Why Tesla Is Dumb to Think It Can Avoid a Capital Raise This Year

Another day, another Tesla Inc. (TSLA) promise that probably won't be kept.

The electric carmaker announced this week that it is "laying the groundwork for Q3 to have the long-sought ideal combination of high volume, good gross margin and strong positive operating cash flow. As a result, Tesla does not require an equity or debt raise this year, apart from standard credit lines."

But given Tesla's track record, this is likely another empty promise. Tesla has fallen short time and again, habitually missing production and launch goals since its inception in 2003. And aside from Tesla's history of shortcomings, the financial picture is bleak. Margins are under pressure and cash continues to fly out the back door.

"It's ludicrous," Tesla expert Anton Wahlman said of the notion that the company won't have to raise debt or equity this year.

Margins will likely be tightened further as Tesla has slashed deliveries of its more expensive Model S and Model X vehicles by 22.2% sequentially to reportedly free up capacity for Model 3 production. The average selling price for the Model X is more than 140% that of the Model 3, and there isn't much yet indicating profit margins on the Model 3 will be as high as the S or X.

Meanwhile, debt coming due in the next 18 months totals about $1.8 billion. Seeing as Tesla is a long way away from being cash flow positive, it will need to satisfy this debt somehow.

Tesla CEO Elon Musk's April Fool's Day Twitter post.

"Most people who are long the stock don't even try to defend that the company is entering into a debt crunch," said Wahlman. "You have to look at how on God's green earth they're going to finance these things and with what."

Other Tesla watchers agree.

Jefferies analyst Philippe Houchois tells TheStreet's Chris Nolter that to fund production increases, Tesla is likely going to need to raise $2.5 billion to $3 billion in equity, diluting shareholders by 6% to 7%.

Efraim Levy of CFRA Research suggests Tesla could have to raise $2 billion to $3 billion to combat what is expected to be as much as $3.35 billion in cash burn this year. Levy forecasts that if Tesla does nothing to address the cash crunch, it could be short $1 billion next year.

Yet those who worship at what Wahlman calls the "Church of Tesla" continue to do so blindly, hoping that the great one known as Elon Musk knows what he is doing. Wahlman says that it's not impossible for Musk to send feelers out to his wealthy friends who might have a couple billion dollars lying around for Tesla to finance its debt.

As far as the average shareholders, though, Musk has pulled the wool over their eyes again. There's no evidence Tesla doesn't need new debt or equity this year -- only evidence that it probably does. The notion that it can go without is PR hype.

"They simply have to live another day," Wahlman said. "They're masters at postponing anything that can shake investor confidence."

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