mission to accelerate the auto industry's transition to electric transportation. Through the first half of this year, the company will have spent about $10 billion in research and development and capital expenditures since 2014, according to Morgan Stanley. Musk, the chief executive officer, said Wednesday while a cash raise isn't critical to release the Model 3, it's probably wise.
"How close to the edge do we want to go? According to our financial plan, no capital needs to be raised for the Model 3, but we get very close to the edge," Musk said on a conference call with analysts. Since "that's probably not the best thing for shareholders," he said, "it probably makes sense to raise capital to reduce the risk."
Tesla shares fell 6.4 percent to $255.99 at the close Thursday in New York, the biggest drop since June. The stock had surged more than 40 percent from early December through the close Wednesday, as the steady state of the Model 3 led investors to bid up the 14-year-old company's market value to rival automakers that have been around more than a century and sell millions of cars a year.
The capital expenditures planned ahead of the Model 3 introduction surpassed the $2.3 billion that Ryan Brinkman, a JPMorgan Chase & Co. analyst, had estimated the Palo Alto, California-based company would spend in all of 2017. Tesla's projection raises the likelihood of a stock offering to boost capital in the near term, he said.
"And with a market cap approaching that of GM and Ford, arguably it could be done on amenable terms," Brinkman wrote in a report Thursday.
With plans to price the Model 3 close to $35,000 before incentives, the vehicle looms as the linchpin in Tesla's plans to manufacture at high volumes and achieve the profitability that's eluded the company in all but two quarters since going public.
Once Tesla boosts production of the Model 3, spending levels will decline, Musk said on the call. Tesla expects to ramp up Model 3 production to more than 5,000 a week by the fourth quarter before doubling that at some point next year.
"There's obviously going to be a fair bit of incremental investment to go from 5,000 cars a week to 10,000 cars a week, but it's going to be a lot less than getting to 5,000 cars a week in the first place," Musk said. Going from 5,000 to 10,000 will probably cost "somewhere between 50 percent to 70 percent of the cost of the 5,000 line."
Brian Johnson, an auto analyst at Barclays Plc, said in a report Wednesday ahead of Tesla's earnings that he would "not be surprised to see a $2.5 billion raise instead of the $1.5 billion equity raise currently reflected in our model."
Whiston projects the company's needs are even greater -- he expects Tesla will have to raise $3 billion to fund Musk's ambitions.
Reassurances from Musk on the timing for the Model 3's introduction may relieve fret over whether the company can overcome its long history of product delays. Management ranks, on the other hand, remain unstable -- Chief Financial Jason Wheeler, who joined the company about 15 months ago, will leave in April.
"The Model 3 is designed for manufacturing," Musk told analysts. Compared with the Model S and Model X, both of which can sell for more than $100,000, the smaller Model 3 will be simpler to build. "It's a very compelling car, and we understand manufacturing a lot better than we did in the past."
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