The new crown epidemic has spread throughout the world, and many cities in the United States have also fallen into a "suspended state". Almost all automobile factories have closed factories, including the "hot fried chicken" Tesla company. According to foreign media analysis reports, if the outbreak is prolonged, Tesla may go bankrupt in the worst case.
According to foreign media reports, there has been a fierce debate between bears and optimists about the future of Tesla stock. There is no doubt that the company has disrupted the automotive industry and changed the future of transportation, but this does not guarantee long-term success for investors.
If New Crown Pneumonia plunges the United States and the world into a long-term recession, it may test Tesla in an unprecedented way, putting the company step by step in the worst possible situation.
Step one: car manufacturing falls off a cliff
Tesla has been ordered to close its Fremont plant in California. The lithium battery plant in Nevada may be a "non-essential business" ordered by the next governor. Tesla's workshop is still in production). Therefore, we can assume that Tesla's car manufacturing business has fallen off the cliff, at least in the short term.
We don't know what Tesla's cash consumption was during the shutdown, but the company raised $ 2.31 billion in February by issuing new shares, and then has a balance sheet of $ 8.8 billion in cash, which may soon disappear.
As an example, let's assume that Tesla's production has been stopped for two months and revenue has dropped to zero. The company must pay all current operating costs and can only reduce the cost of sales by 80%. According to the financial report for the fourth quarter of 2019, the company will consume $ 344 million in operating costs and $ 399.5 million in sales costs per month. The cash consumption rate was $ 743.5 million per month and $ 1.49 billion in two months.
Once the manufacturing business starts again, the United States and much of the world are likely to fall into recession. When the difficult times came, one of the first items abandoned by consumers was a luxury car worth more than $ 50,000.
For example, between the 2007 and 2009 global financial crisis, BMW car sales fell by 17%, and car companies' profits almost disappeared, but there was no suspension of production for several weeks. From a macro perspective, US gross domestic product fell by 0.3% and 2.8% in 2008 and 2009, respectively. We call it the “Great Recession”
Goldman Sachs estimates that US gross domestic product will fall by 5% in the second quarter of 2020. For now, it predicts a rebound in the second half of this year, but this cannot be guaranteed. At present, GDP is estimated to be declining, but the worst case scenario may be worse than the Great Recession.
If Tesla's sales decline by 20% to 25% from its peak in the fourth quarter of 2020 due to the recession in the next year or two, it could have a devastating impact on cash flow and balance sheets. Keep in mind that Tesla has been ramping up spending to drive growth, so its cost structure is not ready to cope with falling demand.
If Tesla returns to the delivery rate in the first half of 2019, we may see severe losses in the operating division. In the first two quarters of 2019, the company's annual delivery volume was 316,000 vehicles, with an average monthly operating loss of $ 114.9 million. Now, the monthly maintenance capital expenditure is increased by US $ 100 million, which is about 40% of Tesla's expenditure this year. Even if the operation starts again, the company will consume US $ 214.9 million per month.
In general, the two-month suspension and 12-month production cuts will result in $ 4.1 billion in cash consumption, leaving a huge gap in Tesla's current $ 8.8 billion cash balance.
Don't forget, Tesla's current cash level includes $ 726 million in customer deposits. Technically, this is not the money the company has already made. This is another potential cash loss on the balance sheet if customers demand the return of these deposits.
Assuming our estimates above are accurate, Tesla could burn $ 4.8 billion in cash from operations and deposits in the next 14 months.
Step 2: the market abandons Tesla
If the losses really start to increase, we worry that the biggest risk for Tesla is that the market will betray the company. Tesla has raised $ 13.4 billion through debt and finance leases, and has raised billions of dollars in funding through the sale of shares. If cash inflows stop as demand declines and cash consumption increases, it could be devastating for Tesla.
Tesla's next major debt maturity date is March 2021, when $ 1.4 billion of bonds will mature. If operations have not improved by then, refinancing this debt can be difficult.
In the next 14 months, Tesla may be forced to pay $ 1.4 billion to pay off its debt. Coupled with the above-mentioned operating cash consumption, by the summer of 2021, $ 6.2 billion of the $ 8.8 billion in cash may disappear.
