The only thing scarier than the current stock price in Tesla is the 36 pages of risk factors related to Tesla in its annual report. Below are some key takeaways from the "risks" associated with the business.
"Our limited operating history makes evaluating our business and future prospects difficult, and may increase the risk of your investment."
"Our long-term success will be dependent upon our ability to design and achieve market acceptance of new vehicle models, specifically Model S and new vehicle models such as Model X. "
"We have a history of losses and have to deliver significant cost reductions to achieve profitability in 2013 and long-term commercial success. "
"We incurred a net loss of $396.2 million for the year ended December 31, 2012. In addition, we have accumulated net losses of $1,065.6 million from our inception through December 31, 2012. We have had net losses in each quarter since our inception. Even if we are able to successfully maintain our current Model S production levels, there can be no assurance that it will be commercially successful. "
"The automotive market is highly competitive, and we may not be successful in competing in this industry. We currently face competition from new and established competitors and expect to face competition from others in the future. "
"If we are unable to establish and maintain confidence in our long-term business prospects among consumers, analysts and within our industry, then our financial condition, operating results, business prospects and stock price may suffer materially. "
"We may need or want to raise additional funds and these funds may not be available to us when we need them. If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected."
I currently feel as if the liquidity situation alone, could force Tesla into bankruptcy.
A very serious problem with Tesla is that all of its cash flows come from financing activities, which creates a very serious problem (explained further below). For one thing, it shows that Tesla is a business not built on its business model, but built on other peoples money. Infact, Tesla pulls in more from "financing activities", than from actual sales of its cars (revenue). The whole survivability of the company is based purely on how many more people they can sucker, before the company collapses. It's all one big ponzi scheme waiting to collapse.
Whether it be from selling stock and taking your money, or borrowing and taking the lenders money. The great thing about significant cash flows from financing activities is that, it can make a company that does nothing, seem like something.
Tesla has not generated any significant profit or cash flows from operating activities, to pay for any debt. Also, Tesla is not expected to be significantly profitable for at least 2 years. So, whats happening right now is all just a game. Its to see how long the lenders will continue to supply cash to Tesla, and how fast Tesla can burn through cash.
The companies current liabilities exceed current assets, and could cause a serious liquidity problem in the future, when these debts are due. Whats even more worrisome is that the company bases its liquidity situation on a hunch that its lender will supply it with more cash through 2013, which is supposedly when Tesla will become profitable. Even though the company forecasts further loses coming from the building of the Tesla Model X. At that point who will be supplying the cash to actually run this business? The company is eating up cash faster than it can borrow. Sooner or later, its all going to come down like a house of cards. Agressive expansion through debt is not sustainable, no matter how good the company's future prospects look.
Looking at the income statment, you can clearly see that Tesla only started gaining significant revenues, after it had take on large amounts of debt.
The company only has around $240 million in cash, compared to their large debt position of $450 million (which has been rapidly increasing YOY). So cash wont be able to cover long term debt, and further loans will be needed to pay existing debt. The company will face significant financing problems in the future, and this is being conservative. If Tesla continues to lose money as management predicts, the cash burn would be even quicker. Tesla would eventually have its equity, wiped out, and would not be able to pay off their debt (causing a liquidity problem), forcing the company into bankruptcy.
The companies debt has increased by over 49% in just a 1 year period from FY2011 to FY2012. From FY2010 to FY2011 the long term debt of Tesla increased from $72 million to $271 million, an astounding 275% YOY increase in Debt.
Lets hypothetically say that Tesla becomes profitable and the business model does well, how much would the company need to make just to be able to cover the increase in debt? Well, Tesla would have to increase their earnings by 49%(based on FY2011 to FY2012 data) in 1 year just to break even on their leverage.
The icing on the cake is that the company only has a measly book value of $168.5 million compared to its market cap of $11 billion. I can almost guarantee you that through future losses, the equity will be completely wiped out.
I see analysts flaunting higher price targets for Tesla left and right, while ignoring basic fundamental facts about the company in question. Sooner or later the market is going to wake up, but by then it will surely be too late. The investors and analysts will all be left scratching their heads, wondering what happened.