Can Tesla Profitably Finance Its Aggressive Expansion Plans?

That is one of the main concerns about Tesla Motors' (NASDAQ: TSLA  ) growth story in an article published in Germany's Manager Magazin that made the rounds yesterday as the stock fell almost 6%. Tesla has aggressive plans to expand its Superchargers while simultaneously ramping up production. But will Tesla have all the cash it needs to make this happen?

A well-timed expansion
Tesla's aggressive Supercharger expansion is fundamental to the bullish case for Tesla stock. Not only will it provide extensive infrastructure for the company's Model S, but it also parades the company's enormous confidence that it will be able to bring its mass-market, lower-cost vehicle to market as early as 2016, and hopefully at least by 2017.

Expanding from just about 17 Superchargers earlier this year, Tesla plans to have a Supercharger station within driving range of 98% of the U.S. population and parts of Canada by 2015.

Planned Superchargers in U.S. and parts of Canada. Source: Tesla Motors.

Internationally, the company's plans are just as aggressive. A Sept. 10 press release reads: "By the end of 2014, 100 percent of the population of Germany, the Netherlands, Switzerland, Belgium, Austria, Denmark and Luxembourg will live within 320 km of a Supercharger station, with about 90 percent of the population in England, Wales and Sweden living within the same distance of a charging station."

Sure enough, Tesla is moving quickly. Before the above press release was published, Tesla already had Norway covered.

Interestingly, this massive expansion of infrastructure will be complete right before the 2016-2017 time frame the company laid out in a recent corporate presentation for the higher volume, lower price point, third-generation platform Tesla is planning to launch. The company's expansion plans, therefore, provide solid evidence that management sees a clear and fast path to this higher-volume vehicle. And it's on this confidence that the stock can trade at such high levels with such bullish, forward-looking numbers priced in.

A shortage of cash flow?
According to Manager Magazin, the Model S director of programs, Jerome Guillen, said that the development and expansion in Europe is Tesla's biggest challenge. When asked about what it will cost the company to build out this infrastructure, all Guillen had to say is that the company will "make sure that the expansion is cost-effective."

In the company's second-quarter earnings call, Tesla CFO Deepak Ahuja (as pointed out in this Business Insider article) had some more vague guidance: "We want to stay as close as we can to a free cash flow position... but that's not something we necessarily want to guide to. We're going to manage it... and spend the cap ex where we need to to ensure we're growing at the right pace."

Though Tesla seems to have a plan on how it will afford all of this aggressive expansion, it will be interesting to get an update on the company's progress in this area when it reports earnings on Nov. 5. It's certainly a hot issue. The Business Insider article eloquently sums up why it's a topic to watch: "This gets to the heart of the short thesis on the automaker's stock. Tesla bears say quarter after quarter that the company is burning through cash too quickly to build the infrastructure it wants, and make the improvements to supply chain that it needs."

What do you think? Are Model S sales enough to finance this aggressive expansion while the company is simultaneously ramping up production? Or will Tesla need to take on new debt or raise more capital by selling equity?

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Read/Post Comments (9) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On October 22, 2013, at 8:13 PM, weaponz wrote:

    Tesla charges 2k per car for superchargers. A supercharger costs 150-300k per station. That means every 75-150 cars pay for 1 supercharger station.

    Tesla sold almost 20,000 cars already. That is enough to pay for 200 superchargers.

    So yes Tesla has enough to make rapid expansions, the biggest delays are most likely in the paperwork.

  • Report this Comment On October 22, 2013, at 8:47 PM, SteveTG3 wrote:

    Daniel, at 50K Model S/X per year, Tesla will be bringing in about $300 million per year. At 100K per year, about $800 million per year.

    2014, 2015, should average at least 50K cars per year. That would fully pay for the expansion.

    2016 hitting 100K cars per year would more than pay for the expansion.

    Then there's the billion in cash they have right now. More than pays for the expansion.

    Then there's the SuperCharger cost 60KwH customers pay for.

    I read the Business Insider article. Either uninformed about Tesla or, well, I guess they could have their own reasons for what they put out.

  • Report this Comment On October 23, 2013, at 4:28 AM, jeffhre wrote:

    I find it interesting that so many can assign Tesla capital to it's allocated basis so far in the future. Remarkable. In any case Tesla does no advertising in it's marketing budgets, yet will have large structures with Tesla signs and logos on supercharging stations across the country. Where millions of travelers pass.

