Archive for the ‘Investing’ Category.

What Seems To Be Going on At @Tesla, and The Risks Of Buying (and Shorting) $TSLA Stock

I know I have blogged too much about Tesla of late, and you can be forgiven for just skipping on.  However, I find the situation fascinating -- I have seen splits between bulls and bears on stocks before, but never a situation where there is such a cultural divide between the two groups. What really caused me to write this article is that I have read a number of naive and idealistic people who have written online that they have invested all their money into Tesla.  They love the car, they love Elon Musk, and they are going to trust him with all their money.  EEEEEKKK!  I am going to give my warnings about not being an investment professional in a minute, but I feel more than comfortable even as a regular guy telling you absolutely DO NOT put all your money into a single investment, particularly one you do not control.

So, disclosures:  I am not an investment professional.  I have studied the science of dissecting corporations at Harvard Business School, but I have a less than perfect history of actually trying to make money from this knowledge.   I am short $tsla via put options (a very small percentage of my portfolio), but shorting a stock like this where there is so much passion on the bull side is dangerous.  I and others recognized many of the issues I will discuss in this post over a year ago, but had we been trying to roll puts or sit on a short position all this time it would have gotten very expensive. Making this investment even more risky -- either way, long or short -- is the fact that at this point you are effectively betting on one question: Will Tesla be able to raise new capital in the next 6 months.  This is a question even the experts can't handle and as a result it is probably only safe to dabble in Tesla as a bar bet for most.

BTW, since there is a culture war over Tesla that mirrors the larger culture war in this country, criticisms of Tesla are often interpreted as being based on bad motives and evil intentions.   So I will say that despite having once worked for Exxon, I am not in the pay of the Kochs or other fossil fuel interests, and don't have an axe to grind over electric cars.  I am putting solar on my roof and I have a deposit put down on a Lucid Air.  I have a number of renewables investments in my portfolio, e.g. PEGI.

But I believe the reckoning may be coming soon for Tesla.  If you understand the risks and it is <5% of your portfolio, fine -- take a flyer.  But for any of you that have a lot of money in Tesla and maybe don't have a lot of experience investing or analyzing companies, my advice is get out ASAP.  You have a unique opportunity here that despite a lot of red flags and smoking guns, the stock still trades at a level that will get most folks out of their position cleanly.

The Tesla Passion

Tesla has an incredibly passionate customer base that overlaps a lot with its incredibly passionate investor base.  This passion is based, in part, on:

  • The model S which, when it first came out, was years and years ahead of its time.  Every other electric car at the time was a joke -- the model S was a real legitimate luxury sedan one might want even if one did not care about EV's.  The later Model X SUV was also pretty good (though in my opinion not as good).  The current Model 3 is a mixed bag which we will discuss further. But suffice it to say that Tesla earned the right to be called a leader and an innovator in the field
  • Elon Musk.  He seems to be passionate about the same things (the environment, hating on oil companies, etc) that his fans are passionate about.  He is involved in amazing, super cool stuff like SpaceX.  He is constantly coming up with new product and service concepts and promising them to his user base.  He responds directly to customer complaints and suggestions and generally promises everyone that they can have their fix or feature really soon.  He has created a mythology that he is Tony Stark incarnate, and many of his fans honestly believe him to be the smartest man on Earth.
  • Comparisons to Apple.  Elon Musk and his fans frequently argue that they are reinventing the auto industry as Apple. with the implicit assumption that they will shift historically low auto gross margins to be like Apple's crazy-high gross margins.  How this will happen is left a little vague, but among other things there is a vision of the car as a software platform, where consumers pay recurring fees for a stream of over-the-air features and updates.
  • Self-Driving.  Tesla fans are convinced that they are just days away from having full automated self-driving features in their Tesla.  Many paid thousands of dollars on faith for this feature and continue to wait patiently for it to be delivered (which it has not been), even years after paying for it.  It is an article of faith among Tesla fans that Tesla is years ahead of every other self-driving competitor because the smartest guy in the world is running the program.
  • The sales process.  The sales process (which is mostly online) seems much friendlier and less intimidating than going in to a dealer, and non-commissioned Tesla employees in their small showrooms seem much more likeable to the average Tesla buyer than the average car salesman.
  • Every quarter, promised new products.   Elon Musk is an absolute fountain of new product ideas.  Reading his Twitter feed is like looking through Popular Mechanics covers in the 1970s.  Solar roof tiles! Sending a man to the Moon! Martian colony! Electric Semi!  Electric pickup!  Electric coup!  Self-driving on-demand vehicle service!  A tunnel to Dodger Stadium!  A flamethrower!  The hyperloop!  A $35,000 Model 3!

