While Wall Street cheered Tesla's third-quarter earnings results -- which did come in vastly ahead of consensus estimates -- investors weren't thrilled that the fourth quarter will likely come in below last quarter's mark, according to the company-wide email.
While there's far worse news that Tesla could have delivered than a dip in profits -- for instance, no profits -- Wall Street was nonetheless unimpressed. The move is drawing plenty of questions at this point. Is Tesla cutting workforce to help pay for its Shanghai factory? What does this mean for its $35,000 Model 3?
Of course, it helps to have context and in this case, we don't really have much. For instance, as Tesla gears up to deliver the Model 3 in Europe and China, are there some explainable costs or reasons for a possible slowdown? Will those explanations point to a return in momentum next quarter?
Those are the types of answers that investors will want when Tesla hosts its quarterly conference call and releases its fourth-quarter results.
The Impact on the Bonds
Despite the flurry of questions and the onslaught of selling on Friday, one note worth covering its Tesla's 2019 convertible bonds. On March 1st, $920 million worth of convertible debt will come due. If Tesla stock is trading at or above $359.88, the company can elect to pay back that debt with stock rather than cash.
Tesla has already said that should the stock close above the conversion price, that it will pay it back with a 50/50 combination of cash and stock. However, with Tesla's recent pullback and Friday's 13% plunge, that puts Tesla's strategy in jeopardy.
As of last quarter, Tesla had about $2.9 billion in cash and equivalents. Tesla's cash and liquidity situation is more complicated than a simple glance at the balance sheet, but it gives us a rough idea of where the automaker stands. In the third quarter, Tesla was cash-flow positive and profitable, and so long as that's the case in the fourth quarter, Tesla should be able to make the payment in March, even if it is all cash. However, it will come at an unfortunate time for Tesla, as it tries to get its Shanghai factory open before the end of the year, continues to expand its Supercharger Network and has a number of new models in the pipeline.
Of course, it's always possible that Tesla stock will be able to rally above that conversion price in time to pay part of the debt with stock. After all, it's more than a month away and we've seen crazier things than a 20% rally in Tesla's share price in a short time period. Earnings will likely be a big catalyst between now and then, too.
Either way, keep the debt in mind.