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introduction
After a tumultuous period of extremely volatile fluctuations in the Tesla title (TSLA) triggered by August 7 announcement of Elon Musk's "Taking Tesla Private", there was a blog entry "Staying Public" August 24 announcing that Tesla would remain public company. I found all this ridiculously comical given that a company with over $ 11 billion in debt (and a negative working capital!) Definitely needs a lifeline to possibly have capital available on the public securities market.
The fact that there is absolutely no possibility that the current shareholder base could support such a transaction or that the capital is actually available to "buy back" shareholders not wishing Participating in such a transaction now offers an additional perspective projections on Tesla's operational activities throughout its history.
With respect to Tesla's objectives, forecasts and projections regarding its operational activities and financial projections (Bill Maurer has an excellent summary of these unfulfilled statements), a more favorable perspective could have been that "the world go according to the plan. "Tesla supporters have always seemed to have such a benevolent view of Musk's deadlines and unfulfilled statements, even though the financial reality of these unsatisfactory statements had totaled more than $ 5.7 billion in operating losses at the time. course of its history.
Now that Musk has made some equally bizarre and now unsatisfied "projections" about the possible structure of Tesla's capital and companies, I believe that all unrealized statements and projections of operating activities should be considered much more critical perspective. Essentially, in my opinion, Elon Musk is willing to say and do everything in his power to manipulate Tesla's story by making people believe what he would like them to believe. The last episode is just another example of what I just described.
Does the proposal "Taking Tesla Private" have a chance to succeed?
From a capital markets perspective, I do not believe that at least $ 50 billion of capital would have been available for such a transaction, even in a relatively "easy" and "foamy" capital market environment.
The rumor of significant support from Saudi Arabia's Public Investment Fund (PIF) was also comical given that its current assets were around $ 230 billion (they were not going to allocate between 10% and 20% of their assets in one investment!). The Saudi FIP has also recently shown its own need for financing by coming in to collect $ 11 billion by issuing debt in August.
Another alleged collaborator, Silver Lake Partners, currently has a total capital of approximately $ 40 billion and, based on the usual risk management guidance, only $ 2 billion would have been available from such a company. source. The statements and implications of Essentially Musk about "Secured Funding" were not very different from those of a loquacious fool who was participating in a cocktail on all their "connections" and their supposed accomplishments . As I mentioned in one of my comments about the ongoing events in the "private" farce, the entire sequence of events brought me back to a bad episode of Gossip Girl where the characters.
The comedy and absurdity in all this is improving however, given the subsequent involvement of Goldman Sachs and Morgan Stanley. As mentioned in the blog "Staying Public", such consultations with such a clever choice of advisers (to implicate another point of data on the genius of Musk!) Seemed to result in clarifying the difficulty of a such transaction. I have more than 30 years of deep financial market experience, and Elon could have called me on August 6th and in less than ten seconds I would have offered a short notice on "NFW" and saved a lot of time, problems, and money.
The reason for this quick and decisive opinion is exactly what Musk claims to have learned late in the three-week drama in August. All these so-called loyal institutional investors also have dry and boring constraints and risk management guidelines that would prohibit such investment. All this should have been obvious from the start, but not knowing or caring about such things also shows a lot about the dangerous defects of Musk.
As Musk and Tesla have already "pushed the limits" with opaque financial revelations and omissions of notable detail, the latest episode also shows that Musk does not really care about normal obligations and constraints that do not suit him. This behavior itself should be considered a significant risk for investors, but when coupled with persistently missed goals and operating forecasts, the risk of investing in Tesla would likely be be considered substantially higher.
Having 20 years of experience in mutual fund management, I can also ask myself about why Tesla's "loyal" institutional investors did not even want to consider a private investment in Tesla. Even before recent episodes of Musk's erratic behavior of:
Tesla's institutional investors, although enjoying "history" in a market with a very limited number of real-growth securities, were probably also very aware of the risks associated with investing in Tesla. But with security listed, there is always a way out. With the "go private" system of Musk, there would have been no way out. This is why institutional investors have probably not provided support beyond what should have been obvious from the compliance and regulatory constraints.
For individual investors wishing to play with "In Musk We Trust" by also participating in Musk's illusion about a "special purpose vehicle" for them to continue to support Musk's visions, this was also absurd . Any attorney specializing in securities law could have told Musk, in about ten seconds, that such an idea was also not possible for the same problems of compliance with the regulations. Individual investors would also have been reluctant to participate, given the lack of an "exit" problem, as already described for institutional investors.