But beyond all this is the cultural divide between skeptics and passionate Tesla supporters.  Tesla supporters online tend to have little or no financial knowledge or ability to analyze a company's balance sheets and operations, whereas the skeptics tend to be digging through details of balance sheets and pro formas.  One might think this would be a red flag for Tesla supporters, but in fact it just hardens their position.  All of us talking things like cash flow and quick ratios are just dinosaurs, captives of traditional narrow capitalist thinking -- exactly the sort of thing that the brilliant Elon is sweeping away.  We are the ones who are naive at best, or at worst paid short-selling agents of the internal combustion engine lobby.  I have never seen an investing situation like it, and the nearest analog I can come up with is the conflicts between Scientology supporters and skeptics.

So what exactly is the problem with Tesla?  I will name a few of the major ones here, but want to note that much of the credit for the hard investigation and analysis on many of these points go to many folks in the $TSLAQ community, a group often huddled around @teslacharts on Twitter.

Problem #1:  Tesla Has Tried to Disrupt Too Much

I have written about this before, when I said,

One of the hard parts about reinventing an industry is being correct as to what parts to throw out and what parts to keep.  Musk, I think, didn't want to be captive to a lot of traditional auto industry thinking, something anyone who has spent any time at GM would sympathize with.  But it turns out that in addition to all the obsolete assumptions and not-invented-here syndrome and resistance to change and static culture in the industry, there is also a lot of valuable accumulated knowledge about how to build a reliable car efficiently.  In Tesla's attempt to disrupt the industry by throwing out all the former, it may have ignored too much of the latter, and now it is having a really hard time ramping up reliable, quality production.

Ditching the ICE, throwing out assumptions that PEV's had to be silly little econoboxes, and thinking about cars as a software platform are all awesome disruptions and fundamental to the Tesla competitive advantage.  But at the same time Tesla was doing this, it also attempted to throw out 100 years of auto industry learning on manufacturing and selling cars.  On the manufacturing end, Musk promised an "alien dreadnought" with machines that moved so fast humans wouldn't even be allowed in the building.  Tesla has not been able to make this work, and as a result has had to try to relearn old rules of car manufacturing on the fly.  This has hurt both their capacity ramp as well as their product quality.

On the sales end, Tesla wanted to do away with traditional dealers, and the Tesla owners I know loved not having to buy from a car salesman.  But they did not come up with anything to replace the dealer system -- cars still need to be delivered, inventoried for sale, and repaired.  All of these have been huge problems for Tesla in what Musk has called "delivery hell."  Tesla has factory workers moonlighting delivering cars, it has inventory tucked away in all kinds of weird ad hoc lots, and Tesla owners often have to wait months for car repairs, usually because Tesla doesn't build enough spare parts.

Note that Tesla has also saddled itself with building out the entire world fueling network for the car.  ICE car makers can depend on already existing gas station infrastructure.  One could imagine that Tesla might have partnered with someone else to do this -- perhaps a large electric utility or a consortium of other car makers -- but instead has gone it alone building proprietary Supercharger stations across the country.  Time will tell if this makes sense -- it could create a competitive moat protecting it from new competition but it also costs a LOT of capital and leaves them vulnerable to being the odd-man-out of some sort of shared network.

I will end this section by recalling the comparison of Tesla to Apple that so many of its supporters make.  But as far as the iPhone is concerned, Apple is a design and software house.  It does not build the phones, it has a partner do it for them.  It does not write most of the applications, third parties do that.  And (at least in the early days) it did not see through its own stores, it sold through 3rd parties.  An Apple-like Tesla would NOT be trying to build its own manufacturing, service, and fueling capacity -- it would leverage its designs as its unique value-add and seek others to do these other lower-margin, capital-inensive tasks.

Problem #2:  Tesla is Out of Capital (to Operate or Grow) And Seems Unable to Raise More

Tesla has never been profitable and continues to burn through a lot of cash.  It burned through a couple of billion dollars in 2017 and more this year, and right now probably has less than $2 billion on hand with a lot of funding needs, including over a billion dollars of debt that is maturing over the next 6 months.  Tesla may not have the cash even to cover its operating needs over the next 12 months, as Tesla has not been able to prove it can produce the model 3, or any of its vehicles, at a gross margin that will sustain the company's fixed costs.

But forget about operating losses for a moment -- you can go to twitter and argue these to death, and I will address it again below.  But what of Tesla's growth?  Tesla's current factory space is maxed out, so much so that they are building some Model 3's in a big tent.  The Tesla growth story depends on the promised pickup truck and semi truck and coupe, but there is absolutely no place to build them right now -- a place to build them has not even been started and Tesla does not have the capital to create these assembly lines, or likely even to finish the product design.  And even ignoring these, what about the next generation Model  S and X?  In the auto industry, car designs are typically refreshed as a minimum every 4-5 years.  The Model S will be 5-years-old in December of this year.  Where is the new second generation model?  Tesla has enjoyed a 5-year head start on anything like comparable competitive vehicles.  Now, a slew of challengers have been announced and will start appearing in dealerships in 2019 -- Tesla has perhaps 1 more year to buff up its product line before it has real competition.

