Tesla (TSLA) raising funds

Last week TSLA announced that it is raising $1 billion in new capital, $750 million in convertible notes due in 2022 + $250 million in common stock.

The offering itself isn’t a surprise.  TSLA has been chronically in the situation where analysts can see a point on the near-term future where the company could easily run out of funds.  This is partly the lot of any startup.  In TSLA’s case, it’s also a function of the firms continuingly expanding ambitions.  Elon Musk has been saying for some time that TSLA will will need new capital, too.

What is surprising, to me at least, is that the offering is not bigger   …and, more significantly, that the stock went up on the announcement.

To the first point, why wouldn’t TSLA give itself some breathing room by raising more money?  Of course, it’s possible that the small size is a marketing tactic and that the underwriters will soon announce that, “due to overwhelming demand,” it’s raising the size of the offering to, say, $1.5 billion.  Otherwise, I don’t get it.

To the second, this is just weird.  TSLA shares rose by a tad less than 30% in the first six weeks of 2017 and have been moving more or less sideways since.  So the idea that investors are willing to buy the stock can’t be surprising positive news.  And I don’t see the plus in some commentators’ claims that the market is relieved the offering isn’t larger.  I think the market should be mildly concerned instead.

Something else must be going on.

The only thing I can think of is that Wall Street is beginning to believe that electric vehicles are going to enter the mainstream much sooner than it had previously thought.  At the same time, the Trump administration’s intended moves to make it easier for American car makers to sell gas guzzlers for longer may result in Detroit remaining stuck in the past, paying less attention to electric vehicles.  So market prospects for TSLA may be improving just as competition from the “Big Three” may be weakening.

However, that alone shouldn’t be enough to propel a well-known stock higher in advance of an offering.

 

 

 

Intel (INTC) and Mobileye(MBLY)

A week ago, INTC agreed to buy MBLY, an Israeli company that makes cameras and car safety devices, for $15.3 billion in cash.  Its plan is to merge its existing auto components business with MBLY and have that company spearhead INTC’s entire Internet-of-Things effort to enter the auto market.

Why buy rather than build?

The main issue is time, I think.  Part of this is that the timetable for development of autonomous driving vehicles is accelerating.  More than that, however, and the chief reason for the acquisition, to my mind, is the way marketing to the big auto companies works.

Auto companies plan new models several years in advance.  If you want a component in, say, a 2020 model, you probably need to have already convinced an auto maker of its merits by late last year.  Also, unless a component maker has a unique technology, auto companies tend to move slowly.  They’ll initially buy a single component, or they’ll put a part in one car model, just to see how the part–and the supplier–perform.  If things work smoothly, it will consider expanding that part’s use and/or buying other parts from the supplier.

The result is that convincing a car company to risk of using a new supplier takes a long time.  Without MBLY, which already makes key auto components and has an auto-oriented sales force, I think it could easily be a half-decade before INTC would make any significant inroads into the auto market.  INTC probably doesn’t have that much time.

This is not, of course, to say that INTC will be wildly successful in the auto-related IoT.  Without MBLY, though, its chances for success would be considerably dimmer.

Elon Musk’s master plan for Tesla (TSLA)

Last week, Elon Musk issued his second master plan for TSLA as a blog post on the company website.

The plan has four parts:

autonomous driving, with the goal of making self-driving cars 10x as safe as those operated by human drivers.  The main issue here is, according to Musk, compiling enough safety date to convince governments to allow autonomous driving on public roads

expanding the product line, to include pickup trucks and compact SUVs, plus heavy trucks and urban buses.

Although what he writes on this topic is not 100% clear, one goal under this heading seems to be to reinvent the auto manufacturing process in a way that the new/improved factory is 5x – 10x as efficient as current ones.  One ambiguity I see is whether this means 10x the efficiency of, say, a Toyota plant, or 10x the efficiency of the current TSLA operation.  I presume he means the former.