  • Report this Comment On October 23, 2013, at 7:24 AM, AdvanderMeer wrote:

    Assuming 25% gross margin on every Model S sold at an average of $80k, every additional Model S sold because of the availability of superchargers contributes $16k to fund a supercharger.

    If a Supercharger station costs $500k, 32 Model S's wil pay for one supercharger station and 1280 Model S's for all 40 Superchargers in Germany.

    In his speech he claims, 200 Model S'ses will be build for the german market every week in 2014. That means it will take just 6.5 weeks to cover the Superchargers.

  • Report this Comment On October 23, 2013, at 8:15 AM, drax7 wrote:

    Supercharger stations cost less than $200,000 per unit, not 500,000. Misinformation does not help.

  • Report this Comment On October 23, 2013, at 10:43 AM, damilkman wrote:

    No one can make a claim to the cost of the station because it is going to be variable. A four unit station in the middle of the desert of Arizona is going to cost a lot less then a 20 unit station in downtown Manhatten. A more accurate description of the cost is to divide the capex investment in the hardware that supports the charging component and divide by the number of units(cars) it can support at maximum capacity. There may be efficiencies that drive down unit cost for bigger footprints. But that should all be well known. One could take the total cost cross country or world and divide by capacity.

    Items like cost of real estate, cost of construction, taxes, etc are all going to be unique to the location.

    What I find much more interesting is what is the return on investment on the super charging stations? What if no one uses them and 99% are content to use their Tesla just for commuting? Ultimately the super charging stations are a cost center. Your building charging stations in the hope of selling more cars. So the other item then is to compare cost of building out the SC network plus projected opex cost verses number of units sold. In theory if SC stations are popular, locations will need to be upgraded. We could have a new kind of road rage as people get upset because someone decided to take a two hour lunch while their Tesla charged.

    Back to the return of investment I will give an example. There is only one projected SC station in Iowa. It is on I80. So it is there to faciliate someone needing to go east/west on I80. But if no one has a need to commute east to Chicago or West to Denver, or perhaps go on a road trip from the east uses it or those who use it were inclined to purchase a Tesla anyway, the SC station has brought no value. This may be an uncalcuable equation. So there will be some subjectivity to it.

    If you can figure those numbers out you have a better idea of the impact on the company for building out the charging network.

  • Report this Comment On October 23, 2013, at 7:35 PM, dlwatib wrote:

    No need to worry about the superchargers on I80 in Iowa going unused. That's a major East-West route across the country. You wouldn't worry about a TA TravelCenter truck stop going unused there would you? If the supercharger network is to be complete, then you must be able to get across the great state of Iowa. Enough said about that.

    What's important about the supercharger network is not how much each one gets used. Superchargers right now are free, so the less they are actually used the better, unless Tesla gets a kickback on the concessions, which they have not announced so far as I know.

    The superchargers are there to serve one purpose and one purpose only, and that is to address the range question in a convincing way and provide the value that the owner of a $70K+ car would expect. That's not to say that this asset cannot be made profitable in the future.

  • Report this Comment On October 24, 2013, at 10:01 AM, damilkman wrote:

    That is my point. If Super Chargers are not convincing additional buyers it is a burdensome cost center that just drags down profits. Though a SC station in Des Moines Iowa is probably going to be cheaper to build and maintain then Palo Alto. That is why I think it is good to know if possible the cost CAPEX and OPEX to the bottom line for constructing Super Charger stations. It may be free for the consumer, but not for the potential investor.

  • Report this Comment On October 26, 2013, at 2:00 PM, ffbj wrote:

    They are there so Musk can say things like: "You can drive free on sunlight forever."

    They are a great promotional tool and the fact that they are just there, even if you if never or rarely use use one, is nice. The cost? Well they got guys running the numbers and they think they can do it. As ever expansions costs money and I believe, that Tesla thinks, after all corporations are individuals, so cogito ergo sum, it needs to put peddle to the metal. Why quibble about wether they can afford it or not when the question is can they afford not to expand?

    Also in any discussion of expansion you should also include the stores and service centers which probably run your costs up pretty quickly.

    I think the superchargers are well worth the value they provide, and once constructed don't really cost much anymore.

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