Published on May 17th, 2018 | by Maarten Vinkhuyzen0
Tesla Cash Burn or Bonfire of the Analysts? — Tesla Bankwuptcy Explained, Part 3
May 17th, 2018 by Maarten Vinkhuyzen
How did Tesla get into this hopeless situation?
The short answer: “It did not.”
The long answer is in 3 articles.
The first one examined the problems 450,000 Tesla Model 3 reservations created.
The second one gave a long look at the profitability of Tesla products.
This third one finishes with the media madness about “Tesla Cash Burn.”
Cash burn is a derogatory and inflammatory term that is insulting to every serious business that is accused of it. The amount Tesla supposedly has “burned” is staggering, but it is not an accounting term, and if you do search for it, many experts will give you different numbers for Tesla’s amount.
The term stems from the times of the dot-com bubble. There were the startups that spent all the venture capital they raised or, worse, the money from their IPO on fast cars and “sex, drugs, and rock-and-roll” — startups like pets.com that did not have a solid business plan or much commercial sense. Some analysts even thought that a high “burn rate” was a sign of possible future profitability. They did not recognize the bonfire of investors’ money.
This is also the time that Elon Musk started his first internet company (Zip2.com). With the millions he earned from that, he started his second internet company (x.com), which merged into PayPal. At the end of the dot.com bubble, Elon Musk was worth over $150 million. He was an example of an entrepreneur who knew how to not burn money but make money. The third company he started was SpaceX, also not an example of a failed company. His stake in SpaceX could be worth more than his stake in Tesla.
Why, then, is Tesla accused of a huge “cash burn,” suggesting irresponsible financial management?
Part of it is coming from the short trolls, those that have been predicting Tesla’s fall from grace, its bankwuptcy, for many years. Seeking Alpha is their home base in the media world and the place you’ll find the most staggering numbers for the amount Tesla has “burned.” Another part is simple clickbait and making fun of someone “at the top” who looks to be in trouble. An example of this seems to be a recent article by Dana Hull and Hannah Recht on Bloomberg, “Tesla Doesn’t Burn Fuel, It Burns Cash.” This is a perfect example, by the way, of the mistakes journalists make, reasoning by analogy instead of looking at fundamentals and “first principles” — as often pointed out by Elon Musk.
There is an old way to find out what is happening — just follow the money. That is difficult to do with a complex company like Tesla. To help understand what is happening and what money goes where, I made a simplified model of the company. To understand the rest of this article, it is advised that you read it.
In my model, there is a separate company for every product or activity of Tesla. Each separate company gets money from investors and/or other Tesla companies.
The term “cash burn” suggest a bonfire producing only smoke and ashes. Like the internet startups from the Dot-Com bubble that flamed out in 1 or 2 years. But in my model, I made it clearly visible that Tesla spends money on future products and revenue streams. That is not money going up in smoke, but smartly investing the money — the way to become first a millionaire and then a billionaire, like Elon Musk has done via a handful of companies.
I made the period without revenue orange in the pictures, because that is the period when confused people think there is cash being burnt, but all the cash in those orange periods was spent to create future revenues, revenues much larger than the cash required up front.
To understand this, we had to follow the money, and I made each money source and target separately visible. It is clear that the concept of cash burn does not apply here, even if we can find what it means.
The confusing thing about cash burn is that it is not an accounting entity. As an example, here is the Condensed Consolidated Statement of Cash Flows of Tesla’s first quarter:
The amounts highlighted in yellow are reported as “cash burn” by different self-proclaimed specialists on different sites and financial reporting outlets, even Forbes and Bloomberg. That is, each amount can be reported as such, or each combination of 2, or 3, or 4, or all 5 numbers can be deemed the “cash burn.”
Consolidated, they are large numbers, and scary for those who don’t look at the details of the company. And it is now time to bring the expenditures, aimed at creating future revenue streams, within the capacity of the company’s cash flow. But before Tesla could start to live within its means, it did have to grow to this level of scale. Otherwise growth would have been much slower.
In accounting, every line item on the above cash flow sheet is well defined. For a financial reporter, it should be easy to write a coherent piece about those numbers and the risks they can expose. There is no need to use non-professional language that belongs in the yellow press. Why would respected publications join the denizens of Seeking Alpha in such behavior?
It does attract readers, but it also tarnishes the reputation of such journalists. Dana Hull did have a good reputation, but she will be remembered by this hit piece by many readers of this and other clean-future-friendly sites.
Was this single hit piece worth tarnishing her reputation?