What do recent events say about Elon Musk?
As mentioned earlier, most Tesla investors apparently viewed the missed operating objectives and the financial forecasts in a reasonably benign light, in that there was always continuous "growth" with the missed forecasts . But, now, we have another real example of something else proposed by Musk that was completely unrealizable and unachievable. Does such an event mark a turning point in how investors can see and believe Musk in the future? In my opinion, yes.
There is even more in the recent context of the "privatization" system that should raise further questions about Musk's behavior and actions. As mentioned above about the "burn of the century" project, we initially had no idea what Musk's sleeve might have been. Given that very few people thought that Tesla could reach a production rate of 5,000 Model 3 per week in the second quarter, the last week of Musk's quarter should slightly exceed that rate in just one week. prove that all the opponents are wrong and make the shorts cover.
This did not work, however, although the title opened higher the day after the announcement, it quickly declined when the absurdity of the supposed realization was more widely appreciated. The absurdity of such an outcome assumed to be similar to that of Stakhanov is also emphasized even more when the production "guidelines" for the third quarter were only 50,000 to 55,000 models 3 per week . I may not have imagination because I went to school before the introduction of "new mathematics", but the guidelines for the total production of the third model of the third quarter are only 4 000 per week.
Given that the "all hands on the bridge" effort to produce the "short burn of the century" did not work, I think the announcement "go private" was then another attempt to create a short tightening . What is comical about such an attempt is that apart from the fact that there was no chance that this transaction would take place, the stock remained about 20% below the so-called "buyout" price of 420 dollars. could happen.
As there was very little credibility on the current private transaction, I also think, as has already been suggested above, that Musk's statements and projections will be much less credible in the future. For a company with huge capital needs, this could be very risky for Tesla investors.
Meanwhile, what's going on with all these dusty cars?
As the statements of Musk and Tesla in the future will probably be accepted with much less credibility if I understand correctly, the company's current statements about what is really going on with the "ramp of production" of Model 3 will be probably accepted with much less belief.
Some enterprising detectives did drone overflights different "staging lots" at Lathrop and Burbank to regularly show thousands of Teslas sitting in the sun. Business Insider and a local newspaper near Lathrop also covered filming locations. There has been a lot of speculation as to whether cars are waiting for "recovery" after the initial manufacturing or even if such a "production limited" company has no customers for cars but, at in my opinion, a much more favorable explanation shows Tesla and Musk in a very bad light.
As I have essentially suggested earlier in this article, the reality of Tesla is that Musk feels free to do things. And so, given Musk's other vision of the highly efficient and nearly automated "Alien Dreadnaught" manufacturing, where Tesla would be the most efficient manufacturer in the automotive industry, the reality is:
And so I do not know why all these cars are there in the sun because it does not seem very effective.
In any case, the extreme limits of the Fremont facility are now clearly displayed because there is no room for vehicles there. Tesla's claim that the vehicles would only be made to order makes no sense, because if the vehicles were fully inspected and finished, they would be routed to their greedy buyers instead of sitting in a warehouse. In addition, if there is no room for vehicles in Fremont and cars are also made in a tent, this also raises the question of where the next story of Musk promised, the so-called Model Y, could be manufactured.
In the real world, a real data point about the costs of a manufacturing plant
Another recent Tesla story was about their future "China Gigafactory". Elon Musk is never satisfied with factories and to make things more exciting, they must all be gigafactories! As usual, the announcement of the Chinese factory had very few details. A new automobile assembly plant in China, designed by a real automaker (Nissan (OTCPK: NSANY)), provides dry and boring details about the real costs of such a new installation.
As described in a recent Reuters article, Nissan plans to spend $ 900 million for a plant that will have a capacity of 200,000 to 300,000 vehicles a year. Tesla's announcement, although vague as usual, implied that their new "Gigafactory" would have a capacity of at least 500,000 cars a year, which also corresponds to the company's speech according to which demand for their vehicles is huge.
However, the new Tesla China Gigafactory would not be the only one to make cars, but there was also a more "automated and integrated" story about battery manufacturing. Thus, to double the capacity of the announced Nissan plant, it would cost at least $ 2 billion. To increase the production capacity of batteries and battery assembly, it would probably add $ 1 billion, for a total of $ 3 billion in costs.
Although one of Elon Musk's latest claims is that the company is now "positive on cash flow" in the third quarter and that it will never again need external financing (the sixth iteration of this statement, I think), money – plus probably $ 2 billion for additional capacity for the Y model, the semi, the roadster, and so on. So I do not see how the factory of Tesla China will be built.
