For fast-growing companies, often the first catalyst toward business model validation is when the operations turn the corner from cash burning to cash generating. This can often shift the public sentiment from negative skepticism to positive optimism. Look for TesIa Motors (NASDAQ:TSLA), SolarCity (NASDAQ: SCTY), and FuelCell Energy (NASDAQ:FCEL) to report positive cash flows in their reports in the coming weeks.
The cash flow effect
Positive cash flow generation has three possible effects. One, companies may no longer need to raise capital by diluting shareholders just to keep their head above water. Two, any capital raising it does execute will be done with the expectation of genuinely further increasing cash flows and ultimately returning more value to shareholders. Three, it puts companies in a position of strength, rather than weakness, when negotiating terms.
A company that has more cash coming in the door then going out means it's more likely to be able to service debt financing, and thus, will realize better terms. If future financing is done in the form of equity, investors are less likely to punish stock prices -- as is often seen with equity raises. Higher stock prices viewed more favorably means less dilution and ultimately higher fundamental shareholder value.
SolarCity forecasted in its last earnings release being "consistently net cash flow positive on a go-forward basis" beginning with the fiscal fourth quarter. SolarCity confirmed the same in its conference call, adding the phrase "maintain cash flow rates." SolarCity has since raised its top-line guidance. Both of these should tell you that achieving cash flow positive status should be a walk in the park and also not a one-quarter wonder. SolarCity reports Nov. 6.
TesIa one-upped SolarCity in its forecasts. In its earnings release it guided for non-GAAP profitability on top of being cash flow positive. This means TesIa will be profitable even when factoring in noncash expenses such as depreciation and accumulated interest and implies the cash flow positive amounts will be a material notch above breakeven.
Tesla's CFO Deepak Ahuja may have let something slip in its conference call. During the Q&A he stated that "some" of the positive cash flow generation will be offset by capital expenditures. "Some" also means "not all." Cash flow from operations must be very high in order for it to also cover all capital expenditures and still have more leftover considering capital expenditures have been running at anywhere from $40 million to $85 million per quarter the last four quarters. TesIa reports Nov. 5.
FuelCell Energy is a bit different than SolarCity and TesIa in that it didn't give a specific time frame target for cash flow positive. Instead, in its conference call, FuelCell Energy forecast positive cash flow -- which it refers to as earnings before interest, depreciation, taxes, and amortization -- when its annual production volumes increase to approximately 80 megawatts. To put this in perspective, two quarters ago it had 56 megawatts of production.
Last quarter it had 70 megawatts, an increase of 25%. FuelCell Energy stated further production increases would depend on backlog. Since backlog at the end of last quarter equaled 7 times its revenues ($381 million vs. $53.7 million), it's safe to say this backlog supports another 14% production increase. FuelCell Energy will report around mid-December.
Please note that while being cash flow positive is an excellent start, it's unlikely that the cash generated in the coming reports will be high enough to justify the seemingly lofty market cap valuations of any of the three companies. All three are speculative companies trading at valuations that are based mostly on sentiment since their operations are too young to use any financial ratios in an attempt to properly value their futures.
Foolish final thoughts
Watch for three things with TesIa, SolarCity, and FuelCell Energy. First, see if they actually report cash flow positive results. If they don't report what they forecast in the short term, it may be difficult to trust their forecasts long term. Next, take note of how much cash flow they report and compare it to the previous quarters. Is the amount meaningful or just a token above breakeven, and how does it compare to previous quarters?
Large positive change might suggest a meaningful positive increase going forward. Finally, pay close attention to its forecasts over the next year. You may need to get this information from the conference calls. If it's not mentioned in either the individual company's earnings report or its conference call then tread with caution. If it is in there, you could have a winner on your hands.
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