Another day, another Tesla Motors (NASDAQ:TSLA) short thesis that doesn't quite stand up to scrutiny.
Over on Seeking Alpha, author Boris Marjanovic is calling Tesla "a sucker's bet." Marjanovic discloses that he has a short position, and his thesis is based in part on the fact that there have been no successful car companies started in the last 100 years or so, and Tesla's valuation looks a little bit stretched. But Marjanovic also believes that Tesla is set to run out of cash in as little as six months. That part of his argument is deeply flawed. Here's why.
A numbers game
According to Marjanovic's "survivability math," Tesla can only sustain itself for another six to eight months. He arrives at this timeline based on Tesla's current cash position of $1.2 billion, and an estimated monthly cash burn rate of $150 million to $200 million. Marjanovic even goes as far as to assert that "bankruptcy is inevitable."
Marjanovic notes that Tesla had free cash flow of negative $2.2 billion last year, which is true. Dividing this out translates into a monthly cash burn rate of approximately $180 million per month; but that was last year. Merely extrapolating this forward without additional context is inappropriate. Instead, let's look at that context.
Free cash flow is defined as operating cash flow minus capital expenditures. Tesla's reported operating cash flow last year was negative $524 million, and the company spent about $1.6 billion in capital expenditures. For 2016, Tesla is guiding to vehicle deliveries of 80,000 to 90,000, which represents accelerated growth compared to 2015. Model X production is now ramping up in a big way, even if it took a few months to work out some early production kinks.
Additionally, capital expenditures for 2016 are expected to decline modestly, and Tesla is planning on spending $1.5 billion without needing to raise external capital. Tesla plans on funding these capital expenditures with its asset-based credit line that's secured by finished good inventory -- mostly vehicles that are already purchased and simply in transit to customers.
Simply put, the two components of free cash flow will both improve this year -- operating cash flow increases and capital expenditures decrease -- rendering Marjanovic's oversimplified monthly cash burn estimate completely irrelevant.
To GAAP or to non-GAAP, that is the question
Keep in mind that Tesla also focuses on its non-GAAP "core operating cash flow," which adjusts for lease accounting due to its resale value guarantee. This adjustment effectively moves cash flow from the financing section of its cash flow statement to the operating section. Whether or not this approach better represents the economic reality of Tesla's business is an active debate, but I believe it does because this is cash related to vehicle sales that Tesla receives from its leasing partners.
This is mostly an accounting construct that doesn't actually affect total cash flow (including operating, investing, and financing). From Tesla's 10-K:
Vehicle deliveries with the resale value guarantee do not impact our near-term cash flows and liquidity, since we receive the full amount of cash for the vehicle sales price at delivery. However, this program requires the deferral of revenues and costs into future periods as they are considered leases for accounting purposes.
In no uncertain terms, Tesla's cash flow is an incredibly important factor to watch. In fact, I personally believe it's one of the two most critical operating metrics for the young automaker, along with vehicle deliveries. Cash flow is the key for Tesla to operate sustainably while expanding manufacturing capacity. Marjanovic's estimates are just superficial.
Besides, don't just take my word for it: Elon Musk expects Tesla to be core operating cash flow positive in 2016.
The road ahead
To be clear, I welcome shorts most of the time, provided that they have a solid argument. Generally, shorts play a valuable role in price discovery while offering a counterbalancing perspective on a company's prospects.
The concerns about Tesla's valuation are more valid, but also more abstract, because it's extremely difficult to apply comparable peer analysis due to the considerable time lag between Tesla and incumbent OEMs. I lose plenty of sleep over Tesla's valuation because it does amplify the execution risks in the years ahead -- and there will be plenty of those.
But only time will tell if Tesla can live up to its lofty valuation. Not Marjanovic.