Besides the car development and production issues, remember we also discussed that Tesla has chosen to build out its own fueling, new car distribution, and car servicing network.  The current distribution issues and servicing complaints make clear that a LOT more capital is going to be needed in these areas.  Capital is needed to inventory parts, to create dedicated storage and delivery centers, and to add more servicing capacity.  Add to this Elon Musk's recent promise to bring body work on Teslas in house and thus create a whole body shop network, and that is a LOT of capital that Tesla does not have.  It is clear to me (though maybe not to Tesla fans) that this capital is not going to come organically through large positive cash flows from operations.

Tesla really needed to raise $5 billion in early 2018.  Its stock was riding high over $350 and its shareholders did not seem to care one bit about dilution.  Why Tesla did not do a capital raise when the money was there and the cost of capital was so low is a total mystery to pretty much everyone.  If nothing else, Elon Musk is absolutely obsessed with "burning the shorts" and the shorts all agree that the one thing that might hurt them in the short term and drag out their returns for years is a large capital raise.  So why not?

One prominent theory among short-sellers and Tesla skeptics is that there is some sort of grand secret inside Tesla -- an investigation or a bad set of numbers or even some kind of accounting fraud -- that prevents Tesla from making the disclosures necessary to go to the capital markets.   I am not sure this makes sense -- what secret could be so bad and still stay secret for so long?   The fact that Tesla seems to hemorrhage senior accounting officers, finance VPs, and controllers just adds to the mystery.  Whatever this mystery barrier to capital raises has been, it has only gotten worse with Tesla's recent SEC investigations and on-again-off-again settlements.  No matter what, the result is that Tesla is starved of capital and apparently cannot easily get more.

If you buy or sell Tesla, this is essentially the question you are betting on -- Can Tesla raise capital?  If they can't in the next 6 months, they are likely headed for bankruptcy or restructuring (but either way wiping out most of the equity holders).  On the other hand, if they were to announce a multi-billion dollar capital raise tomorrow, the stock would rocket back in to the high 300's and all the shorts would be at least temporarily burned (though Tesla would still have long-term structural challenges).  This is why it is inappropriate to have much more than a small piece of your portfolio either long or short Tesla -- you are effectively betting on whether this capital raise will happen and even the experts can't fathom it.  I think it won't happen for the simple fact that if it could have happened, it should have already occurred, but I could be wrong.

Problem #3:  Tesla is an Operational Mess and Not Good at Fulfilling Promises

Elon Musk makes a lot of promises, promises that get a lot of folks excited, but very few of these promises are ever met.  In the long list of promises I listed right up at the top, very few if any have been fulfilled.  For example, Tesla still is not anywhere near the production rates for the Model 3 that Musk promised it would reach over a year ago, a promise so clearly broken that Tesla is being sued over it.  Musk claimed as many as a half-million pre-orders for the Model 3 mainly on Musk's promise to sell it for net $27,500  ($35,000 less the $7,500 federal tax subsidy).  Now the $35,000 version is not even on the manufacturing plan (Tesla still can't figure out how to make money on it) and it certainly will never be produced before Tesla starts losing the $7500 subsidy after December.

For years Musk has pulled new product rabbits out of his hat every quarter, just when he needed them to complete financing or an acquisition.  After the the stock pops up in response, little is ever heard of the suggested product again.  The battery swap technology that got California to give Musk bigger subsidies has completely disappeared from the radar screen.  Musk demonstrated what he said was a completed solar roof tile technology just in time to sell Tesla shareholders on the idea of bailing out SolarCity, but again the technology has never materialized and SolarCity has essentially been shutting down, with fewer new installations each quarter.   The same was true of the Semi truck, released to great fanfare but totally MIA today.  And beyond these promises are crazy, clearly inaccurate promises from Musk that they are taking all body shop work in house immediately or that they are producing their own auto carriers to alleviate a supposed auto carrier shortage.  And even this does not include the small promises he has made almost every day to users to add this or that new feature.  It is almost as if Musk has a psychological need never to admit that there is a problem for which he has not already implemented a solution.

Worse, the products Tesla is making are not fulfilling Tesla's early promise.  Specifically, Tesla fan boards have been full of stories about delivery defects in new Model 3's, including parts that fall off and body panels painted the wrong color.  Leaks from inside the factory have hinted at first-pass yields on the model 3 that are close to the worst in the entire auto industry.  To try to keep investors happy, Tesla has promised that they would produce 5000, and later 6000 model 3's a week, but rather than achieve sustainable production at these levels the factory has engineered a couple of crazy push weeks where production is juiced to these levels, and then falls back to lower rates.  This is probably one reason for the quality problems, and certainly is not a recipe for reducing production costs.

