Tesla CEO Elon Musk recently referred to his company’s two new automotive plants as “gigantic money furnaces.”
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How many cars Tesla would deliver in the second quarter was a big question for bulls and bears in recent weeks. No deliveries are known. The next question to debate: What exactly is a money furnace?
That’s how Tesla (ticker: TSLA) CEO Elon Musk recently described his company’s two new manufacturing facilities in Austin, Texas and Berlin, Germany. The impact of a money furnace on quarterly cash flow is tough to fathom.
Tesla delivered about 255,000 vehicles in the second quarter of 2022, down from about 310,000 in the first quarter.
The result isn’t so bad given what’s gone on. Tesla’s most productive plant in China was hamstrung for months because of Covid restrictions implemented to help Chinese officials control rising infections. The lockdowns impacted production for the entire auto industry.
The delivery results shouldn’t be a big plus or minus for Tesla stock. The most current analysts delivery estimates centered around the 250,000 level. The number has something for bulls and bears.
Bulls will hang onto the statement from Tesla in its delivery release that June was the company’s best month for production ever. Bears will start to question second-quarter cash flow, given sequential the drop in sales.
Wall Street expects Tesla to generate about $745 million in free cash flow in the second quarter, down from $2.2 billion generated in the first quarter of 2022. The $745 million figure might be high.
“Expectations are not aligned with the impact lower deliveries will have on working capital,” wrote New Street Research analyst Pierre Ferragu in a Saturday report. Tesla tends to generate cash flow from the changes in receivables and payables when sales are growing. Ferragu, for his part, expects break even free cash flow results.
There are a couple of other challenges investors trying to project free cash flow are facing. “It doesn’t help that investors can only guess how such a sizable decline in China operations hurts Tesla’s profitability and cash flow,” wrote Bond Angle founder Vicki Bryan on Friday.
Bryan believes Tesla’s China plant accounts for the majority of the free cash flow the company generates. There are a few reasons analysts believe Chinese profitability is higher than profits generated in the U.S., including arcane deferred tax accounting as well as the positive impact the Chinese plant had on overall profit margins shortly after it started up. Exactly how much higher, as Bryan points out, is difficult to know. And with Q2 production disrupted mainly in China, the impact on cash flow might be bigger than investors expect.
Bryan also expressed concerned with Musk’s money furnaces in her report. “There should be like a giant roaring sound which is the sound of money on fire,” said Musk in a recent interview with the Tesla Owners of Silicon Valley Club. “Berlin and Austin are losing billions of dollars right now.”
Billions sounds troubling. Musk might have been speaking about annual-type losses, or he might have been talking about all the capital the company has sunk into the new plants before either has started to generate significant sales. Or Musk might have been being hyperbolic. Whatever Musk’s thinking, start-up losses are another thing for investors to wrestle with.
Tesla didn’t immediately respond to a request for comment about Musk’s statement.
Cash flow estimates have come in as delivery estimates fell from about 350,000 to 250,000. Investors find out if that is enough on Wednesday July 20, when the company reports second-quarter numbers after the close of trading.
As for the second half of 2022, production is expected to continue to ramp higher in the second half of 2022. Wall Street expects roughly 390,000 deliveries in the third quarter and 445,000 deliveries in the fourth quarter, putting the full year 2022 number at around 1.4 million units. That’s up about 50% from the roughly 936,000 vehicles delivered in 2021.
Tesla stock is down about 35% year to date, worse than the 20% and 29% comparable, respective declines of the S&P 500 and Nasdaq Composite. Its shares were off 1% in premarket trading Tuesday.
Write to Al Root at [email protected]