As with everything about Tesla, there are always rumors, speculations and stories about how something could really happen. With regard to the China factory, there seems to be an assumption that "local financing" will be available. With regard to this notion, however, China is already in the midst of huge scandals about defaults in "special-purpose financing vehicles". So I think China could not spend a lot on Tesla's projects.
Is there now more competition?
Another part of Tesla's story is that there will be unlimited demand for a "Model Y" SUV. Well, guess what, considering the other challenges of Tesla – including never respecting the plans and deadlines – there is now a major new competitor who will have a fully electric SUV at least two years before Model Y has his chance to sit in a dusty lot parking lot.
This SUV is the new Mercedes EQC, but even this model is not the only one to beat Tesla in the electric SUV segment, given the Jaguar I-Pace and Audi E-Tron already launched. Tesla fans, who probably still believe in fairy tales such as Tesla's "$ 35,000 mass-market vehicles," will argue that the EQC will not be a competitor given its likely price about $ 80,000. This price, in my opinion, is actually a very revealing fact about the actual costs of producing electric vehicles. Daimler, as a disciplined organization, is not willing to waste money on his vehicles – a concern that does not seem to be shared by most Tesla investors.
There was another interesting detail about the announcement of the EQC, however, which also invalidates another Tesla fairy tale that is the dream of the cost benefits of its "Gigafactory". Even forgetting the fact that Panasonic was likely charging Tesla a fixed unit cost for each cell, which invalidates Musk's "economy-of-scale" suggestions, Musk insists that such a "integration" will always give Tesla an advantage in terms of batteries.
The interesting detail of the announcement of the EQC is that Mercedes will manufacture the batteries itself:
"The centerpiece of the Mercedes-Benz EQC is the lithium-ion battery produced internally in the floor of the vehicle."
But how can this be? How is it possible to manufacture batteries without Gigafactory? Well, an organization as disciplined as Daimler seems to have found the way – and they certainly would not do it if they thought they were going to lose money.
This is very different from Tesla, which recorded operating losses of nearly $ 6, although Musk now claims that the company will be profitable in the future. From my perspective, given Tesla's long list of unfulfilled promises financially, I believe that the likelihood that Tesla will generate consistent operating profits is very low. In any case, even with the additional promise of "positive cash flow", there is a huge difference between being able to generate a low level of positive cash flow (which Musk will then need) and generating enough cash to repay $ 11. billions of dollars in debt and also support capital expenditure needs of at least $ 3 billion a year.
Conclusion
As I described earlier in this article, I believe that the recent episode of "Tesla privately" provides a real example of what Elon Musk is willing to say and do to try to control the "story" about Tesla . Aside from what will likely be permanent and costly regulatory and litigation issues involving Musk and society, I think Musk's irresponsible and manipulative behavior will now be subject to much more scrutiny and that his statements will have much less credibility. . For a heavily indebted business in a highly capitalistic sector where there is a continuing need for sources of capital, it is a huge risk that is not appreciated by Tesla investors.
None of what I describe should be a surprise, however, many of Musk's statements and promises are exaggerated and unsatisfied:
- A "general public" vehicle of $ 35,000,
- an introduction in July 2017 of such a "general public" vehicle,
- "Full Self Driving", sold for almost two years but with no announced delivery date,
- "Alien Dreadnaught" is the most efficient manufacturer in the world,
- "Solar tiles" that are not yet available, and
- The No Brainer synergies between Tesla and SolarCity, but where SolarCity's previous business activities are now complete.
I could go on for a good while on many other examples of unfilled statements, but Bill Maurer's blog post linked above already provides a very comprehensive list.
The main point of this article, however, is what has already been mentioned throughout the year: the future credibility of Elon Musk will be much more doubtful. For a heavily indebted company in a highly capital-intensive sector, this will pose a huge risk for Tesla's investors.
Disclosure: I / we have no position in the actions mentioned and we do not plan to enter positions in the next 72 hours.
I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.
Additional disclosure: This article expresses the author's views and views on various investment topics. Since all statements in the article are represented in the form of opinions rather than facts, such opinions do not constitute a recommendation to buy or sell a security. My own investment position described in the Disclosures is not intended to provide investment advice or to recommend a specific investment strategy, but is an information element required by Seeking Alpha. My own investment position may have been initiated at very different price levels than current prices and it is also for this reason that my stated position is certainly not conceived as a recommendation of any kind. # 39; investment. All investors should also do their own research before making any investment decision.
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