Tesla Drops After WSJ Report Fuels Cash Concerns
Shares of Tesla (TSLA) are under pressure on Monday following a report that the electric car maker has asked some suppliers for cash back from previous purchases to help it become profitable.
SUPPLIERS ASKED FOR CASH BACK: The Wall Street Journal, citing a memo Tesla sent to a supplier, said Tesla has asked some suppliers to refund a portion of previous payments made by the company in order to help it become profitable. According to the memo, which asked a supplier to return a "meaningful amount of money of its payments since 2016," all suppliers were being asked to help Tesla become profitable. The memo described the request as essential to continued operations and an investment to continue long-term growth on both sides. Chief Executive Officer Elon Musk responded to the Journal's article, tweeting that "Only costs that actually apply to Q3 & beyond will be counted. It would not be correct to apply historical cost savings to current quarter." WHAT'S NOTABLE: Tesla, which has publicly struggled with manufacturing issues, labor issues, and a fatal crash and is expected to report quarterly results on August 1, previously said it expects to report positive GAAP net income in its third and fourth quarters. In early July, Tesla reported Q2 production totaled 53,339 vehicles, a 55% increase from Q1. Of note, Tesla said it produced 5,031 Model 3 vehicles in the last week of the quarter, meeting its Model 3 production rate, and expects to increase production to 6,000 Model 3s per week by late August. Tesla CEO Elon Musk asked engineers to remove a standard brake and roll test from the tasks completed as Model 3 cars were finished to speed up production and make the company's goal of making 5,000 of the cars in a week, according to Business Insider, citing internal documents. The carmaker is also facing a third investigation by California State Safety and Health regulators after a complaint was submitted by an unnamed employee of the company at its Fremont, California assembly plant, Jalopnik reported. Erika Monterroza, a spokesperson for the state's industrial relations department, confirmed the agency had opened a new inspection on June 19, the third for Tesla since April.
RECENT ANALYST COMMENTARY: On July 19, Needham analyst Rajvindra Gill downgraded Tesla to Underperform from Hold, telling investors that cancellations for Model 3 orders have picked up in recent weeks and refunds now outpace deposits for the Model 3. Gill cited expectations of slower Model S/X sales amid increased competition and possible cannibalization from Model 3, expiration of a $7,500 tax credit, slower gross margins improvement with "persistently high" production costs, lower energy segment revenue after recent restructuring and Tesla's "unsustainable capital structure with a projected $6B free cash flow burn through 2020." About one in every four Model 3 orders is canceled, Gill added. Responding to Gill, a Tesla spokesperson told Reuters that the "notion that Model 3 cancellations are outpacing orders is unequivocally false".
PRICE ACTION: Shares of Tesla are down 4% to $301.12 in morning trading.
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