Tesla Model X: A design flop?

A slide from a Tesla (TSLA) presentation that recently surfaced was interpreted by many market participants to mean a delay in the launch of the Model 3, the "all-electric vehicle for the masses (at $35,000).

Tesla swatted down speculation of a delay, saying the Model 3 was on track to be shown in 2016 and for production to begin in 2017. But rumors of a possible delay shine light back on the Model X, the "hump" vehicle launched between the current Model S and coming Model 3, responsible for carrying the torch for sales in the next few years before the Model 3 is available.

Here's the problem with the Model X: The target consumer is women, according to Tesla, but the design has falcon-wing doors that open up, not out, precluding the ability to attach anything to the roof — like a ski rack or luggage carrier. Would you buy an SUV or crossover that couldn't carry excess luggage, surfboards,kayaks, etc.? Isn't the primary crossover/SUV buyer a large family, sports enthusiast, or both?

With the weight of the entire stock seeming to be carried by the Model X, is it time to refocus on the Model X design? Since 2013, forums on the Tesla website have engaged in energized debate regarding how one could carry luggage for six, multiple skis, bikes, kayaks, canoes or surfboards on the car, and if the ability to do so was crucial to selling an SUV or crossover. It's time to re-engage this debate and start asking for answers from Tesla, as this "hump" vehicle not only must carry the sales torch, but could be carrying the "going concern" torch.

After Tesla's first-quarter earnings filing announced in early May, one avid Tesla bull at Morgan Stanley described the rate of cash burn as "eye-watering." Indeed, Tesla's use of cash per quarter is at historic levels, even higher than in 2013 when Tesla, almost on the verge of bankruptcy, was reportedly begging Google to buy it. Cash burn was $558 million in the quarter ending Mar 31, bringing cash levels down to $1.9 billion. That's worse than negative free cash flow in the Dec 2014 quarter of $455 million, which, in turn, increased from the cash burn of $312 million in the Sept 2014 quarter.

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At this cash-burn rate, I would say Tesla could run out of cash by spring of 2016. Tesla recently negotiated a secured bank credit facility of $750 million, encumbering all of its property, plant and equipment (PPE), layering current and future convertible and high yield debt issuance.

Tesla bulls continue to engage in the usual game of "pay no attention to the man behind the curtain," and point to projections by Musk that Tesla will be cash-flow positive by the fourth quarter of 2015 and sell 55,000 cars this year. With the Model S selling at rates of about 10,000 per quarter, which most auto analysts would think is a risky number to maintain given the launch of a new luxury vehicle that generically would cannibalize existing luxury model sales, this puts an enormous amount of pressure for Tesla to sell 15,000 Model X cars in 2015, and an even higher number in 2016. With the Model 3 launch of mid-late 2017, or if it gets pushed out to 2018, the Model X is clearly the "cash-flow cavalry" for Tesla.

Now, here's the kicker: While Tesla claims to have roughly 20,000 orders for the Model X, these actually are not "orders," they're "reservations," which cost $5,000 for your place in line to receive a Model X, currently slated for March 2016 if you order today. When I called the sales rep hotline listed on the website, I confirmed that the "reservation" is fully cancelable and refundable with no penalty.

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Tesla doesn't reveal the actual "specs" of the car until later this year when it asks its reservation holders for official down payments on the car, after which the consumer still has a short period to cancel and get a full refund. I asked the sales rep what else she could tell me about luggage and recreational item storage and I was cut off quickly and reminded " I cant tell you anything that isn't already on the website." That line was repeated 2-3 times during my phone call. Tesla sales reps seem to be trained well to end that conversation quickly.

So, where do we put luggage for a family of 4-6, canoes, surfboards, 3-4 bikes? The bike question was answered for me by an avid biker, who said a commonly sold hitch attached to the tow package on the crossover. Stacking the bikes horizontally behind the car was actually a preferred way to carry premium bikes, rather than on the roof. Tesla said in late 2014 that the

Model X will come with a towing-hitch package option.

Are SUV /crossover buyers going to tolerate being forced to dramatically increase the length of the car, carry increased risk when changing lanes, and making it very difficult to park, especially parallel park? Will SUV buyers tolerate a a big "asterisk" or "work-around" feature to their car that they wouldn't have with other SUV purchases?

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Most auto analysts I spoke with would agree that gull-wing or falcon-wing doors are a novelty item that carry complications. They notoriously leak water in the car during hard rains, and are very problematic when snow accumulates on the roof. Rarely do they appear on anything but sports cars, as they limit the ability to store anything on the roof, and the only real place to store extra luggage in the X is the "frunk," or the front of the car where the engine normally is.

So the question remains: When the target Model X consumer, the "soccer mom," realizes she can't fit extra luggage, surfboards, etc., what is her reaction going to be? Take it back? Why not — she gets a full refund.

With the Model X being crucial to turning Tesla cash-flow positive and stopping the "eye-watering " burn, the time for this discussion is now.

Commentary by James Sanford, a portfolio manager for Sag Harbor Advisors (www.sagharboradvisors.com). He has also worked with Credit Suisse Securities, JP Morgan Securities and Gleacher & Co.