Tesla isn't spending enough money - and investors should be worried

Hollis Johnson/Business Insider

The Tesla Model 3.

• Nomura's Romit Shah noted Tesla's lower capital spending in Q1.
• Tesla has reduced its capital spend prediction to $3 billion from $3.4 billion in 2018.
• Tesla's newfound capital consciousness is perplexing.

After a bizarre of a first-quarter earnings call on Wednesday night, the analysts who cover Tesla's stock are starting to pump out reactions.

Nomura's Romit Shah, a bull with a $420 price target and a buy rating on shares, expressed concern about CEO Elon Musk's borderline unhinged behavior on the call, but then in a research note to clients highlighted Tesla's lower capital spend for the quarter.

The carmaker went through about $650 million, versus expectations of over $850 million, Shah wrote. The company now has about $2.7 billion in cash in hand and reduced its expected spend for 2018 to $3 billion from $3.4, while also stressing that it won't need to raise any new funding.

Shah might be cheered by this, but Tesla isn't spending enough money right now. The rollout of its Model 3 mass-market vehicle has been a disaster - getting it back on track is imperative and nobody would blame Tesla if it threw money at the problem. In fact, investors should be blaming Tesla for not throwing money at the problem while it has the money to throw.

The reduced capital spend pleases Shah because it reinforces Musk's pledge to raise no new funding in 2018 while also swing from staggering losses to a positive cash-flow position and profitability in the second half of the year.

But as a practical matter, Tesla is running as close to the edge financially as it ever has. To fix the Model 3's rollout, it's increasing costs, and if that doesn't yield a lot more second-half revenue, the company is essentially playing chicken with its own balance sheet.

It's costing Tesla about a billion dollars each quarter to stay in business. General Motors spends about the same. But Tesla is making and selling just over 100,000 vehicles (that could double by the end of the year). Last year, GM sold 10 million. Both company's staged IPOs in 2010 and since then, Tesla has never posted an annual profit while GM has booked over $70 billion. And they're market caps, mysteriously, are the same.

Tesla spent some time on its bizarre earnings call dealing with capital discipline, but holding back on drawing down its cash now should be a signal to investors that Tesla's goal isn't necessarily hitting its marks in 2018, but making good on Musk's promise to avoid a new raise.

The auto industry is by its nature capital intensive. Tesla's share price has been hammered on Thursday, but it's still riding high. If ever there were a time to raise money, this is it. It's perplexing that Tesla is so dead-set against not doing it while carefully nursing the cash it has.

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