Tesla is burning through billions, and it's revealing an ugly reality about the company's financial situation (TSLA)

Tesla continues to burn through cash at a staggering rate.
It could run out of money before the end of the year.
Tesla's vulnerable balance sheet is the ugly reality behind the carmaker's glamorous image.

Bloomberg reports that Tesla is burning through $6,500 a minute.

That's alarmingly impressive for a relatively small, young carmaker that's preparing to announce first-quarter earnings expected to be staggeringly negative.

For the record, all car companies blow though huge piles of cash. It's the nature of the business. But they don't tend to perpetually lose money; Tesla hasn't posted a yearly profit since its 2010 IPO.

All eyes are on Tesla's prospects of actually running out of cash before the end of year. The company has about $3.5 billion on hand, plus lines of credit. CEO Elon Musk says no capital raise is coming, and that Tesla will start to bring in more than it spends later in 2018.

That's optimistic. Here's what could go wrong:

Customers bailing out on Model 3 deposits.

The Model 3 was sold to an eager public as a $35,000 all-electric vehicle that could get more than 200 miles on a single charge.

But so far Tesla has managed only to build and sell the $44,000-and-up version. Anyone of the 400,000 customers who put down $1,000 each for a preorder could purchase that trim level if they have the means.

But a lot of reservation holders would probably like to spend 10 grand less and get the base model they were told was coming.

Tesla keeps telling them it's coming, and they shouldn't be surprised: The company likes to start with expensive versions of its vehicles and work its way down to cheaper ones.

That bolsters revenues, but it means Tesla's mass-market buyers continue to wait for their cars. The company is betting that they'll be patient, but it's a big bet.

And as Tesla nears the point at which it will have sold too many vehicles (200,000) in the US for buyers to qualify for a $7,500 federal tax credit. Losing that will make a Model 3 a stretch purchase for some buyers. They could decide to ask for their $1,000 back, and Tesla would have to comply.

A capital raise that doesn't boost the stock price.

Tesla has said that it wouldn't need to raise money, and the company has gone ahead a raised anyway.

Investors have typically welcomed the raises, sending the stock higher. When Tesla raised over a billion in equity 2017 and later offered almost $2 billion in junk-debt issue, the stock spent much of the year well above $300.

The markets have typically seen Tesla's capital appetites as a way to assess investors confidence. The usual drill is that the raise is announced, a level is set, and Tesla then exceeds expectations. Presto! Stock rallies.

Why would it be different this time? Because Musk said that Tesla would turn the money drain around by the middle of the year, get the Model 3 decisively back on track, and be able to ride out 2018 with the roughly $3.5 billion the company has in the bank, along with its credit lines. (And end up, in fact, with the $1 billion in cash that the automaker likes to maintain on the balance sheet.)

Reversing that would signal poor capital management and a cost structure imposed by sluggish Model 3 production that could be terminal. Coupled with what will likely be huge losses in the first and second quarters, that could cause investors to run for the exits.

Continued negative return on investment.

Tesla's level of spending isn't unusual for a car company. What is unusual is Tesla's level of spending for a carmaker that sold just 100,000 vehicles in 2017 and brought in only about $3.3 billion in revenue.

General Motors spent close to $8.5 billion 2017, but it converted that spending into roughly $150 billion in revenue and a profit of nearly $13 billion.

GM shares were handily surpassed by Tesla shares in 2017, as far as market performance goes, with Tesla's market cap at one point topping GM's. But GM also returned billions to investors through share buybacks and dividends.

Tesla can't continue to ask investors to stay the course if it can't figure out a way to turn billions in capital incineration into billions in profits. Markets are nervously eyeing the Model 3 in this context because even if Tesla can hit ambitious production targets — 5,000 a week by June — it's unclear whether the car will achieve an appealing profit margin.

See the rest of the story at Business Insider