Problem #4: Q32018 May be Tesla's High Water Mark

Which brings us to the 3rd quarter results, which should be announced in just a few weeks.  Musk has been vociferously promising for months that Q3 and Q4 would be GAAP profitable and cash flow positive.  He went so far as calling out the Economist Magazine for having the temerity to suggest that this did not sound realistic.

Perhaps as a result of this very public commitment, Tesla has very clearly pulled out all the stops to really juice the third quarter.  For example:

  • It carried over a lot of inventory from Q2 to be sold in Q3
  • It has mined its order book to find all the folks who have ordered the most profitable cars.  It abandoned the promised first-come-first-served manufacture-to-demand approach to focus on batch producing cars for those who ordered the highest margin versions.
  • It has mined two years of orders and sold them all in one quarter
  • It has reportedly done a sale and leaseback of all its demonstration and loaner fleet
  • It has reportedly taken full payment from multiple people for the same car, delivering it to one person and holding the money from the other for a 4Q delivery.
  • It has stretched out the time it takes to repay deposits for cancelled orders to 45 days
  • It has stretched its payment to vendors, resulting in a number of vendor complaints.  As a result its net working capital has gotten more and more negative.
  • It has had special end-of-quarter sales of inventory
  • It has used expensive promotions (e.g. free Supercharging for life) that it promised earlier not to use again in order to move inventory at the end of quarter
  • It has switched to batch production from produce to order in the factory, presumably to cut costs and increase throughput but having the effect of creating inventory for which there is no current buyer.
  • Once it was too late for manufactured cars to get sold in the quarter, it cut way back on production in the last days to conserve cash.
  • Tesla has some undisclosed number of government ZEV credits it can sell, which would lead to a one-time increase in profits and cash flow.  Tesla takes advantage of a loophole in GAAP accounting to leave these off their balance sheet, presumably so they can act as Musk's personal burn-the-shorts slush fund.

It is not clear if this will result in a small profit or positive cash flow.  The problem is that whatever Q3 results are, they will be almost impossible to duplicate in Q4.  Tesla will likely talk about what a growth trajectory Q3 represents over previous quarters, and they will be right, but what will be missing from the story is how nothing will be left in the tank for Q4.

The following is essentially speculation, because Tesla refuses to answer any questions about their order backlog.  In fact, Musk famously blew off an analyst in a previous conference call who tried to inquire about the order backlog.  But there are good reasons to think that the backlog of profitable customer advance orders and deposits is tapped out, that Tesla in Q3 has serviced everyone in the backlog who wanted a car that could be produced at a reasonable gross margin and everyone else in the backlog are folks who ordered cars, particularly the $35,000 Model 3, that Tesla has no intention of building any time soon because they would lose their *ss doing so.  In this context, Q3 is not an organic quarter in the midst of a growth trend but a manufactured quarter where over 2 years of pre-orders were tapped in one three month period, leaving nothing in the tank for the future.

The evidence for flattening demand for Tesla is pretty compelling.  Model S and X sales volume has basically been flat for over a year.  And as for Model 3, the unsold inventory tucked away in random locations combined with the desperation fire sales at the end of Q3 point to a saturation of demand.

Note that a flattening of demand has a double whammy for Tesla.  First, it means that their stock valuation will likely crash.   Tesla's valuation at huge multiples of revenue (there is no profit) only makes sense for a rapid growth company.  If the rapid growth tails off, the valuation will come to Earth.

And this is not even the biggest problem.  Let's take a step back.  In the old days, say in the 1980's, growth was a consumer of cash.  This is because manufacturing and inventory cycles were long.  Growth meant investing in more parts and production now, only to get higher revenues later -- working capital skyrocketed with growth and could nearly bankrupt otherwise healthy growing companies.

Today, however, supply and manufacturing chains are much shorter.  Products can be produced and sent to customers before the vendors are even paid.  Dell computer was an innovator on this, getting paid by customers for a PC before Dell itself had paid for any of the parts.  Combine this with Tesla's innovation of having customers put down deposits on their cars months or years before the sale, and this means that growth actually creates cash for Tesla as working capital becomes more negative.

I have the same thing happen in my seasonal business.  Through the spring, as I hire people and visitation to our campgrounds increases into the summer, we get big increases in revenue immediately while we don't have to pay new hire salaries for a couple of weeks or expenses like trash for months.  Growth generates cash because we get the revenue before we pay the expenses.  But the whole thing reverses itself at the end of season, as revenues fall and all the bills come due.  This negative cash flow effect as revenue growth reverses at the end of the operating season almost bankrupted me the first couple of years until I learned to plan for it.

