Since some folks seem eager for Tesla to be spending all of its cash, I wanted to share a thought.
It takes cash to run a company. Cash in their bank account is not like cash in your account or mine. They use cash to run the business day to day to day and week to week, and this is especially impactful when you have a company that’s going to be as large as Tesla.
Let’s talk about their quarterly inventory waves and make some assumptions:
- Let’s say they sell half their volume in the last few weeks of the quarter.
- Oversimplified, let’s translate this into half their quarterly volume in cars that need to be built before they’re sold.
- This inventory will be sold by the end of the quarter.
Okay, now the math assuming 500k cars per year:
- 500k cars / 12 months * 1.5 months / half quarter = 62.5k cars to be sold in the last weeks of the quarter.
- 62.5k cars * $40k cost to build the car = $2.5 billion
Say at the beginning of the quarter they have $8 billion in the bank. Half way through the quarter, this starts to convert to inventory that will be sold in the last weeks of the quarter.
The nadir of their account balance is $6.5 billion, with $2.5 billion sitting in cars waiting to be sold. (While it’s not truly this simple, see example caveats below, I think the concept still holds.)
They’re using over 1/3 of their cash balance just to build cars for the quarter – to fund their ongoing operations. Sure that money comes back at the end of the quarter, but they needed to spend it in the interim to build cars – hence it takes money to make money.
If you scale to 3 million cars per year, this cash requirement now because 6x as larger, or $15 billion.
Now, you can start talking about accounts receivable and accounts payable and net terms (customers paying you faster than you have to pay your suppliers), but I don’t think it changes the fact that you want and need a cash buffer to run a business.
I wouldn’t be so hasty to spend cash if you want for Tesla to continue to grow – they’ll need more and more of it to fund not only their growth (e.g., build factories), but they’ll also need more and more cash to fund their day to day operations as they get larger and larger. This is all good stuff, just don’t be in a rush to get rid of it
Same goes for another offering. Why so eager to sell more of the company? I think the cash would be helpful (more will be needed as Tesla grows), but again Elon has stated himself that growth will soon (already?) start to be constrained by their ability to hire good engineers. I’m not at all surprised by this – there are a lot of smart people out there, but that’s different than good engineers, which is also different than finding them, recruiting them, and getting them fully effective.
In the coming years Tesla will continue to increase their cash balance as they continue to sell cars. Will it be too much cash? Not for awhile in my eyes.
Do they need more cash right now? It doesn’t appear that way to me either. Having said that, who knows what Elon has in store for us, and isn’t that part of the fun?