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Tesla Inc.'s Capital Expenditures Could Soar Nearly 200% This Year

By Daniel Sparks - Mar 18, 2017 at 1:36PM

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Launching its first high-volume, lower-cost electric car will come at a steep cost.

On Thursday, electric-car company Tesla (TSLA -3.30%) followed through on CEO Elon Musk's recent commentary regarding a likely capital raise to reduce risk associated with rapidly increasing spending for its ambitious growth plans. Tesla said it would raise about $1.15 billion.

As Tesla raises cash in preparation for a big jump in spending, it's a good time to take a look at how much the company's capital expenditures could go up this year.

Tesla vehicle production at the company's factory in Fremont, California.

Tesla vehicle production. Image source: Author.

Big plans, lots of cash

It's no surprise that Tesla needs a lot of capital. The company has some very ambitious plans for Model 3. With the help of a higher-volume, lower-priced Model 3, management expects its annualized production to increase from about 100,000 units today to a whopping 500,000 units in 2018.

But exactly how much cash will Tesla need? A lot more than it did last year. Here's what we know.

With plans to begin production of its upcoming Model 3 in July, Tesla expects capital spending during the first half of the year to rise sharply as it lays the groundwork for production. Management guided for $2 billion to $2.5 billion in capital expenditures in the first half of the year alone -- an amount that easily trumps the $1.3 billion it spent during the entire year of 2016 on capital expenditures.

What about the second half of the year? While Tesla didn't provide guidance for expected capital expenditures then, since management is focused primarily on initial investments required to get its upcoming Model 3 to volume production, Musk did recently imply that Tesla anticipates spending to come down during the second half of the year.

Here's what he said during the fourth-quarter earnings call:

I mean, there's obviously going to be ... incremental investment to go from 5,000 cars a week to 10,000 cars a week, but it's going to be a lot less than getting to 5,000 cars a week in the first place. We don't know exactly what that's going to be except I'm confident it will be less ...

Musk went on to conclude he wouldn't expect capital spending in the second half of the year to exceed 70% of its spending during the first half. Therefore, assuming spending in the second half of the year maxes out at about 70% of spending during the first half, investors can arrive at a ballpark estimate for Tesla's total capital spending in 2017: approximately $3.825 billion -- up an incredible 194% compared to capital expenditures in 2016.

Gigafactory and Model 3 are Tesla's biggest investments

How will this spending be allocated? Unsurprisingly, mostly on investments related to ramping up production of Model 3 (and batteries for the Model 3 at the Gigafactory).

Tesla's under-construction Gigafactory as of Jan. 3

Tesla Gigafactory as of Jan. 3. Image source: Tesla

As CFO Jason Wheeler explained during Tesla's fourth-quarter earnings call:

So we don't break down and we don't disclose the specifics here, but obviously, Gigafactory and Model 3 are going to be the biggest investments. We've also got CapEx investments in equipment and tooling related to Model 3. But then also, there's going to be a piece in CapEx on building out our service and our retail infrastructure as well and the Supercharger network. So it's the usual suspects.

So, while it does expect Model 3 to drive significant growth, Tesla won't be escaping the capital-intensive nature of the auto business. Investors should keep an eye on the company's spending, looking for it to pay off with outsized growth in the business.

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