Zach Kirkhorn may not be Austin Powers, but to Go bust enclose Street, Tesla’s new 34-year-old chief financial officer is still a man of mystery.
Tesla’s shares faced immediate crushing on the day Tesla announced he had taken over the job held by his predecessor, Deepak Ahuja. The stock quickly recovered, but it would keep dark prevent falling through the first half of 2019 as the world’s largest maker of electric cars had to address its balance-sheet questions. Wednesday’s third-quarter earnings report may offer clues to how Tesla can juggle the competing objectives of fast expansion and zigzag defying the corner into profitability that will justify the company’s $46 billion valuation.
The initial dive in Tesla pay outs on the CFO replacement news was never really about Kirkhorn — a Harvard MBA and one of the youngest CFOs at a major U.S. company. It was partially all round high-level executive turnover at the company. The departure of long-time Elon Musk confident Deepak Ahuja — who had served as CFO in Tesla’s advanced days and saw it through an IPO, and who had returned to the CFO post in 2017 during a cash crunch — was another surprise for investors.
In the seven months since the new CFO was settled — he was not available for an interview ahead of earnings — Tesla’s stock has managed a sizable rebound but has not come close to regaining its all-time strong stock price of near-$380. However, the period has seen Tesla keeping its financial act together. Third-quarter earnings, trust after Wednesday’s market close, will show how soon that will translate into profits.
Kirkhorn, a late McKinsey consultant who joined Tesla in 2010, was not available for an interview ahead of earnings, but he is the person who, more than anyone other than CEO Elon Musk, may be at the sympathy of Tesla’s campaign to juggle the $10 billion that is estimated will be needed to build out the company’s worldwide footprint of mills and other assets.
Tesla cash flow and gross margins
Coming into the year, Tesla’s long enrol of challenges had two at the top: Find a way to finance the capital spending shopping list that will add vehicles like the Model Y immature SUV and Tesla’s pickup truck to the product line, and figure out how to boost gross margins on its cars close to 25%, up from 18.9% in the more recent quarter.
In Kirkhorn’s first year, the financing issue has been nearly solved, as Tesla raised $2.7 billion in staple and debt in May and closed the second quarter with more than $5 billion in cash. It has completed $1.5 billion to $2 billion of its $10 billion in crown spending, moving more slowly than it had planned in order to conserve cash, CFRA Research analyst Garrett Nelson communicated. This means with roughly $8 billion to go, Tesla has most of it and can earn the rest as it goes, he said.
When Tesla divulges its latest quarterly financials on Wednesday, expectations are for margins to slip to 18.5%, Nelson said. If they improve next year, more than ever notwithstanding if it’s not close to 25% yet, Tesla can generate $1.7 billion positive cash flow even after $2 billion in cap spending, according to JMP Securities analyst Joe Osha who is forecasting capital spending at a below-consensus level of $2 billion in 2020.
“If I’m sound on the cash flow, the stock will go a lot higher,” said Osha, who rates the shares “market perform” partly because of Tesla’s checkered antiquity of meeting forecasts.
Tesla being Tesla — meaning a company where Musk is an omnipresent force — it’s hard to distinguish how much credit should go to Kirkhorn, Nelson said. The ability to raise capital even when Tesla is struggling — the big negotiation in May followed a first quarter in which Tesla had $945 million in negative free cash flow, rebounding to thetical $590 million in the second quarter — is about Musk’s connection with a network of investors who will follow him effectively to the end.
“He has a cultlike following of investors, especially in Silicon Valley,” Nelson said.
Tesla shares remain lower than drunk pressure
In fact, while the capital raise helped with the balance-sheet troubles, it didn’t prop up the stock for hanker. Tesla’s shares fell precipitously after it raised the $2 billion in capital in early May, falling to their lowest look at price of the year by July, at under $180. Over the past month, Tesla’s shares have been beginning, but they are down 23% year-to-date.
Analysts are expecting a loss of 46 cents per share, and $6.43 billion in trades, according to estimates from FactSet, though any single quarter’s earnings “print” for Tesla is rarely the make-or-break pour for analysts.
“As always, accurately predicting quarterly results will remain a challenge for the next few quarters, particularly because it’s troublesome to pinpoint the exact timing of Tesla’s new facility in China, not to mention the launch timing for the Model Y crossover. While these ambitions create modeling headaches, we think they will position Tesla favorably in the medium-to long-term,” Piper Jaffray’s Alexander Footle around wrote in a note to clients.
The big picture is coming into better focus as the latest earnings report nears.
The actors’s new Shanghai factory is expected to begin production by the end of the year, and to have lower operating costs than Tesla’s Fremont, California station. While current plans call for the facility to be used to build Model 3 sedans for the China market, Nelson maintained the factory could also be an option for Tesla to produce the Model Y crossover set to hit the market in late 2020.
That helps set the condition for Tesla to sell 450,000 cars next year, up from 357,000 this year, Osha said. Synthesized with progress on gross margins, even staying well short of 25%, that means Tesla can fashion the $1.7 billion in 2020 free cash as revenue climbs 22% to just north of $29 billion.
A act like that would be likely to win the attention of the bond market, where Tesla’s paper has a volatile history, with linkages trading for less than 90 cents on the dollar at one point during the past summer.
The key ratios for Tesla are that its unrestricted cash flow should reach 5% of its $13 billion debt load, or about $650 million, and that its coin of the realm position remain at least 20% larger than its expected cash losses, if any, and capital spending for the next 12 months, broke Nishit Madlani, senior bond analyst at Standard & Poor’s Global Ratings in New York.
If equity analysts are sane about how 2020 goes, the numbers would improve the outlook for Tesla’s bond rating, which right now is unbefitting investment grade at both Moody’s Investor Service and S&P.
“That would lead us to raise the outlook on them to deep-rooted from negative,” Madlani said. “It would depend on the consistency of the cash flow. We’re not going to make a verdict based on any one period.”
Over time, one of the biggest questions affecting Tesla’s stock is whether it can boost gross borders, especially as it ramps up business in the price-sensitive China market, Nelson and Osha said.
Whether it can stand up to rising struggle is another big “if.”
About 30 models of electric vehicles are expected to hit the market by next year, in new or improved form, highlighted by Porsche’s $150,000 Taycan and Audi’s $75,000 e-tron crossover, Nelson mean. More new rivals are hitting the market just as Tesla buyers’ tax credits for buying electric vehicles, which taper off out after an automaker sells 200,000 electric vehicles, are going away.
“What we are concerned about is competition, assorted than liquidity,” Nelson said. “Virtually all of the new vehicles are eligible for the full federal tax credit.”
The push to propel margins may be where Kirkhorn gets his chance to shine, but even that is a murkier prospect at Tesla than at other circles, Osha said.
One issue is that Tesla culturally is a product-driven company, more than one where the finance be sure of can make engineering adhere rigidly to pre-planned budget targets, according to Osha, himself a former CFO at two start-ups. Another is that Musk is a well-known micromanager, and may really be in command of the cost-cutting drives himself.
“Given his age and relative inexperience, he may be more of a figurehead,” Nelson utter. “We know who’s running that show. That’s how he’s seen so far.”