Model S. Image source: Tesla Motors.
Electric-car maker Tesla Motors (TSLA 0.44%) has some ambitious growth plans on the horizon. By the end of 2018, Tesla wants to:
- Acquire SolarCity and integrate the solar-panel business under Tesla's brand and stores.
- Unveil a semi and vehicle for high-passenger-density urban transport.
- Begin delivering Model 3.
- Develop an autonomous driving system.
- Increase vehicle production from 50,000 vehicles annually in 2015 to 500,000 annually.
- Ramp up Model X production to rival that of Model S.
- Step up its nascent energy storage business.
- Begin manufacturing batteries for all of its vehicles at its new Gigafactory while simultaneously building the factory itself.
Unsurprisingly, Tesla will need to spend billions of dollars to move toward these goals. Indeed, the company plans to do exactly this.
Here comes the outlay
Going into 2016, Tesla surprisingly expected its capital expenditures to actually decrease compared to its $1.6 billion in 2015. Management expected 2015 capital expenditures of $1.5 billion. But this plan went out the window when Tesla witnessed higher-than-expected demand for its Model 3, which prompted Tesla to move its target for achieving a 500,000 vehicle annual build rate two years earlier, from 2020 to 2018.
With its revised production ramp-up in mind, Tesla now expects to spend much more money in 2016. Management explained in the company's first-quarter shareholder letter:
Given our plans to advance our 500,000 total unit build plan, essentially doubling the prior growth plan, we are reevaluating our level of capital expenditures, but expect it will be about 50% higher than our previous guidance of $1.5 billion for 2016. Naturally, this will impact our ability to be net cash flow positive for the year, but given the demand for Model 3, investing to meet that demand is the best long-term decision for Tesla.
Interestingly, though, the bulk of Tesla's spending is set to take place in the last six months of 2016. By the end of Q2, Tesla's year-to-date capital expenditures only amounted to $512 million -- down from its $831 million in capital expenditures in the year-ago trailing-six-month period.
But don't let Tesla's capital spend in the first half the year fool you, management expects second-half capital spend to jump about 340% compared to the first half.
"Despite the disciplined pace of capital spending in the first half of this year," Tesla explained in its second-quarter shareholder letter, "we still expect to invest about $2.25 billion in capital expenditures in 2016, in support of our accelerated production plan for Model 3."
Model 3 prototype. Image source: Tesla Motors.
Given just how important Tesla's Model 3 is to the company's future, and how 373,000 deposit-backed reservations within two weeks of the vehicle's unveiling have demonstrated such an extraordinary interest in Tesla vehicles at a lower price point, the main concern at this point may be whether or not the company can spend money fast enough to capture the opportunity in front of it -- not whether it is about to spend too much money. It's a well-known fact that the auto industry is one of the most capital-intensive industries there is.
The huge capital requirements required for running an auto business combined with Tesla's extraordinary plans for growth leave the company in a tough position. Management will need to expertly balance unprecedented growth in capital expenditures and ruthless capital allocation discipline in order to ensure it's getting the biggest bang for its buck. On the other side of the coin, Tesla will need to ensure it actually has the capital to spend as it executes on its growth plans. Fortunately, Tesla currently boasts a $3.25 billion cash position after a $1.7 billion equity raise earlier this year, but investors shouldn't be surprised if the automaker needs to raise even more capital.
