I think it comes down to timing.
Let's look at their cash needs:
For Model 3 launch (going through Q4, 2017), assuming 250,000 unit build plan
$1.2 billion for the equipment for Fremont for initial Model 3 production
Let's call it $25 million for finishing up Gigafactory phase 1
$75 million each quarter capex in addition for Superchargers and various retail/service build outs worldwide
$125 million for installation of equipment, Fremont expansion that is not equipment
That's $1.65 billion to launch the Model 3, but that doesn't count the parts up front ramp. Now, if they can get suppliers to take delayed payment terms that they implied, then the ramp isn't as bad if the launch goes relatively smoothly unlike the Model X launch.
Cash on hand is $3.1 billion. They would like to have $1 billion in cash and they have access to another $750 million in ABL.
Now, the issue is the timing of the 500,000 unit build plan for 2018. For that, we have at least:
Spending $400 million on Gigafactory phase 2, of which has already started in Q3, 2016
Spending $3 billion to expand Fremont again
Ongoing expansion of Superchargers and retail/service locations in 2018.
So the issue is when does the capex spend for 2018 hit? Some is already hitting with Gigafactory expansion. They will likely spend the $400 million spread through 6 quarters, or roughly $70 million each quarter until the last quarter. Panasonic starts their investment in that section in Q3, but really in Q4 of 2017. If it takes 2-3 quarters to have the factory expansion done, and Tesla does the 500,000 unit build plan in two sections, then the capex spend for the first section would likely start in Q3 of 2017. Then the next section would be Q4, 2017 to Q1, 2018. Of course, that amount doesn't happen all at once.
The real question is whether or not Tesla gets TE profits in 2017 in order to pay for the 2018 500,000 unit build plan. It seems that the Model 3 launch is not the problem, it's the timing of the capex for 2018 and the Model 3 launch S curve that will determine things. Clearly, if Tesla had an extra $1 billion or $2 billion, Tesla could freely choose to start the expansion to the 500,000 build plan pretty much directly on the heels of the 2017 expansion.
@techmaven Thanks for laying this out in numbers! Super helpful contribution for discussion.
First, if we assume your 250k unit plan of $1.65 billion plus parts... then I think it's probably reasonable to add at least $400M to parts (but probably more). In that case, we're looking at $2 billion. Also, I would imagine that more is needed for the GF than just $25 million to supply packs for 250k units.
Second, I think there's a decent probability that SCTY is a cash drain in 2017. In Q3 earnings call, Elon said "I expect SolarCity to be approximately cash neutral, all things considered, next year." (
http://seekingalpha.com/article/401...-results-earnings-call-transcript?part=single). I take that as he hopes that SCTY is cash neutral but that there's a fairly good chance that it will be a cash drain. In fact, if it was clear that SCTY would be a positive cash contributor in 2017, then Elon would have said that... and he didn't. The question then becomes how big of a cash drain can SCTY be next year? That, I don't know the answer to... and I don't know if anybody does.
Third, in Q3 earnings here's what Elon said in his second comment on cap raise:
"But I stand by what I said earlier which is, currently, if we did not go out and raised a bunch of money – our current plan says we don't need to raise any money. It gets a little scary in terms of how much capital we have in the bank relative to our sales volume, but at least currently raised capital is something that's nice to have, not a necessity. And maybe it's a smart move to de-risk things and all that."
Now, I want to focus on what he said about "it gets a little scary in terms of how much capital we have in the bank relative to our sales volume". I think this is an important sentence he added. We all know that Elon has made very bold financial bets in the past with his own money because he has a high risk profile (not in a bad sense). Elon's ok with things not working out at times, because he knows he can recover (ie., spending all his money on TSLA, SCTY, SpaceX and borrowing friend's money). So if things are "scary" to Elon, then that means it's really scary. Now, we don't really know exactly what he meant by that, but I'll give my interpretation. I took it as Tesla could afford not to raise capital but that their cash in bank would get so low that it would be scary (ie., few hundred million dollars in bank). Again, this is Elon talking and he's gone through several near bankruptcies with his companies. So, if it's a "little scary" to Elon that means it's going to be terrifying to analysts and investors. Again, this is debatable and it's just my take. Tesla, at this size, really needs a good chunk of cash in the bank because they are a capital-dependent business and can be exposed to additional risk if lending markets freeze up in case of a recession. If there is a recession next year, and Tesla is down to their last $300M in cash, and they're forced to raise money but the markets are in a severe downturn, it could get very very nasty. We're talking about possible double digit stock price (ie., a recession could sink TSLA stock price by 30-40% or more, and Tesla's precarious cash position could sink it another 20%). This is something that should be avoided, and that's why a capital raise really isn't "optional" but it is "needed". With Tesla, they really shouldn't drop their cash balance lower than $2 billion, or else that's just entering a place of precarious cash position... especially for a company that's trying to sell roughly $15 billion in autos next year (ie., $10 billion in S/X and $5 billion in Model 3 assuming 100k cars at $50k asp due to earlier orders leaning toward performance/etc). Actually, I'd be more comfortable if Tesla didn't drop under $3 billion in cash at all next year. Now, I know others will disagree with me and that's fine. Ie., "Elon says Tesla will be fine, so they will be fine". But my question would be for a company that's selling $15 billion in autos (which is a capital intensive business), how much would cash in bank would you want that company to maintain especially in case there's a recession? And then, add on top of that a cushion for SCTY which, as I shared earlier, might burn some cash as well in 2017.
