Tesla deserves an A for its financial management


Now that Tesla is considering joining the “payments club”, i.e. these companies
who pay dividends and redeem their shares – it’s time to evaluate
financial management of the company. And despite the massive decline of its
share price this year, Tesla scores high on it teacherit is
test. Musk should be congratulated for being able to think
on redemptions at this stage. When it comes to its finances, Tesla is a
straight A student.

It’s hard to believe Tesla is even considering a stock buyback. It feels like yesterday that Tesla desperately needed the cash. In 2017, Tesla burned $1.4 billion in the last quarter of the year. A witty headline from Bloomberg said it all: “Tesla doesn’t burn fuel, it burns money.”

But things have changed. Tesla hit a nadir in 2017, with a net loss of $2.2 billion, which grew to a net profit of $721 million in 2020 and $5.5 billion in 2021. And while the numbers annuals are not yet available for 2022, Tesla reported net income of more than $5.5 billion in the first six months of 2022, topping its revenue for all of 2021. Tesla’s net income growth was driven by its ability to scale up operations, primarily by ramping up production of Tesla’s best-selling Model 3. Auto sales grew from $8.5 billion in 2017 to $19.4 billion in 2019 and at $44.1 billion in 2021. And despite capital expenditures of over $6.0 billion, Tesla had free cash flow of over $3.5 billion in 2021.

In 2018, investors were concerned about Tesla’s large debt load, which at the time stood at around $12.0 billion in outstanding debt. But Tesla was able to turn its cash burn into cash rotation, then use the cash to pay off its highest-earning debt. For example, in 2021, Tesla redeemed $1.8 billion in aggregate principal of the 2025 Notes (seven-year bonds issued in August 2017 that yielded 5.3%). As a result, by the end of 2021, Tesla’s debt had fallen to $6.8 billion, while its cash had jumped to $17.6 billion! In fact, Tesla’s net debt – i.e. its total debt minus cash – is negative at -$10.7 billion, which means that Tesla can pay its debt in full and more than ten billion dollars still remains on its balance sheet: more than enough for a major share buyback.

Tesla made sound financial decisions early on. Beginning in 2013, Tesla financed its expansion and growth using convertible debt or bonds that can then be converted into common stock if the stock price appreciates enough. It issued $600 million in convertible bonds in 2013, $2 billion in 2014, $850 million in 2017 and another $1.6 billion in 2019. At the time, Tesla was the headliner convertible bonds and was able to get away with offering its investors a very low coupon. For example, its five-year convertible bond issued in February 2014 attracted investors with a coupon as low as 0.25%! Investors accepted these ultra-low coupon rates because they were attracted by the possibility of converting the bonds into stocks if Tesla’s stock price appreciated sufficiently. Unfortunately, the holders of the convertible bond with a coupon of 0.25% were unlucky: they saw their bonds mature when Tesla’s stock price fell well below the price of conversion of $359.87. But it all worked out well for Tesla, which was able to raise capital at just 0.25% without needing to dilute its equity.

Tesla also used unconventional strategies to improve its liquidity. By taking deposits from customers who ordered mostly Model 3s, Tesla was able to monetize the patience and kindness of its customers. These deposits, which amounted to $925 million at the end of 2021, serve as interest-free loans, allowing Tesla to kill two birds with one stone: improve its liquidity while helping to strengthen the commitments of loyal Tesla fans. And in recent years, Tesla has used innovative financing such as automotive asset-backed notes. These are bonds secured by the fleet of Tesla Model 3, Model S and Model X vehicles under lease. Due to the security provided by leases and other credit enhancements, Tesla was able to get away with paying a very low yield of 0.56% on its oldest secured note.

Tesla faces growing competition in the electric vehicle space, which will likely erode its margins, and the risk of a recession looms over all automakers. But Tesla is in a strong financial position, with a history of financial acumen and a proven track record. Apple made its first stock repurchase in March 2012, nearly 32 years after its initial public offering (IPO) in December 1980. Tesla had its IPO in June 2010 and plans to repurchase its shares just twelve years later . Tesla’s strong cash position and relatively low debt has earned the company a credit rating upgrade to BBB from the S&P, but its rating is expected to be even higher. Tesla gets a very solid A for financial management, at least in my test.


This article originally appeared in Forbes.


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