Tesla, Inc. Model 3 Forecasts Sales Boost To Justify “Junk” Offering

Tesla Motors Inc (TSLA) Model 3

Tesla, Inc. has always been a little bit ahead of itself with projections. On Monday, however, the firm surprised everyone by upping its forecast for Tesla Model 3 build numbers. Now, said CEO Elon Musk, it’s possible that production of the EV sedan could jump to 700,000 per year. As with many of his projections, Mr. Musk didn’t give a timeline for completion.

The CEO made the comments on a call set up by Goldman Sachs. The call was designed to discuss the rationale behind the $1.5 billion in junk bonds that the firm plans to sell in the immediate future. That marks the first time that the EV maker will go to the traditional debt markets in search of financing.

Tesla Model 3 boom gets bigger

Like much of his forward projections, Mr. Musk’s comments about the Tesla Model 3 were a little bit vague. He simply said that the car could eventually see annual sales of more than “more than 700,000 units.”

Tesla Model 3 Design. Source: Tesla Motors
Tesla Model 3 Design. Source: Tesla Motors

Given that the firm is planning on building more than half that level next year, that actually argues for a severe slow down in the growth rate of Tesla, Inc. car sales.

Not only did Mr. Musk increase the volume forecast, he also upped the outlook on average price. On the same call he said he expects the average Tesla Model 3 to sell for $45,000. That’s up from $42,000 previously. The new figure won’t be reached, however, until the car has hit full production.

Therefore, the new projections massively increase the total revenue that can apparently be  expected from the sale of the Tesla Model 3.

Tesla says that the $1.5 billion it’s raising from the junk bond market is to be used to improve its balance sheet. As the firm has high negative free cash flow, it needs a cash cushion to keep operations running.

For now, the most important factor driving shares in the firm is production. If it can raise its build numbers steadily through the end of the year, Wall Street will be happy.

Tesla, Inc. stock is staying strong

Despite the announcement of an increase in debt, Tesla, Inc. stock is still staying strong. The price of shares fell by a small fraction on Monday. However, they’re still up by more than 15 percent over the last three months of trading.

The “Junk” status of the bonds is being reinforced by ratings agencies. Standard & Poor’s has a B- rating on the firm’s long term credit. It also set a B- rating on this issue in particular.

The firm, however, cautioned that its outlook was negative. That’s because it believes there’s a strong likelihood of execution issues related to the Tesla Model 3, or cost overruns in other parts of the business.

Moody’s put a B3 rating on the bond issue. It said the long term outlook on the debt was stable.

Tesla will have something more than $4 billion in cash on hand after it sells these junk bonds. It will, however, increase its cash burn by raising its cost of debt.

To date the firm has ordinarily issued convertible bonds. They carry a lower interest rate, but can be converted into shares by the holder. We still don’t know the interest rate the firm will offer these new bonds at. If the ratings are a good guide, and they might not be, the firm is probably expecting something north of 5 percent.

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Adrian Smith

Adrian Smith is a finance and tech writer and currently working on a Masters in Business Information. He has developed a keen interest in all things finance and technology and loves to write about it.


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