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Tesla Uses $300M in Model 3 Deposits to Stay Afloat

Tesla Motors Inc. caused a sensation by picking up $300 million in Model 3 customer deposit cash in just 96 hours this week. The hidden story: that money may have rescued Tesla from a precarious negative working capital crisis. Tesla now has the opportunity to become a profitable car company for the first time.

Most people do not realize that the average vehicle sold in the U.S. has been sitting on a dealer’s lot for about 60 days. That explains why Ford has $126 billion and GM has $6.5 billion in positive working capital (current assets minus current liabilities), to fund their operations.

Tesla’s hype allowed the company to raise $5 billion of equity and debt to fund its car company, and to support the process of raising another $5 billion for its “Gigafactory,” which will build lithium ion batteries for its vehicles and Powerwall energy storage systems.

Investors’ willingness to pony up seemingly endless amounts of cash over the last decade to fund operations is phenomenal, given that at the end of 2015 Tesla was losing $19,810 on each car it sold, and hemorrhaging negative cash flow of $51,344 on each vehicle it built. As a result, Tesla at year-end had a dangerous negative working capital position of $24.7 million.

The main reason Tesla was able to continue operating over the last six months was collecting $5,000 customer deposit checks for future delivery of its $72,000 average selling price Model X, introduced on September 29, 2015. With 31,300 preorders, customer cash deposits reduced Tesla’s risky negative working capital position by $156.5 million.

But with Model X deliveries beginning December 18, 2015, and most of the backlog filled in 2016, Wall Street analysts panicked in the first six weeks of 2016 that Tesla was running out of cash and might fail. Tesla’s stock plunged by 40 percent, to $146 a share.

In what many analysts saw as a desperate move to save the company, Tesla CEO Elon Musk announced on February 10 that the company would begin  taking $1,000 deposits on its Model 3 — average selling price, $42,000 — on March 31 for initial deliveries in late 2017.

Analysts scoffed at Tesla slashing its traditional $5,000 deposit to $1,000 as another sign of competitive weakness. Expecting 50,000 preorders could generate $50 million in cash deposits, the analysts projected Tesla would just barely be able to cover its negative working capital situation.

But viral customer enthusiasm for the mid-priced Tesla Model X generated 27,000 people camping out at dealerships to qualify to be in the front of the delivery line for a Model 3.

With total orders from dealerships and online breaking 300,000 by early evening on April 4, Tesla’s working capital has done a financial somersault, from about negative $24.7 million to an outstandingly positive $275.3 million.

With a backlog of roughly $14.9 billion, Tesla can continue its money-losing for at least another 12 months before the next cash crisis arrives. But with a strong balance sheet, Tesla now has the breathing room to become, potentially, a profitable company.

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