In the same way Tesla has been getting positive cash flow (via negative working capital) from growth, but this will reverse the moment that growth slows.  When their growth inevitably slows in the fourth quarter, no matter how well they claim to have performed in the third quarter, Tesla is going to see a huge cash crunch.   I am not sure they will have the cash to cover it, and smarter people than I are betting on a Tesla bankruptcy or restructuring in the next 2-3 months.  Any such event will largely wipe out equity holders.   Which is why I am advising you to keep away.  Elon Musk and Tesla may have some double-secret plan to avoid this cash crunch, but are you willing to bet your savings on it?

Problem #5:  Elon Musk is NOT the Smartest Man on Earth

The ultimate answer to all these concerns about Tesla by Tesla fanboys is that they have confidence in Elon.  I see people write on boards, dead seriously, that Elon is the smartest person in the world.  One wrote two days ago that they thought he was the smartest guy in history.  They have confidence that Elon will make things work out, and that Elon will always be able to attract new capital because everyone in the world feels the same love for Elon that they do.

Here is the problem:  Elon Musk is not the smartest guy in the world.  He is clearly a genius at marketing and brand building.  He has a creative mind -- I have said before he would have been fabulous at coming up with each issue's cover story for Popular Mechanics.  A mile-long freight blimp!  Trains that run in underground vacuum tubes!  A colony on Mars!  But he suffers, I think, from the same lack of self-awareness many people develop when they are expert or successful in one thing -- they assume they will automatically be equally as brilliant and successful in other things.  Musk creates fanciful ideas that are exciting and might work technically, but will never ever pencil out as profitable business (e.g. Boring company, Hyperloop). Musk is not good at managing operations or manufacturing.  He does not seem like a very good planner, which should be a must in a business with long lead times and billions in capex.  He has brought too much of the "fake it before you make it" culture from the web world, where the stakes attached to unsuccessfully faking it are so much lower than they are in, say, the car business.  This natural tendency to overestimate one's abilities is just made worse by all the fan attention that constantly tells him he is the real Tony Stark and the Smartest Man on Earth.

SpaceX works pretty well because someone who is not-Musk and actually knows that business runs the operations and designs the product.  Even in Tesla, the Model S was designed by someone else, as much as Musk would like to claim credit.  I have said for over a year that Tesla needs to find the right role for Musk and it is NOT CEO and COO and CTO and chief Tweeting Officer all in one.   Tesla needs Musk at this point as their face to the public.  He would be a good chairman and could help lead the company's product road map.  He is great at communicating exciting things to the public -- within limits.

The "within limits" proviso in the last line is based on what is surely Musk's worst flaw -- he can be a petulant, impulsive, unreliable child on Twitter.  I won't go into all the stories, most of them made the national news, but  he tried to insert himself into the Thai cave rescue story and when his contribution was not useful, called out one of the rescuers as a pedophile.  He frequently is obsessed with short-sellers and taunts them with promises to burn them.  He reacts poorly to criticism and bans a lot of critics on Twitter.  And, most disastrously, he tweeted that he had funding secured for a $420 buyout of Tesla that caused the stock to shoot up, only to fall back to Earth when it was revealed that no such offer existed.  This latter event was a clear violation of SEC rules, and after an SEC investigation Musk and Tesla settled with the SEC.  But even that was not the end, as Musk then repudiated the settlement, and then two days later signed a new more onerous settlement, and then a few days after that mocked the SEC over twitter in a clear violation of the terms of the settlement he just signed.  Which is where we sit today, waiting to see how the SEC responds to this latest outburst and with rumors swirling that other SEC and justice department investigations may be in progress at Tesla.

Which leads to the question -- is Musk just immature on Twitter, or is he actually corrupt ala Elizabeth Holmes at Theranos or the smartest guys in the room at Enron?  People might respond that Musk is a brilliant, visionary guy -- he can't be corrupt!  But my wife who has to have her blood tested a lot loved Elizabeth Holmes and her vision.  I personally worked with Jeff Skilling briefly at McKinsey before he went to Enron and he was both visionary and a real genius.  The way he introduces new products right when he needs an external boost, and then drops them, looks a lot like a stock-pumping operation.  And I personally think the Tesla bailout of SolarCity was completely corrupt -- it benefitted Musk and his friends and family at SolarCity and did less than zero for Tesla shareholders.

*     *     *

That is the situation as I understand it.  If you still want to make a big bet on Tesla, one way or other, hopefully you are a bit better informed of the risks.  Trade carefully, as the saying goes.  Or do as I do, and just watch the show because it is enthralling.

Great Moments in Crazy Stock Bubbles -- Are These Investors On Drugs?

