Will Tesla file for bankruptcy?

Tesla (TSLA) is facing tough times ahead as the automaker’s aggressive Model 3 production strategy in meeting deadlines failed as per plan. In the midst of this tumultuous situation, CEO Elon Musk tweeted on Easter with an April Fool prank that said “Tesla goes bankrupt” and their last effort of selling Easter Eggs never yielded result properly. Will Musk’s joke really turn true and is bankruptcy at the doorsteps of Tesla?

Easter-bankruptcy was severe that even Musk and other employees didn’t have money for a cab to return home and burned the midnight oil at the factory itself. This has been confirmed by the recent report which stated that 34,494 vehicles were manufactured by Tesla in the first three months of 2018, which is about 40% higher than 24,565 cars manufactured in the last quarter.

Bankruptcy has many chapters and Tesla has them all, including chapter 14 and a half, as stated by Musk as the worst one. But when there is more debt than assets and the company doesn’t have enough cash or liquidity to repay them then the company might file for bankruptcy.

A company will file for Chapter 11 protection, which involves not a closure but a reorganization of the debtor’s business affairs and assets, or Chapter 7 that involves stopping all operations and going out of business. The investor will get a low return on the investment made by the company that went bankrupt.

The challenges faced by Tesla are increasing slowly. These challenges include shortages of Model 3 deliveries, credit rating downgrade by Moody’s Research, huge capital raise, cautious fraudulent accounting activities, and resignations of two finance executive last month. The fatal crash and Model S recall too remained hindrances for Tesla.

For Model 3, Tesla has previously projected a weekly production rate of 2,500 vehicles by the end of March and 5,000 vehicles by the end of the second quarter of 2018. In a recent report, Tesla said it manufactured 9,766 Model 3 vehicles as it addressed production and supply chain barriers. For the past week, the company produced 2,020 Model 3 cars and expects to manufacture 2,000 vehicles over the next seven days.

Tesla gave assurance to the people that if it can send a Roadster to the asteroid belt, the company could probably solve Model 3 production. Tesla’s focus is very much on Model 3 production, so everything else took a second place. Tesla continues to target a production rate of about 5,000 units per week in about three months for the third quarter.

Backed by positive operating cash flow, high volume, and higher gross margin, Tesla might not raise equity or debt this year. Tesla predicts Model 3 output to rise rapidly through the second quarter as the company is taking steps to improve further capacity due to stable advance bookings.

Looking ahead, Tesla expects a negative Model 3 gross margin, while generating positive operating cash flows in the first quarter. However, the company predicts Model S and X gross margins to rise in 2018 with improved trim mix and option content, lower acquisition, and manufacturing costs. In 2018, Tesla sees gross margin from energy generation and storage to improve significantly on higher cost efficiencies and deployment of commercial projects.

Easter-bankruptcy was severe that even Musk and other employees didn’t have money for a cab to return home and burned the midnight oil at the factory itself.

Tesla could face all the challenges and reach out to deliver Model 3 as expected earlier. At the end of December 31, 2017, total assets had risen by 26% from last year, helped by a 68% jump in property, plant, and equipment. Simultaneously, current liabilities grew by 31% and total liabilities increased by 37%. Tesla is unable to pursue opportunities for enhancing shareholder value as the results show a wider negative free cash flow at the end of the year.

On growth estimates front, analysts are expecting a 145.9% dip in the current quarter and a 74.4% plunge in the next quarter. For the full-year, analysts predicted a 21.60% growth in estimates and 130% jump in the next year. Among the sell-side analysts, 13 analysts have rated a sell rating, 11 gave a hold rating, and 11 have given a buy or strong buy rating.

With a current market capitalization of $51.64 billion as on Friday, Tesla stock sell-off in the last month had dragged down its market cap by $14.5 billion. This led to a cut in Musk’s stake by nearly $3 billion. Rising concerns about cash position, Moody’s downgrade, and the fatal crash investigation were cited as the reasons behind the sell-off.

Tesla stock, which is down about 15% for the past six months, has surpassed the $300 mark on Friday after remaining below the mark since March 26, 2018. Markets are expecting the stock to stick on the $300 mark and generate a sizable jump as price actions are balanced on bulls and bears.

Vilas Capital Management expects that Tesla is on the edge of bankruptcy as falling Model S & X demand and Model 3 delivery problems will crash the company in the next three to six months. The company needs to have enough cash to meet the long-term liquidity needs, where it sees $1 billion capital expenditures next year and a $2.91 billion in long-term debt.

Will Tesla near bankruptcy or not? We have to wait for few more quarters. Elon Musk, who will get a performance-based salary hike in the future, is expected to take necessary actions to make the company as a profitable one.