Tesla’s Growth And Profit Paradox

One of Tesla’s (TSLA) main criticisms since the company turned public eight years ago in July 2010 is its inability to maintain a positive cash flow. Since then, Tesla has had only four positive cash flow quarters which investors have reasonably seen as an issue. Obviously in order for a company to survive, they need to be able to generate profits, otherwise they will run out of money. However, an idea that the market seems to forget is that Tesla was founded in 2003 and only started general production of their first car – the Tesla Roadster – in 2008. This is a company that has only been producing their product for 10 years. Companies such as Tesla need time to grow before they can reach their full potential. To add to this, growing is expensive. A rapid growth phase often does not yield immediate profits, but for a company like Tesla, with an established product, rapid growth is exactly what the company needs. Throughout this article I will lay the groundwork for a concept that could allow Tesla to thrive long term, although it may suffer short-term hits. The plan is to forego creating a quarterly profit, but rather invest as much capital as possible to expand the company. This will be risky, there’s no denying that, but if it works, Tesla could be at the level of production of other top manufacturers. This is exactly what they need if they want to be a mass market brand.

What Needs to be Done
In order for Tesla to survive, it must stop being criticized for spending money, especially when it’s setting up the future success of the company. It’s more than understandable to criticize Tesla and question their ability to succeed when they are burning cash, but there’s a difference between spending and burning. Burning cash is certainly a type of spending, one Tesla has been all to familiar with in the past. The Model 3 assembly line being the most recent and damaging. SolarCity was different, as Tesla acquired it in order to expand and grow their business, yet they were still criticized for it. Cash can be spent in many ways and Tesla needs to prioritize their spending on the expansion of the company. A major factor that bulls are leaning on is Tesla’s ability to profit in the coming quarters. Using the final two quarters of 2018 to profit may not be such a bad thing, even if it is prioritized over expansion for that time. An important side of Tesla profiting could be as a “proof of concept” to gain confidence from outsiders which Tesla might need to rely on for funding. For this reason, until the end of 2018 Tesla should continue on Musk’s goal of profiting without raising any capital, but for Tesla’s future growth, they will need to raise more capital.

If Tesla can prove that it can profit with its current business and manufacturing model, analysts and investors will have more reason to believe that profits will come from expansion. Investor and analyst confidence is very important as it will help finance Tesla’s future projects. The expansion will allow Tesla to execute at a higher rate and efficiency. With more vehicles being produced, Tesla will be able to reduce wait time for customers and increase profit margins. This is a big deal because there have been many Model 3 reservation holders that have withdrawn their orders because of the long wait. Even if the customer prefers the Model 3 over a competitor’s car, many might opt to take the competitor’s car instead because it is available.

A new factory in the US would help Tesla immensely, but they would need more than just that. The production of their solar products needs dramatic ramp up as well and another factory could manage that pretty well. Overall, two new car manufacturing factories should be built, one in Europe and one in the US, both modeled after the Shanghai factory to produce both batteries and cars. In addition to the car factories, one new factory producing solar products in the US also would be necessary. Lastly, Tesla should be more open to make acquisitions if they believe that it will help them in the future. This article will discuss why Tesla needs to put aside short-term profit and focus more on their expansion.

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