Tesla surprised many industry analysts when it added a mention that it “doesn’t require an equity or debt raise this year” to its production and delivery report earlier this month.
Many of those industry analysts still don’t believe it, but CEO Elon Musk seems confident about it as he now adds that “Tesla will be profitable and cash flow positive” during the second half of the year.
Tesla being cash flow positive has been linked to the automaker achieving a production rate of 5,000 Model 3 vehicles per week.
The company has long made the investments required in its production line in order to achieve this production rate, but it has only been producing a fraction of its goal over the past few months, which is costly and weigh heavily on the company’s financials.
As of the end of fourth quarter 2017, the company had over $3.3 billion in cash and it was burning quickly through it as the revenue for the Model 3 didn’t compensate for the high cost of ramping up production.
The production certainly improved over the last quarter with Tesla exiting Q1 with a production rate of about 2,000 units per week and 8,180 Model 3 deliveries, but the company is still expected to have made a good dent in its cash reserve. We will have a better idea of it next month when Tesla releases its Q1 financial results.
But now Tesla is trying to bring the Model 3 to 5,000 units per week by the end of this quarter and if they achieve it, Tesla could start selling the vehicle with a positive gross margin and make the vehicle program profitable by Q3.
Musk seems confident about it early this morning when he tweeted this in response to a The Economist article about an analyst claiming that the electric automaker will need to raise over $2.5 billion by the end of the year:
Musk has previously said that he expects Tesla to be cash flow positive once they hit a production of 5,000 units per week, but that’s one of the clearest statements he has ever made about when he thinks Tesla will be profitable.
Even if you are not an investor or fan of the company, I think Tesla’s profitability is important for all EV enthusiasts.
The Model 3 program is already the largest in the world in terms of production volume, but Tesla also needs to prove it to be profitable in order to convince the industry of the electric future and put the last nail in the internal combustion engine’s coffin.
Once Tesla can prove that you can have a massive vehicle program with 250,000 to 500,000 units per year and be profitable, the industry will have to take notice and rethink their compliance car strategies.
While I think the profitability is important, I’m not so sure about the issue of raising money.
You will note that Musk said that he expects Tesla to not “need” to raise money. It’s important that Tesla shows that it doesn’t need to raise any to survive, but I think Tesla could raise more money anyway after that in order to accelerate its growth with new vehicle programs.
Maybe they will be able to finance that with money from the Model 3 program, but I think investors wouldn’t be mad at a moderate capital raise to bring Model Y, Tesla Semi, and the next-gen Roadster to production faster.
What do you think? Let us know in the comment section below.
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