As of this moment, Canadian tulip bulb marijuana company Tilray is trading at $146 a share for a total market capitalization of $11.2 Billion.  This is a company that had $10 million in revenues last quarter.   It is trading at a 420x multiple of last year's revenues.  It is up 20% today alone.  The race to own Canadian marijuana stocks in advance of the January 1, 2019 legalization in Canada is simply insane.  I would have attributed this to millenial dumb money leaving Tesla and looking for a new home, but a couple of weeks ago, American alcoholic beverage company Constellation Brands paid $4 billion for just a piece of another Canadian weed company.

Investments at this sort of valuation before the market even is opened are speculative in the extreme.  People will use the argument that "wouldn't you have wanted to be in on the ground floor of Coke or Pepsi or Phillip Morris or Anheuser Bush?"  A few responses:

  1. Buying in at an $11 billion valuation is not really the "ground floor".  $11.2 billion is a higher market cap than Whirlpool or Hyatt or Alcoa.
  2. The beer and cigarette and soft drink industries all started with hundreds, even thousands of competitors.  When RJ Reynolds started his tobacco company, there were 15 other tobacco companies in Winston-Salem alone.  Without your current hindsight, you would have been hard-pressed in the early stages of those industries to pick the winner.
  3. This goes without saying, but we have no idea of the future size of the marijuana market, and even without the risk of trying to predict consumer behavior it is really hard to predict regulatory behavior
  4. Usually only one part of the value chain of a new industry really makes the profits.  We have no idea where that will be in the marijuana business.  In beer and tobacco, the big profits are not with the growers of tobacco and hops, for example.
  5. Early pioneers in an industry are often not the survivors.  Your computer today, is it a Tandy?  Kaypro?  Commodore?  IBM and Compaq don't even make PC's any more.  Apple does but only because it reinvented itself as a phone maker.  And how about those cell phone pioneers?  Is your phone a Nokia?  Motorolla?  Blackberry?

December $145 put options on Tilray are trading around $72 dollars, which essentially means that there are folks betting that the company will lose half its value in the next 90 days.  I can't remember ever seeing anything that extreme.

Update:  Well, a day later it is at over $200 and a $20 billion valuation.  Incredible.

 

Tesla: With the First Domino Tipped Over, It is Just Physics Now

You may not see much Tesla coverage here for a while, despite a lot of breaking news.  Here is why:

The dominoes are all lined up, and that was an interesting story (the dominoes include:  Tesla's poor management of a good product, its lack of adult supervision, its repeated failure to meet targets, its utter contempt for being held accountable to targets, its paranoid worldview, its past near-corrupt actions like the insider SolarCity purchase, Musk's irrational hatred of shorts, its running out of cash without any plan for a capital raise, the fanboys who would eat any dog food Musk served up, etc.)

The first domino has been tipped over (Musk's outright lie that he had funding secured for a $420 buyout when he had not even talked to bankers or his board yet, just to tweak the shorts for a few hours in one day).

Now, I am not sure that I find further falling dominoes that interesting -- after all, it is just inevitable physics at this point.

Note:  The crash is likely to be much slower than at Enron.  Once confidence failed in Enron, the crash came almost at once because Enron was like a large bank that was investing long and borrowing short.  Once the short-term borrowing window was closed for them, it was over.   Tesla can likely make it 6 months before they start scraping bottom and/or their debt covenants.

Update:  For the Tesla fanboys who seem super-excited about the loss of liquidity moving to a private company, here is what being a minor shareholder in a private company is like:

Three of Tinder's co-founders and several other current and former senior executives are suing the dating company's parent organizations, Match Group and IAC. According to a complaint published online, the lawsuit seeks billions of dollars in damages for allegedly manipulating financial information in order to reduce Tinder's valuation and illegally take away employees' stock options.

The complaint explains that Tinder was supposed to be valued in 2017, 2018, 2020 and 2021; On those days, employees should have been able to exercise their stock options. Instead, the lawsuit alleges that parent company IAC/Match Group inaccurately lowballed Tinder's valuation in July 2017 at $3 billion, the same as it did two years ago despite the dating app's substantial growth. Then, the parent company secretly merged Tinder into Match Group, which meant employees earned far less in stock options. Then, IAC threatened to terminate anyone who revealed how much the company was actually worth, the lawsuit claims.

Tesla Predictions Secured

I had dinner last night with my old college roommate Brink Lindsey and he even sort of rolled his eyes about my recent Tesla obsession, so I really really will try to make this the last post for a while.  However, I have to count coup on a few accurate predictions I made last week here and here.

First, I said, in reference to how Musk can bail himself out of his "funding secured" tweet when it has become clear this is not the case:

So what can Musk do?  Well, the first defense might be to release a statement like "when I said funding secured, I was referring to recent conversations with ______ [fill in blank, maybe with Saudis or the Chinese, call them X] and they told me that if we ever were looking for funds they would have my back."  This is probably the best he could do, and Tesla would try to chalk it up to naivete of Mr. Musk to accept barroom conversation as a firm commitment.  Naivite, but not fraud.   I don't have any experience with the Feds on this kind of thing but my guess is that the SEC would expect that the CEO of a $50 billion public company should know the rules and legally wasn't allowed to be naive, but who knows, the defense worked for Hillary Clinton with her email servers.

