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Right now, their pp&e and working capital seem like they could be liquidated to pay back debt, so agree that bankruptcy doesn't seem to be a near term concern.

Right now, their pp&e and working capital seem like they could be liquidated to pay back debt, so agree that bankruptcy doesn't seem to be a near term concern. However I don't know what covenants are in those loan documents, and its possible that given the delays tesla could trip a covenant and get in trouble with lenders. Though I'm sure Elon has worked his magic on them as well Hard to say if they're doing fine at this point, as the model 3 doesn't really show up in the financials yet. The real concern is that model 3 production capacity increases without sufficiently decreasing production efficiency. So revenue goes up but COGS skyrockets, and the business is structurally not profitable on even a gross profit basis. This would lead to huge financing needs, and also probably a drop in the stock price (though the stock price seems immune to dropping). This could lead to company failure and is not a theoretical risk

DennisP 9y ago
Sure, if they end up selling the Model 3 at a loss they'll be in trouble, but I don't see any particular reason to think that'll happen. And most likely they'll be fine with lenders as long as they make the payments, which so far they seem perfectly able to do.
- aaavl2821 9y ago
  Agreed, they seem to be ok for now I don't know teslas model 3 unit production costs, but if you look at cost curves for other car companies as they scale up manufacturing, and take into account all the fixed costs and manual processes currently used in production of a small number of model 3s, the unit cost is probably massively high. Historically you can reduce those costs by 80%+ as you scale, so it is possible tesla can produce profitably. On the other hand, tesla set the price for its car before it started making it. So it's entirely possible that they were underestimating the cost / complexity of the manufacturing process and that they simply can't support their cost base with that price. Again, this is a hypothetical, but real concern More likely is they get there, but takes longer / more money than expected. And in a competitive world, that can be catastrophic We don't know which of these hypothetical scenarios will play out, so we must assess the likelihood that each happens and value the company that way. Current valuation suggests probabikty of success is very very high and value of success is very large; id argue that both those numbers should be lower
- nCwLABXpfJLz 9y ago
  Well they haven't profited off the Model S and Model X, and those are $100k vehicles. Is that not a reason to lose money on the Model 3? I suspect they'll make money selling the $50k Model 3s they're starting with, but the $35k base is going to be a stretch.
smallnamespace 9y ago
> could trip a covenant and get in trouble with lenders Lenders usually don't exercise their covenants willy-nilly because doing so is a good way to end up with less money than you started with. Most covenants are written broadly, in a way to let lenders recapture some of their principal in the event the corporation is indeed on the way to bankruptcy. Specific example: company is floundering, throwing their remaining cash into a losing business. Lenders might prefer to trigger covenants, take them to bankruptcy, and liquidate and receive 60 cents on the dollar, rather than wait and receive less later on. But if the lenders think the business is doing fine and they will eventually get repaid, the covenants are more of a negotiating position rather than a real threat. Of course all this changes if the debt changes hands and, say, a hostile entity gets a controlling share -- but that's what finance departments are supposed to look out for.
- aaavl2821 9y ago
  agreed, by "get in trouble" i meant that lenders could threaten to renegotiate terms or influence the company's strategy. but i am sure elon / tesla have good relationships with the debtholders so this probably wouldnt happen until after a million other worse things go wrong
xadhominemx 9y ago
If Tesla liquidated its PP&E, you would have no assets with which to make automobiles and it would go bankrupt.
- aaavl2821 9y ago
  technically, if they liquidated their PP&E and repaid all of their debt, they could not go bankrupt as bankruptcy is a process specific to companies with debt. but yes, if this happens the company is gone if things start looking really bad, debtholders and equity holders will start clamoring for a change in strategy to preserve their assets. likely they would push to bring in new management to fix manufacturing issues, push for tesla to sell itself, or push for tesla to divest certain parts of its business, or some combination of the above given how valuable tesla is, for anyone to want to buy them in whole or in part would require a massive drop in their stock price, so stock investors would probably be wiped out long before any bankruptcy proceedings started

DennisP 9y ago

Sure, if they end up selling the Model 3 at a loss they'll be in trouble, but I don't see any particular reason to think that'll happen. And most likely they'll be fine with lenders as long as they make the payments, which so far they seem perfectly able to do.

aaavl2821 9y ago
Agreed, they seem to be ok for now I don't know teslas model 3 unit production costs, but if you look at cost curves for other car companies as they scale up manufacturing, and take into account all the fixed costs and manual processes currently used in production of a small number of model 3s, the unit cost is probably massively high. Historically you can reduce those costs by 80%+ as you scale, so it is possible tesla can produce profitably. On the other hand, tesla set the price for its car before it started making it. So it's entirely possible that they were underestimating the cost / complexity of the manufacturing process and that they simply can't support their cost base with that price. Again, this is a hypothetical, but real concern More likely is they get there, but takes longer / more money than expected. And in a competitive world, that can be catastrophic We don't know which of these hypothetical scenarios will play out, so we must assess the likelihood that each happens and value the company that way. Current valuation suggests probabikty of success is very very high and value of success is very large; id argue that both those numbers should be lower
nCwLABXpfJLz 9y ago
Well they haven't profited off the Model S and Model X, and those are $100k vehicles. Is that not a reason to lose money on the Model 3? I suspect they'll make money selling the $50k Model 3s they're starting with, but the $35k base is going to be a stretch.

smallnamespace 9y ago

> could trip a covenant and get in trouble with lenders Lenders usually don't exercise their covenants willy-nilly because doing so is a good way to end up with less money than you started with. Most covenants are written broadly, in a way to let lenders recapture some of their principal in the event the corporation is indeed on the way to bankruptcy. Specific example: company is floundering, throwing their remaining cash into a losing business. Lenders might prefer to trigger covenants, take them to bankruptcy, and liquidate and receive 60 cents on the dollar, rather than wait and receive less later on. But if the lenders think the business is doing fine and they will eventually get repaid, the covenants are more of a negotiating position rather than a real threat. Of course all this changes if the debt changes hands and, say, a hostile entity gets a controlling share -- but that's what finance departments are supposed to look out for.

aaavl2821 9y ago
agreed, by "get in trouble" i meant that lenders could threaten to renegotiate terms or influence the company's strategy. but i am sure elon / tesla have good relationships with the debtholders so this probably wouldnt happen until after a million other worse things go wrong

xadhominemx 9y ago

If Tesla liquidated its PP&E, you would have no assets with which to make automobiles and it would go bankrupt.

aaavl2821 9y ago
technically, if they liquidated their PP&E and repaid all of their debt, they could not go bankrupt as bankruptcy is a process specific to companies with debt. but yes, if this happens the company is gone if things start looking really bad, debtholders and equity holders will start clamoring for a change in strategy to preserve their assets. likely they would push to bring in new management to fix manufacturing issues, push for tesla to sell itself, or push for tesla to divest certain parts of its business, or some combination of the above given how valuable tesla is, for anyone to want to buy them in whole or in part would require a massive drop in their stock price, so stock investors would probably be wiped out long before any bankruptcy proceedings started