Analyst Calls Tesla Motors Inc (TSLA) a “Cash-Hungry Startup Unicorn”

Tesla Motors Inc is in a stage of rapid growth and expansion and analysts think that the firm might sell as much as $3B of stock to fund its expansion plans – one going so far as to call the firm a “Cash-hungry startup unicorn”. Tesla is lucky to understand a central truth that far too many startups realize too late. The simple truth is that, the first-mover advantage doesn’t go to the first firm that ships but to the first firm that scales – and Tesla must scale and very fast.

Tesla has probably bitten on more than it can chew when CEO Elon Musk revealed that he now wants to build 500,000 cars by 2018 instead of the original plan targeted at 2020 – the he also noted that he plans to double that output by building and delivering 1M cars by 2020. Elon Musk’s ambitious expansion plans are kind of a no-brainer considering the fact that the firm has about 400K preorders of its Model 3.

Here’s why Tesla needs to grow and expand

Potential buyers of the Model 3 have backed their pre-orders with a $1000 refundable deposit and Tesla Motors must keep its end of its bargain by ensuring that it brings the Model 3 to the road by 2017. The problem however is that the Model 3 is still being designed and the firm must put some things in place in order to have a smooth roll out of its expansion into the mass market.

The firm needs to hasten the completion of the Gigafactory in order to enjoy economies of scale on batteries. Musk must add tooling and extend its assembly line for the mass market Model 3, expand it sales and service operations worldwide, build more superchargers, employ more engineers and manufacturing experts. Needless to say, the aforementioned activities will cost a great deal of money that Tesla doesn’t have right now.

Tesla might sell $3B stock to finance expansion

Tesla Motors will be forced to sell equity in order to raise money for its expansion plans. At the end of the first quarter, the firm had $1.44 billion in cash and cash equivalent of $1.44B up from $1.19B from the same period in 2015. The firm’s long-term debt was $3.12B up from $2.65B in the same period last year. Hence, it is obvious that the firm needs funding to expand its business.

During the earnings call, Elon Musk admitted that “I think it’s going to make sense for us to raise some amount of money — some combination of equity and debt — and make sure the company has a good buffer of cash on hand. I think it’s important for de-risking the company.” He however noted that he won’t be touching the $400M from reservations because people could cancel and ask for refunds. He says he’d rather see the money as a buffer of sort. In his words, “I don’t think we want to rely too much on customer reservation money as a source of capital,

Analyst Brian Johnson at Barclays opines that “With its ambitious plans that will require an incremental fundraising, we view Tesla as more of a cash-hungry startup unicorn than a traditional public company.” Johnson is also skeptical about the outlook for the firm because of its financing needs. He says, “with Tesla likely to come to the market for a capital raise near-term, it’s worth asking whether it deserves an up round or a down round.”