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Tesla Asks Suppliers for Refunds; Shares take a Hit.

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In what’s shaping up to be a make-or-break quarterly earnings report for Tesla (TSLA - Free Report) scheduled for August 1st, investors are selling shares in the wake of several recent negative news items about the electric carmaker.

Late last week it was reported that cancellations of Model 3 reservations were increasing as potential buyers grow impatient with long wait times and uncertain delivery expectations. While actual figures will not be released until the upcoming quarterly report, some analysts believe that cancellations now outnumber new orders for the first time since the debut of the Model 3 over two years ago.

The huge amount of orders had been seen as a backstop for Tesla. With over 400,000 customers waiting for a Model 3, it was perceived that if Tesla could simply find a way to produce enough automobiles, positive free cash flow and GAAP profitability were just around the corner. A significant number of cancellations would put those expectations in jeopardy.

On Sunday the Wall street Journal reported that Tesla has asked at least one of its suppliers to refund cash that had already been paid for products and materials that had already been delivered as far back as 2016.

Tesla shares traded down over 4% at $300.50 at midday on Monday.

Analyst expectations for Tesla's earnings are mixed with 3 upward revisions and 5 downward revisions in the past 90 days. Tesla is a Zacks Rank #3 (Hold).

The total dollar amount of the concessions requested by Tesla and the number of suppliers involved have not been released. Though the original memo seemed to suggest that all suppliers were being asked for price concessions, some individual suppliers surveyed by the WSJ reported that they had not been contacted by Tesla.

Price negotiations are not out of the ordinary in the automobile sector as manufacturers and suppliers both have an interest in the profitability of their business partners. Some give and take is normal as a new automobile model makes its way from the design stage to final production - and what were once cost projections turn into reality.

What’s unusual about Tesla’s request is that it is asking for retroactive price relief on products that have already been delivered, and that the request included language that made it seem as though the future of the company was dependent on achieving price relief from suppliers.

Tesla’s precarious cash position has been well documented as the company continues to burn in excess of $700 billion each quarter as it attempts to ramp up production of the Model 3 and achieve profitability in 2018. CEO Elon Musk has been fairly adamant that the company that Tesla will not have to tap the capital markets for additional funding for operations this year.

Tesla bonds due in 2025 are currently trading at 90% of par and an interest rate of 7.25%, which would make additional borrowing in the debt markets fairly expensive.

All of these developments make the August 1st report extremely important for Tesla. If they are able to show a meaningful increase in the number of Model 3s that they have been able to produce and deliver to paying customers, most if not all of the capital issues will simply go away.  If they fall short however, it could be rough sailing ahead. The next few weeks are extremely critical for Tesla.

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