Step 3: Supplier knocks on the door
Suppliers will also begin to focus on operational trends, which could become a significant cash burden for Tesla. By the end of 2020, the company had US $ 3.8 billion in accounts payables, and accounts payable could change from a short-term financing mechanism serving as a source of cash to a significant cash loss when notes mature.
If cash consumption increases and sales decline, suppliers may also start demanding more stringent terms. Suppliers want to make sure they get paid; if a company appears to be in financial trouble, terms like 90-day payments are not attractive.
Tesla also offers suppliers some guaranteed order commitments. We don't know the specific terms, but Tesla described $ 5.7 billion in 2020, $ 2.9 billion in 2021, $ 3.6 billion in 2022, and future commitments totaling $ 16.3 billion. This is a huge amount of cash promised to be spent in the future.
We don't know how much cash Tesla will bear if demand for cars declines. But if we assume that sales will fall by a quarter next year, we can also assume that payables will also fall. This alone will bring a cash burden of $ 942 million. Coupled with what we outlined above, Tesla's $ 8.8 billion in cash has now fallen to about $ 1.7 billion, which may be the minimum level needed to maintain the company's daily operations.
Step four: Musk's debt
This may seem unbelievable now, but if the stock price continues to fall, Elon Musk himself could eventually become a problem for this car stock.
As of February 12, 2020, Elon Musk had received personal loans of US $ 548 million from various banks and used his Tesla shares as collateral. We don't know when these loans will need to be repaid, and Musk may be forced to sell Tesla's stock. Don't underestimate this possibility.
In 2008, Chesapeake Energy CEO Aubrey McLendon's loan security requirements forced him to sell more than 30 million shares of the company in three days, almost emptying his stake in the company. In 2012, Robert Stiller, founder of Green Mountain Coffee Roasters, received a $ 123 million margin call, forcing him to sell a large number of shares and causing him to lose his position as chairman. Both of these margin calls have accelerated the decline of stocks that are already in freefall, so we know this has happened before.
Executives don't expect margin calls, and when we see margin calls, it's because these executives are taken aback by the rapidly falling stock prices. Let us assume that the margin call will not come until the loan reaches 25% of the value of Musk's Tesla stock used as collateral. In the worst case, we will have to see his stock value fall to about $ 2.2 billion. This means Tesla's market value needs to fall to $ 11.8 billion, or about $ 64 per share. Musk hasn't mortgaged all his stock, so margin calls are actually much faster than $ 64 per share. If they do come, it could cause further panic in Tesla stock.
Step five: the downward spiral begins
Companies rarely go bankrupt because of one factor; usually, when a series of events begin to affect each other, they fall. If Tesla's stock falls, it will be seen as a more risky company, which could cause buyers to question Tesla's ability to honor its warranty commitments, improve service centers, and even expand its charging network. This has led to reduced sales and worsened financial conditions, caused suppliers to demand more stringent terms, led to cash loss, and so on.
Once consumers, suppliers, and investors begin to accept this statement, it will be difficult to break. Over the years, Tesla has shown an upward trend in almost every corner of the market. In the coming months, we may see how the company responds to the downward spiral.
Note: Beware of Black Swans
Much of what we outlined above is a general decline in the automotive industry during the recession. But black swan events or unforeseen low-probability events may also occur during crises. After a traffic accident, the U.S. government may require Tesla's autonomous driving system Autopilot to exit the market; factories may go on strike; customers may collectively default on loans and leases. Any black swan could accelerate the decline in Tesla's business and its stock.
Understand the risks of any investment
The above is not a prediction that Tesla will definitely go bankrupt. In fact, I think the company has begun to shift to sustainable operations, which could absorb shocks like a global recession. But investors should understand how their investment arguments can go wrong and learn from past events.
Car companies have a history of financial troubles during the recession. Tesla's reliance on continued open market financing may be cut off. Musk's adventurous personality will eventually become a damage. Tesla faces very real risks, and it is not immune to the economic reality that the new crown epidemic presents to every business today.