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Tesla: Nothing More Than Visions?

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October 26, 2016

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Tesla: Nothing More Than Visions?

elon-musk

Elon Musk, © Tesla

With great fanfare, Tesla head Elon Musk announced what he had devised as a second masterplan. The corporation is not only to produce batteries for its Powerpack and Powerwall, but should also supply the added solar modules (takeover of sister company SolarCity is in progress). The new plan additionally includes aims to design several other electric cars – from trucks and smaller transport vehicles to buses. Considering the many unanswered questions about the production of Model 3, the “new” goals seem even more ambitious than the old ones (= 0.5 million in 2018 and even 1 million electric cars in 2020).

Moreover, the Gigafactory will require many more cash infusions. The latest report puts construction progress at 14%. The entire complex is said to require a total investment of USD 5 billion. Tesla partner Panasonic has invested there as well, although it is not quite clear what type of investment was planned. Because: Panasonic’s co-funding appears to be the supply of machinery and plants, which Tesla would have to finance on its own. There has been no communication about this so far. Maybe it’s a type of supplier credit and not a direct investment of up to USD 1.6 billion? Meanwhile, Panasonic will continue to deliver battery cells to Tesla, even if this arrangement raises questions of its own – for example, based on which terms Tesla accepts delivery (volume, price).

An interesting side note may be that Tesla is said to have told the SEC that there could be …

link-to-e-journal-web

SolarCity and a lot of unanswered questions

Tesla has formally submitted its bid in the amount of USD 2.6 billion to take over SolarCity in exchange for its own shares at a ratio of 1 to 0.11. SolarCity, in which Musk has an above 20% stake as the biggest individual shareholder, manufactures solar modules and is managed by Musk’s cousins. However, the company is also around USD 3 billion in debt, which would have to be taken over as well (do Tesla’s creditors have a right to object?) and incorporated into Tesla’s balance sheet. Since SolarCity has recently announced a quarterly loss of around USD 250 million (based on GAAP, Tesla posted a loss of nearly USD 300 million in the second quarter), the close timing of the takeover bid has to be viewed with a healthy dose of skepticism.

Another Musk company, SpaceX (which uses rockets to send satellites into orbit), has loaned SolarCity USD …

Considering the remarkably high quarterly losses of SolarCity and the run time of the credits (it is said there are still 2016 due dates for repayment – only what I’ve heard, no guarantee it’s true), it begs the question whether SolarCity would even have survived if the Tesla bid hadn’t arrived. Tesla’s shareholders must be shocked at the prospect of having to accept more than ten million shares as a purchase price for a company with less than one billion dollar in revenue and USD 3 billion in debt adding onto Tesla’s. The threat of class action lawsuits is real, but they are mostly coming from cunning lawyers, who – at the end of the day – will receive the bulk of the settlement amount. The takeover, however, seems to already be a done deal considering Musk’s statements and the interests of the major shareholders.

Convertible bonds

Tesla’s USD 3 billion debt was mainly incurred in convertible bonds. To convert borrowed capital into equity, some of the bonds would need to become due. Repayment will not involve cash but shares. Their number will depend on the conversion ratio – and on the conditions of the bond, whether Tesla itself or the bondholders are able to push for conversion. Expectations are that the holders of certain bonds will make them available for bond repayment/conversion at a relatively low value (around USD 160/share) compared to Tesla’s current share price, allowing for non-recurring gains (share profit plus interest). The total amount is rumored to be USD 422 million. That there is a willingness to repay these bonds now indicates that there needs to be a fallback position before the debt of SolarCity is included into Tesla’s balance sheet after the takeover of the sister company.

My conclusion: Official sources see the next increase in capital occurring still somewhere in …

Strategy

What’s noticeable is that four funds (but more than one fund from the same umbrella fund) bought another bundle of Tesla shares worth USD 4 million in the second quarter alone, despite already being heavily involved in the company and basically possessing the majority of shares together with CEO Musk. Maintaining such a high percentage and stake in a business is not something really common for funds. But it’s …

The catalyst for higher share prices at short notice could be the number of electric cars produced in the third quarter. The numbers floating around range from 20,000 to 22,000 units – independent of the expected loss posted (or even a fictitious profit according to non-GAAP?) this quarter.

Theoretical course development

After capital increase, a further drop in share price. Share prices of below USD 150 seem like a possible scenario. It all depends on whether Tesla can deliver some good news (sales figures) or whether the losses increase. Because of SolarCity – if the company should be consolidated into the Tesla balance sheet in the fourth quarter – the losses posted could even be much higher. The suspense will continue.

Thoughts: High book profits should either be used to secure against increasing share prices (puts) or be realized. Long-term sell options (in 2017/18) with a very depressed price development (USD 100 – 200) are highly speculative (risk of losing the total invested), but could be interesting as an addition for experienced investors who like speculating – with lower limits based on the assumption that the share price will be pushed up for some time.

Please consider: At the beginning of this year, Tesla shares fell from above USD 240 to as low as USD 140 within only one-and-a-half months. What’s it to keep from happening again? There are signs that it may do so.

Risk warning

Investors must understand that buying and selling shares is done at their own risk. Consider spreading the risk as a sensible precaution. The fuel cell companies mentioned in this article are small and mid-cap ones, i.e., they do not represent stakes in big companies and the volatility is significantly higher. This article is not to be taken as a recommendation of what shares to buy or sell – it comes without any explicit or implicit guarantee or warranty. All information is based on publicly available sources and the assessments put forth in this article represent exclusively the author’s own opinion. This article focuses on mid-term and long-term perspectives and not short-term profit. The author may own shares in any of the companies mentioned in this article.

Author: Sven Jösting

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1 Comment

  1. Arno A. Evers

    Those, which have as many activities (tasks)
    running in parallel, as Elon Musk,
    need a big number of good staff,
    which is able, to handle them all favorably.
    To my humble observation, over years,
    there is still enough room for improvement(s)…

    Reply

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