Electric-car maker Tesla Motors (NASDAQ:TSLA) knows how to spend money. In fact, the company basically spends every dollar of gross profit that comes its way. Some have criticized this habit of leaving the company no net income. But investors following the company closely know that Tesla needs to spend heavily -- this is the only way it can capture the fast-growing demand for its vehicles. Going into 2015, Tesla doesn't plan to change its spending habits. This year, the company plans to spend a record $1.5 billion on capital expenditures. Here's what you need to know about Tesla's heavy spending.
Tesla's no-joke CapEx
As a percentage of revenue, Tesla outspends every major automaker on the planet -- by far. In 2014, General Motors sold 9.9 million vehicles, recording $156 billion in revenue. With Tesla only predicting to sell 55,000 vehicles in 2015, how could Tesla ever spend on levels even close to a peer so large? It begins with Tesla's impressive gross profit, which on a run-rate is equal to more than $1 billion, or an impressive 7.5% of GM's on about .5% of vehicle unit sales. Add in Tesla's expectations for sales to grow at 50% annually, and Tesla believes it can comfortably spend $1.5 billion on capital expenditures in 2015 and still report positive free cash flow by Q4.
Spending $1.5 billion on CapEx for a company as small as Tesla is quite a number, and a testament to Tesla's confidence in its ambition to capture future revenue growth. As a percentage of sales, Tesla's planned CapEx spending will be about six times GM's.
Where's the cash going?
For the most part, breakdown of CapEx spending in 2015 for Tesla will remain similar to its 2014 spending: investments in expanding production capacity, Model X development, Gigafactory construction, new stores and service centers, and aggressive Supercharger network growth. But one area that will likely receive increasingly more investment in 2015 is Tesla's upcoming Model 3, which Tesla says will begin deliveries in the second half of 2017.
Tesla said in its quarterly letter to shareholders that its new paint shop in its Fremont Factory "will also be flexible enough and have the capacity to paint Model 3 in the future." Almost certainly related, maker of high-tech automobile manufacturing paint shop and final assembly systems, Durr, reportedly recently received its largest robot order for application technology ever from Tesla earlier this year. Tesla's order, according to Finishing News, was for 100 paint robots, 48 handling robots, and 26 sealing robots, enough to support capacity for 500,000 bodies per year.
A paint shop that handles 500,000 bodies per year fits the bill for Tesla's plans to sell 500,000 cars per year by 2020. Tesla expects its 2017 launch of Model 3 to play a large role in the sales growth that gets the company to a half of a million vehicles per year.
A larger portion of CapEx in 2015 will likely go toward Tesla's Gigafactory, where Tesla will build batteries in partnership with Panasonic. The factory will require a total investment of $5 billion of which about $2 billion will be provided by Tesla and the rest will come from Gigafactory partners -- primarily Panasonic.
Tesla says its Gigafactory is ahead of its initial schedule for a timeframe for first cell production of 2016 to 2017, ready instead to begin production in 2016. The company has emphasized that it's important the Model 3 launch won't be far behind the Gigafactory's first cell production, and vice versa. If either project is delayed, Tesla could put itself in a tough position where it either has extra production capacity too early or a new vehicle with not enough capacity.
Investors should be happy to see Tesla investing heavily. Not only has Tesla, so far, proven to convert big spending into fast revenue growth, but it is also clear that demand for its vehicles is substantial. Even as Tesla continues to resist any advertising spending, sales of its premium-priced Model S continue to rise rapidly, up 41% in 2014. And its Model X SUV has 20,000 cash-backed orders, net of cancellations, on Tesla's books.