Tesla’s (TSLA) Stock Plunge Causes Concern for Daunting March Debt Tranche Repayment

Tesla has nearly a billion worth of debt coming due shortly. If convertibles remain out of the money, they could wipe out nearly a third of the company's cash.

Tesla TSLA Stock

Tesla’s (NASDAQ:TSLA) $920 million worth of convertible debt coming due in March, could wipe out a big chunk of the company’s cash – $2.97 billion as of most recent quarter – unless Tesla shares rebound.

That convert has a strike price of $359.87 per share. Tesla’s stock however, hasn’t traded above that level for weeks. In fact, after Friday’s 12.97% nosedive, the name risks breaking below $300 per share, a key support level. If Tesla’s stock prints above $359.87 by the due date of March 1, 2019, the company’s debt converts into equity shares. If not, the convert will have to be settled in cash.

Tesla has already notified bondholders that they’ll be paid with a 50-50 mix of cash and stock if the ticker closes above the equity-conversion price. However, with TSLA currently trading roughly 57 points below the strike price, the strategy, at least for the time being, seems in jeopardy. Still, Tesla’s always volatile stock has bucked trends before, and could do so again.

Profitability

In the third quarter, Tesla managed with the help of a major improvement in Model 3 gross margins, as well as spending cuts to become cash-flow positive and profitable. It reported $881 million in free cash flow despite repaying $82.5 million in bonds.

The electric car-maker has said it expects to be both GAAP profitable and cash flow positive in Q4’18 as well. It should be noted that for a company that has long been struggling with profitability and cash-flow worries (last year, Tesla’s total net loss was $2.2 billion) the company’s results and forecasts are very encouraging. That said, the Palo Alto, Calif.-based car maker continues to face pressure to maintain a green balance sheet. On Friday Tesla CEO Elon Musk announced in a company-wide memo that Tesla would lay off 7% of its full-time workforce. He also revealed that while the company will be profitable in Q4’18, it will be less than what it earned in Q3.

Tesla’s Q4 results – expected to be announced on Feb. 6 – will provide an indication of how troublesome its next chunk of convertible debt will be. If the company shows positive net income and positive free cash flow in the upcoming quarter ending in December, the March bond obligation won’t be a concern, but again, to spark a successful conversion, Tesla needs to boost its stock price above $360 or higher at some point between now and Feb. 28.

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