In 2016, Tesla (TSLA -3.59%) plans to spend less -- specifically when it comes to capital expenditures, or CapEx. For investors, this is a noteworthy move. Pairing the company's recent achievement of generating positive cash flow from its core operations with the electric-car company's expectations for 58% to 78% year-over-year growth in deliveries during 2016, the narrative surrounding Tesla's cash flow may quickly turn positive.
Tesla production. Image source: Tesla Motors.
Cash is king
"My mandate from Elon is clear: cash is king," said Tesla's new CFO Jason Wheeler, who previously served as vice president of finance at Alphabet. "There's some real steps we're taking as a company to get ourselves to net cash flow positive for the year."
He went on to explain that the most important step toward net cash flow positive is Tesla's plan to spend less on CapEx during 2016 than it did in 2015. Specifically, Tesla plans to spend $1.5 billion on capital expenditures -- down from $1.6 billion in 2015. Planned investments for the year include equipment to support cell production at the Gigafactory, installation of Model 3 vehicle production machinery, 80 new retail locations and service centers, and 300 new Supercharger locations.
Reducing CapEx in a year in which Tesla expects to grow vehicle sales by 58% to 78% is definitely impressive. But what's perhaps even more notable is that the company also plans to become net cash flow positive for the the full year. To be fair, however, Tesla only expects to be net cash flow positive with the benefit of a draw from its $1 billion asset-backed line, or ABL.
Reducing risk of significant share dilution
Achieving net cash flow positive with the help of an ABL is a considerable improvement from the company's situation in prior years. In previous years, Tesla frequently needed to raise capital by issuing new shares -- a move that diluted shareholder ownership. Consider Tesla's offering of more than $500 million worth of additional shares last year.
While the ABL will certainly help, the company also importantly expects its cash flow to benefit from improved operating leverage and continued positive cash flow from core operations -- great signs the company is moving toward regular profitability.
If things go according to management's plans, Tesla's improving financial situation should also begin to materialize on Tesla's income statement as the year goes on. Indeed, the company expects to achieve non-GAAP profitability for the full year, and report a GAAP profit for the fourth quarter of 2016.
Until Tesla actually begins to report regular profits and consistently generate positive cash flow, investors should file the company's goals for cash flow as nothing more than what they are: aspirations. And aspirations don't erase the risk that the automaker may be required to significantly dilute shares over time to compete in the highly competitive and capital intensive auto market if its aspirations turn out to be too optimistic. Investors are going to need to see some evidence -- a track record of profitability.
It would probably be worthwhile for Tesla investors to check in on the company each quarter throughout 2016 to see whether or not it sticks to its plan to spend less on CapEx, and whether it truly benefits from greater operating leverage.
