Tesla Motors Inc (TSLA) Just Filled the Toughest Job in Tech

Tesla Inc Model 3

Tesla Motors Inc stock is up strongly on Wednesday after the firm announced its earnings for the three months through September on Tuesday, November 3. The firm’s fortune turned on higher than expected delivery forecasts for the fourth quarter. Traders have, once again, been swayed by the story Elon Musk is telling. Those worried about the long term should, however, be focused on another reveal.

Tesla Motors Inc (TSLA) Model Assembly Line 2

While showing off its numbers for the quarter Tesla Motors revealed that it had picked someone to replace Deepak Ahuja as its CFO. Mr. Ahuja announced that 2015 would be his last year in charge of the firm’s finances in June. Jason Wheeler, formerly a VP in charge of Finance at Google, will take the job, and he has a lot of hurdles ahead of him.

Tesla Motors keeps spending money

Tesla Motors has burned more than $3.7B in the last seven quarters. That’s an incredible amount of money. It has gone to projects like the Gigafactory, SuperChargers, Model X and Model 3 research, and much much more.

In the September quarter the firm said that it spent almost $600M more in cash than it brought in. Wall Street, by consensus, thought the firm had burned less than $300M in the three months, but Tesla Motors surprised once again. At time of writing shares are selling for 230.42, up 10.56 percent for the day so far.

The free cash flow problems were likely multiplied by the issues that Tesla Motors is having with getting the Model X on the road. In the earnings call Elon Musk confirmed that the roll out of the car has been pushed back by months. The reason for the delay is the “sculptural” second row of seats. Tesla is now making those in house, and spending a lot of cash to do so.

Brad Erikson of Pacific Crest, another man happy with Tesla’s progress so far, said in his report, that there was  “execution and financial risk surround Model X’s ramp, as evidenced by the company deciding to take middle-seat production in-house after a supplier saw material constraints.”

Right now Tesla Motors has no clear path toward turning that cash flow green, and it’s one of the major things that’s putting a hold on the value of the firm’s shares. The biggest risk that Tesla Motors faces in the medium term is a spike in the cost of capital, and there’s a lot of ways in which that could happen.

Waiting for Wall Street to say no

Wall Street is still, very much, backing Tesla Motors to change the auto world forever. Traders are valuing the firm at an incredible level, and the capital markets have supplied Tesla Motors with huge amounts of liquidity. The big danger, as Tesla Motors keeps spending money, is that the costs of getting that cash might go up.

There’s two ways in which that could happen. Tesla Motors gets its cash, alternatively, from debt or equity. Costs could rise if the effective interest rate charged to the firm on debt goes up, or if stock reacts badly to a new issue of shares.

The last time that Tesla Motors asked for cash was in August, and the plea went down so well that Tesla Motors actually upped its ask. That’s an incredible achievement, and it shows that Wall Street, despite getting a little cautious, is still assuming that Elon Musk will succeed.

Adam Jonas, Morgan Stanley’s man on Tesla, said in his report on the firm’s third quarter that “the way Tesla may approach new business opportunities in the automotive industry is not clearly understood by the investment community at this time.” That goes double for how the firm plans to fund itself, especially as costs seem to keep going up.

For now Tesla Motors is still ahead. The firm’s access to new sources of cash in the third quarter left it with about $275M more in its bank account than it had at the end of the June quarter. That means the firm has what Standard and Poors’ analyst Nishit Madlani calls a “liquidity cushion.”

It’s Mr. Wheeler’s job to keep that cushion plump, and stop Tesla Motors’ weight from wearing it out.

Looking for a profit at Tesla Motors

That may be the hardest job in tech. Elon Musk is good friends with Sergey Brin, so it’s likely Mr. Wheeler has been well vetted before taking the job at Tesla Motors , but that doesn’t lessen the toughness of the job ahead of him. It will be Mr. Wheeler’s job to keep Tesla’s cash fire fueled for another five years or so.

It’s incredible that Mr. Ahuja, working in concert with Mr. Musk, has kept Wall Street happy this long, but each new debt issue gets added to the pile that Tesla Motors is building. Each extra stock issue should make the value of everyone else’s holdings lessen, and each new quarter of cash burn should make Wall Street more skeptical.

Tesla Motors will start to ship the Model X en masse by the end of Q1 2016 according to Elon Musk, and the firm will be able to show off the model for its Model 3 by the end of March. On top of that shipments for the full year 2015 is still set to hit 50,000.

As most research houses on Wall Street are saying on Wednesday, it’s feasible to see how Tesla Motors is going to get to 500,000 cars per year in 2020 based on its forecasts. What remains a mystery, however, is how the firm plans to pay for everything until it gets there.

Mr. Wheeler is likely wondering the same thing right now, and it will be an interesting path toward financial independence for Tesla Motors with him at the wheel.

Mr. Wheeler, in a statement on his new job, said that he was “so excited to join an amazing team dedicated to such a broad and inspiring mission. Looking forward to jumping into the fast lane.” Tesla Motors will need able navigation to survive that fast lane, and it’s Wheeler’s job to provide it from here on out.

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