Today Musk writes:

Recently, after the Saudi fund bought almost 5% of Tesla stock through the public markets, they reached out to ask for another meeting. That meeting took place on July 31st. During the meeting, the Managing Director of the fund expressed regret that I had not moved forward previously on a going private transaction with them, and he strongly expressed his support for funding a going private transaction for Tesla at this time. I understood from him that no other decision makers were needed and that they were eager to proceed....

I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving. This is why I referred to “funding secured” in the August 7th announcement.

Of course the Feds probably expect "funding secured" to mean a signed term sheet (which does not exist) accompanied by an 8-K (which STILL has not been issued).  I then said in my prediction:

But this defense is MUCH MUCH better if, in the next day or so, Tesla can announce a deal with X on paper with signatures.  Then Musk can use the same defense as above but it has much more weight because he can say, see, they promised funding and I believed them when they said they had my back and here they have delivered.

And today we learn:

But was the funding really secured? Apparently not, because in the very next paragraph Musk writes that "following the August 7th announcement, I have continued to communicate with the Managing Director of the Saudi fund. He has expressed support for proceeding subject to financial and other due diligence and their internal review process for obtaining approvals. He has also asked for additional details on how the company would be taken private, including any required percentages and any regulatory requirements."

Hmmm.  So basically Musk had a chat with the Saudis that did not include any due diligence, any percentages, or anything about the structure of the transaction and nothing has been submitted formally to the Saudis for the required review and approval.  The Feds would never accept this BS from an unpopular CEO like, say, Jeff Skilling.  It remains to be seen whether they will really go after cultural icon Musk.

Finally, I predicted the odd and relatively unprecedented transaction that Musk likely envisioned:

Here is what I think Musk wants -- he wants an LBO without any actual change in ownership. Basically he wants to create Tesla New, which will be private and not trade on the markets. He is hoping that all his current fanboy shareholders will exchange a share of Tesla for a share of Tesla New. Musk has already said he will do this with his 20%. In the extreme case, if every current shareholder wants in on the new private company, then no capital at all is needed for the LBO. Musk might admit that perhaps a billion or two are needed to buy out the few recalcitrants at $420, and then all the Tesla fanboys can enjoy short-seller-free illiquidity

There was no way that Musk could expect to raise $70-$80 billion ($420 times the float) or to run an already cash-starved business with that much debt.  The only way to imagine this is if the buyout was only of a small percentage of owners.  And sure enough, here is Musk this morning:

Therefore, reports that more than $70B would be needed to take Tesla private dramatically overstate the actual capital raise needed. The $420 buyout price would only be used for Tesla shareholders who do not remain with our company if it is private. My best estimate right now is that approximately two-thirds of shares owned by all current investors would roll over into a private Tesla.

I won't comment on whether this is possible because I don't know enough about security laws.  I have been told that the SEC would likely frown on a private company with no public disclosures that has thousands or even millions of individual shareholders, but again, I don't know.

I find it amazing that anyone would want to stay in on this basis, but like Musk, the Tesla fan-boys seem to care more about burning the shorts than the quality of their own long investment in Tesla.  How can moving your small (percentage-wise) investment in Tesla from being exchange-traded to being locked up in a private company possibly be an improvement?  Today your investment has total liquidity (you can sell any time), it has massive 3rd party scrutiny and accountability, and it has real-time price discovery.  You would lose all of that in a private company.  You can only sell when Musk lets you sell and at the price he chooses to give you based on whatever company information he chooses to release.  Choosing the private option as a minority shareholder is like saying that you would rather hold non-refundable airline tickets than fully refundable ones.

Postscript:  I am new to the world of short-selling fights, as I am not really an active investor and just got sucked into watching Tesla because I found it interesting.  But wow, the tribalism of politics sure has leaked into the investment world!  In tribal politics, we see people more motivated by hatred of the other tribe than by making progress on their own tribe's goals.  This same kind of "reasoning" seems to dominate a lot of the Tesla long-short battle.

Update:  Here is a new prediction.  For a while Elon Musk has claimed he will not have to raise capital this year.  Everyone basically looks at his numbers and thinks he is nuts.  What's more, given his $50 billion equity valuation currently, he SHOULD be raising capital now while his stock is high and thus his cost of capital is low.

But one way to look at this is if he raises $20 billion in equity to buy out the 1/3 he thinks will want the cash rather than the new stock, he could easily just make that $22 billion so the company has an extra $2 billion in operating cash and thus raise capital this year without it looking like he violated his promise not to raise capital.