Another is exactly what “efficiency” is.  I’m taking it to mean that Musk intends to create factories that, for the same capital investment, will produce 5x – 10x as many cars in a given time as current factories do.  My cursory inspection of auto 10Ks (other than TSLA, I don’t think I’ve owned an auto stock since the 1980s) tells me this won’t mean a huge jump in unit profits for any auto firm, including TSLA, since most of the costs of making a car are in materials and labor, not capital equipment.  Greater efficiency would boost overall profits, however, as well as allow TSLA to dramatically increase its vehicle output.

sharing.  Musk thinks that in an era of autonomous driving, some people won’t own cars themselves anymore.  They’ll simply call for one from a sharing service when they need it.  Other people will own cars but will allow their vehicles to be used in a sharing service when they don’t need them.  TSLA intends to organize sharing services for its vehicles.

This is a much more revolutionary statement than it seems.

The average car is used only 10% – 15% of the day, according to Musk.  If sharing boosted that usage figure to, say, 30% in highly populated areas, then those regions would need only half the cars they do today   …maybe fewer.  At some point, this would mean an implosion in demand for new autos–and the end of the car manufacturing industry as we know it.

merger of TSLA and SolarCity (SCTY).  In his Master Plan, part deux, Musk says he wants to create a “smoothly integrated and beautiful solar-roof-with-battery product that just works, empowering the individual as their own utility, and then scale that throughout the world. One ordering experience, one installation, one service contact, one phone app.”

He says this can’t happen while TSLA and SCTY are separate companies, something he describes as “an accident of history.”

I’m not sure I buy this.  I do think that Musk created clear economic superiority of TSLA over SCTY when he decided to place the Gigafactory for solar batteries inside TSLA.  To my mind, that makes SCTY radically dependent on TSLA today.  Merging the two companies would put SCTY back on an even footing.  For TSLA shareholders, arguably the main benefit of the combination is obtaining SCTY at a cheap price.

ARK Investment Management and its ETFs

ARK

I was listening to Bloomberg Radio (again!?!) earlier this month and heard an interview of Cathie Wood, the CEO/CIO of recently formed ARK Investment Management.  I don’t know Ms. Wood, although we both worked at Jennison Associates, a growth-oriented equity manager with a very strong record, during different time periods.  Just before ARK, she had been CIO of Global Thematic Strategies for twelve years at value investor AllianceBernstein.  (As a portfolio manager I was a big fan of Bernstein’s equity research but I’m not familiar with her Bernstein output.)  She’s been  endorsed by Arthur Laffer of Laffer Curve fame, who sits on her board.

ARK is all about finding and benefiting from “disruptive innovation that will change the world.”

Ms. Wood was promoting two actively managed ETFs that ARK launched at the beginning of the month, one focused on industrial innovation (ARKQ) and another the internet (ARKW).  Two more are in the works, one for genomics (ARKG) and the last (ARKK) an umbrella innovation portfolio which will apparently hold what it considers the best of the other three portfolios.

What really caught my ear in the interview was Ms. Wood’s discussion of the domestic automobile market (summary research available on the ARK website).  Most cars lie around doing nothing during the day.  What happens if either ride-sharing services like Uber or the Google self-driven car, which make more constant use of autos, catch on as substitutes?  According to Ms. Wood, until these innovations reach 2.5% of total miles driven (based on the idea that on a per mile basis ride-sharing costs half what owning a car does), there’s little effect.  But at 5% penetration, the bottom falls out of the new car market.  New car sales get cut in half!

Who knows whether this is correct or whether it will happen or not   …but I find this a very interesting idea.

about the ETFs

The top holdings of ARKW are:  athenahealth, Apple, Facebook, Salesforce.com and Twitter.  These comprise just under 25% of the portfolio.

For ARKQ, the top five are:  Google, Autodesk, Tesla, Monsanto and Fanuc.  They make up just over 24% of the portfolio.

Both will likely be high β portfolios.  Both have performed roughly in line with the NASDAQ Composite since their debut.

The perennial question about thematic investors (I consider myself one) is whether the high-level concepts are backed up by meticulous company by company financial research.  This is essential.  In addition, it’s important, to me anyway, that the holdings be arranged so that they’re not all dependent on a single theme–the continuing success of the Apple ecosystem, for instance.

I’m not familiar with Ms. Wood’s work, so I can’t say one way or another (Fanuc and ABB strike me as kind of weird holding for ARKQ, though).  But I think her research is worth reading and her ETFs worth at least monitoring.  For us as investors, the ultimate question will be whether Ms. Wood can outperform an appropriate index.  The NASDAQ Composite would be my initial choice.