Tesla Inc (Nasdaq: TSLA) has taken a lot of heat for its ugly balance sheet, its aggressive cash burn and its string of equity fundraising rounds. However, one Wall Street analyst says Tesla has a brighter financial future right around the corner in 2018.
According to Morgan Stanley analyst Adam Jonas, Tesla’s cash flow situation should dramatically improve in the first half of 2018 as it ramps up its Model 3 deliveries. Tesla has been burning through more than $1 billion of cash per quarter, but Jonas says the very nature of Tesla’s accounting suggests cash burn pressure may soon be abating.
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Tesla collects payments from its customers much faster than it doles out payments to suppliers, a process which can be delayed by up to 90 days. Jonas says this dynamic should relieve some pressure on Tesla’s balance sheet in 2018.
“During times of fast production growth (as we’d expect through the first quarter of 2018), this can pull forward significant amounts of cash, which can serve to address much of the market’s concerns over near-term liquidity.” Jonas says.
While Jonas says the impact of this accounting phenomenon will be temporary, it couldn’t come at a more critical time for the company. Thanks to the cash pull-forward, Morgan Stanley is predicting Tesla’s cash burn will improve significantly in the first quarter of 2018 and the company will report a net positive free cash flow of $600 million in the second quarter.
Morgan Stanley is projecting Tesla will deliver 8,000 Model 3s in the first quarter, 24,000 in the second quarter, 32,000 in the third quarter and 46,000 in the fourth quarter of 2018. For the full year, the firm is projecting a net cash burn of $1.1 billion.
Jonas is cautious on Tesla stock given all the uncertainty surrounding the company as it ramps up Model 3 production. However, he says there is serious upside potential if Tesla successfully executes its strategy.
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“While the pace of the working capital improvement is largely temporary in nature, we believe the stock market will be forced to recognize the potential de-stressing of the balance sheet, which, when combined with larger numbers of the Model 3 in the hands of customers and [original equipment manufacturers] can drive a very sharp upward move in the equity price,” Jonas says.
Morgan Stanley has an “equal-weight” rating and $379 price target for Tesla stock.
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Tesla Inc (TSLA) Needs a Good 2018 to Relieve Cash Burn originally appeared on usnews.com