 

The Weirdness That Is Twitter

So the last couple of days I was bored and I logged into Twitter for the first time in a while and spent a few hours trying to convince myself that if I really wanted to, I could build a presence on Twitter.   Increased my follower count from about 1000 to about 1300 and got some notice and retweets.  And pretty much zero satisfaction, so I think we are going to declare that experiment over for a while.  But, this time, unlike the last effort, I managed to pretty much remain a nice guy and not become a hateful troll, so that is a step forward.

Anyway, weirdly, I managed in the process to create my single most -- by far -- liked and retweeted post, and it is really random.  It was just a toss-off reply to @popehat when he asked rhetorically if dentists all hire awful lawyers.  So I wrote this (which is an entirely true experience)

 

What Tesla Is Doing This Week

I do not have any insider knowledge, so this is pure speculation, but I have worked in a lot of organizations that did insane things to try to reach milestones or goals, and so I think it is educated speculation.

A lot of Tesla's market valuation comes from the prospects of getting a lot of volume with their mid-priced (sort of) Model 3.  They need to get production rates up both to reduce costs and to try to get ahead of a huge oncoming rush of competitors entering the BEV space.  Last year, they promised to have Model 3 production at 5000 a week by the first of this year, a goal they missed by a mile.  So now they have set the expectation that they will be at 5,000 a week production by the end of the second quarter, which is basically this week.

One of the weird things about Tesla is the difficulty in getting good information about its operations, particularly since it is a public company.  So many investors, for example, were trying to figure out Model 3 production numbers that an entire cottage industry of VIN analytics and delivery reporting has arisen.   But the basic story is that they are not there yet and that's not going to change by the end of the week.

But that does not mean they won't be trying to achieve something that looks like 5,000.  In the past Tesla has resorted to the "run-rate" claim, that their run rate for a day or an hour was at such and such much higher number.  So that is, I think, what is going to happen this week.  Parts and subassemblies are likely being stored up so that in a great burst 714 can be completed in one day or if not that, 30 or so can be completed in an hour so that the company can claim a 5,000 unit weekly run rate was achieved.  This is obviously BS -- any bottlenecked process can usually be juiced for a short period of time (examples:  Transcontinental Railroad track laying record, Liberty ship build time record) -- but I predict we will see it.  I also wouldn't be surprised if you found the numbers for last week were actually below trend due to Tesla hoarding sub-assemblies and parts for huge one-off production push this week.

As an aside, we are coming up to June 30, which for taxpayers can be considered Tesla subsidy day.   I have written about this before, but if Tesla can manage its deliveries down a bit in the second quarter, it can extend the taxpayer subsidy of its vehicles another 3 months (the subsidy starts winding down after the 200,000th electric vehicle sold in the US and Telsa is right about there, so much so that rumors are it is sending all its output to Canada this week so it doesn't put them over the US number.  Bloomberg estimates that pushing the 200,000th sale from June 30 to July 1 will cost US taxpayers hundreds of millions of dollars:

In my previous post I wrote about Tesla's attempt to prolong the $7,500 U.S. incentive for electric cars by pushing sales into the next quarter. A reader on Twitter who goes by the handle @Smack_Check did the math on how much such an effort would be worth to Tesla's customers: $366 million.

That's the value of additional credits available if Tesla waits just one day (July 1, instead of June 30) to record its 200,000th sale in the U.S. Here are @Smack_Check's fairly conservative assumptions:

Tesla will produce an average of 5,000 cars a week in the third quarter, all models combined (that means about 3,000 Model 3s/week, on average).
Each quarter after that, total weekly production will rise by 1,000.
U.S. sales will account for half of all Tesla sales worldwide during the subsidy period.

Disclosure:  I am short Tesla via the ownership of one (1) put option which in my mind constitutes more of a bar bet than an investment.  Shorting fan-boy stocks is risky, as is shorting companies the CA legislature is probably scheming right now to bail out somehow with their taxpayer money.  If it were not for these two problems I would be all-in on the short like James Bond at the end of Casino Royale holding a straight flush.   The odds that Tesla will really be worth $60 billion * (1+i)^10 in ten years is pretty much zero.  Also, it's amazing how many of Elizabeth Holme's behaviors at Theranos as documented in Bad Blood one can observe in Musk.

Update:   Fixed Tesla current market value, which is closer to $60 billion today.

Update on the Bubble

This morning on my short drive to work I heard a commercial that reminded me of the glory days of 2005.  First, it was a commercial for a home equity loan, a pitch that largely disappeared for a decade or so.  Second, though, the pitch said that you could take the money and put in in the stock market or -- I am not kidding on this, I think I got it word for word -- "buy the dip in the Bitcoin market".    There you have it:  Borrow against the theoretical unrealized price gain in your home and use it to market-time Bitcoin prices.  Take your paper gain in one bubble and apply it to a bigger bubble.  Nothing could go wrong there.