Tesla (TSLA) is one of the most recognizable names in the electric vehicle market and rightfully so. Under the leadership of company CEO Elon Musk, Tesla has made a name for itself through the production of cutting edge electric vehicles designed to shake up the traditional automotive industry. The company’s flagship car, the Model S, spurred Tesla’s growth upon its inception. Now, Tesla has expanded its lineup of automobiles into SUVs like the Model X and the Model 3, of which is the best selling electric car of 2018 according to JATO dynamics.  Furthermore, Tesla has also moved into the energy sector with projects like the Gigafactory, used to assemble cars and batteries, along with the PowerWall, as a consumer energy storage unit. However, despite the promising innovations produced by Tesla, the $12.7 billion worth in debt outstanding looms heavy over the company. By understanding what it will take for Tesla to pay off its debt and the company’s future projections, we can determine whether or not Tesla is a solid investment opportunity.

Debt Situation

One of the major concerns regarding Tesla is the extreme amount of debt the company holds. Per Tesla’s Q1 shareholder letter, Tesla repaid a $920 million convertible bond repayment, which contributed in dropping the company’s cash reserves to $2.2 billion, down $1.5 billion from Q4 of 2018. Even after paying off this bond, Tesla still holds $12.7 billion in debt. The majority of this debt is to Wall Street firms, such as Goldman Sachs, which helped Tesla raise capital in its infancy stages. The large amount of debt that Tesla has incurred raises concerns over the long term projections for the company, as many believe Tesla will be unable to pay off such an enormous sum of money. What is further troubling is that Tesla plans to take on even more debt in the future, as according to Tesla’s Q1 shareholder letter, Gigafactory Shanghai will be almost fully funded through local debt. According to SEC archives, Tesla has “secured an approximately $522 million (as at March 31, 2019) credit line from local banks.” The sheer amount of Tesla’s liabilities is a significant red flag for investors, as any falter in production may mean the company cannot meet its debt payments.

 Cash Flows

The lifeblood of a company like Tesla is cash flow. Similar to how blood flowing through the body keeps it working, so does cash flow to Tesla. In order to sustain their growth as a company with negative net income, Tesla needs to move towards a positive cash flow. Tesla’s operating cash flow sits at $1.86 billion (trailing twelve months), which was significantly hampered by the faltering of Model 3 sales in Q1 of 2019. Based on data provided in Tesla’s Q1 shareholder letter, The majority of Tesla’s cash flow rides on the sales of the Model 3, a car that comprised nearly 82% of Q1 vehicles produced. The debt payments Tesla is expected to make will only impede growth for Tesla in addition to diminishing its positive cash flow. In order to shift towards a sustained positive cash flow, Tesla will need to execute high levels of production and sales near flawlessly, a tall order to fill considering the unreliable history of the company in relation to their operations.

Tesla’s Plan

According to Michael Sheetz of CNBC, Elon Musk announced in May that the company plans on raising $2 billion through stock and debt sales as part of a plan to regain cash for future production. Musk is panning on the continued global expansion of the Model 3 in markets like Europe and Asia in addition to the expansion of Tesla’s energy storage business. However, the only way for Tesla to continue its growth is to incur debt in order to rapidly increase production. The call for raising funds by Musk supports this outlook, as Tesla continues to accumulate cash to fund their future growth. This all-out approach to increasing sales implemented by Musk may mean incredible success for the company, or irreparable disaster. The probability of disaster weighs greater however, due to the risk of bankruptcy associated with the massive debt incurred in order to back growth.


As we have seen in the past, companies that lead through innovation (like Apple), may start slow but eventually establish global dominance in their market. Tesla contains the same potential to achieve global supremacy in electric vehicles, especially as the problem carbon emissions continues to grow. Despite the plethora of financial problems Tesla faces, it’s important not to underestimate the genius of Elon Musk and the incredible leaps in technology that the company continues to make. Because of this, Tesla is best described as a high-risk high-reward investment. As long as Tesla management can continue to increase revenue while fending off debt payments, Tesla is primed to become a top-tier company. If you choose to invest in Tesla, be sure to account for the risks associated with the investment before looking at the potential rewards.

Financial data from finance.yahoo.com

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