Tag Archives: Tesla

what I find most surprising about Tesla (TSLA)

April 8, 2016 By in Autos, Technical Analysis, Uncategorized Tags: , , , , , 3 Comments

a concept stock

My California son got me interested in TSLA a couple of years ago.

It’s a “concept” stock.  That is, the stock trades on the dream or vision of future revenue and profit.

…like Amazon

In many ways, it’s like Amazon (AMZN) was in the late 1990s.

That company seemed to me to be on the verge of financial disaster for most of the first decade of its existence.  It only began to be profitable after it expanded from its original virtual bookstore idea to becoming an online department store.  In my view, had AMZN not aggressively raised a lot of capital during the Internet Bubble, it would not have survived.  After all, it lost money eight (?) years in a row before breaking into the black.

the center of an empire

TSLA is the seat of the Elon Musk empire.  Some say it’s a car company (me included); some would characterize it ultimately as a battery company, with cars as the wrapper that contains the principal TSLA product.

the stock

The stock is now trading at $260 or so a share, giving TSLA a market capitalization of about $39 billion.  Suppose we think, to make up a number, that the stock should trade at 30x earnings.  If so, the current price expresses investor belief that at some point the company will be making $1.3 billion a year and still have, say, 20% growth in annual profit in prospect.

back of the envelope numbers

Let’s say TSLA is a car company and that it will be making on average $7,000 a car, after tax, on its output at some future date.  If so, the current market price already factors into it that TSLA will be selling about 200,000 cars a year–and expanding rapidly.

I think that’s possible.  More important, the market says that’s what investors are willing to believe, and pay for.

risks

There are risks, yes, the most obvious of which is that the company keeps pushing back the date when it will turn cash flow positive.  What cash flow positive means is that the company will be able to generate enough cash from operations to cover costs, and will no longer be eating into its cash reserves to make ends meet.

what I find surprising

What’s stunning, though, is that less than two months ago the stock was trading at just over $141, or just over half today’s price.

New information has come out since then:

–TSLA began taking deposits for its $35,000 base price Model 3.  In less than a week, it has collected $1,000 each for about 300,000 units, with enough add-ons to bring the average selling price to $42,000. Most won’t receive their cars until 2018.  This support seems to me to show there’s potentially huge demand for electric cars, even at today’s lower oil price.

–the company announced that it missed its 1Q16 sales target because of parts shortages.  Presumably this means it did not turn cash flow positive as anticipated during the quarter.  That’s bad, especially since we’ve heard this song before.

the stock price

The stock is up $10-$20 a share on the two items, which were announced at roughly the same time.

What I find interesting is that a relatively large market cap company can move from $140 to $240 in a matter of weeks on a change in sentiment.  That’s about 70%!

So much for efficient markets and investor rationality   …not that anyone outside the ivory tower believes in this stuff.  But this is a huge move.

algorithmic trading?

I think it’s evidence of relatively naive algorithmic trading at work (based ultimately on two other wacky academic ideas–that the most important thing in investing is to control costs, and that there’s no craft skill/specialized knowledge involved in investing).

I also see it as support for my view that trading can be unusually profitable in this environment.   We should look for other instances where this may be happening.

 

 

 

3Q15 for Tesla (TSLA); do an extra 4,000 cars make a difference?

November 5, 2015 By in Autos, earnings conference calls, Stock ideas Tags: , , , , , , , Leave a comment

Yesterday, TSLA shares were up by 11% after reporting an in-line quarter the night before.  This was in a market that was down slightly.

The reason?

The company modified its full-year guidance for production from 50,000 – 55,000 units to 50,000 – 52,000 units.  With 4Q15 almost half over, investors took this new guidance as relatively reliable.  But the key factor is that the guidance, while down, was not the 45,000 – 50,000 that Wall Street had been fearing.

Wild gyrations are a fact of life for highly speculative stocks like TSLA (I own a small position).  That’s not the interesting part.  After all, what sustains the sky-high valuation of the stock is not the current results is the dream that one day the company will be selling millions of units and earning billions.

What is an important investment lesson is the reason that a production difference of around 5,000 cars in a quarter, which sounds like a small amount, should make such a difference to investors.

It’s all about cash burn, or the question of how long a company that ‘s using more cash than it’s taking in can sustain itself without turning cash flow positive.  This also happens to be one of the few things in a “dream” stock that’s important and that we can know for sure.

 

In the TSLA case, the firm realized–at the start of 2015, in my view–that the multi-billion dollar bond offering it made in 2014 wouldn’t be enough to sustain it until it began to generate more cash than it used.  Contact with investment bankers resulted in a spate of glowing reports being issued by brokerage house analysts–and then a $750 million stock offering.  What investors has been panicking about a few weeks ago (and may begin to worry about again;  who knows?) is that this extra three-quarters of a billion dollars might not be enough.

If we figure that a fully loaded Tesla retails for $100,000 ( figure I just plucked out of the air), a shortfall of 4,000 cars translates into a cash shortfall of $400 million.  So, “Poof!,” half the cash cushion created by the recent equity offering is gone.  (I’m assuming that everything else for TSLA remains the same, which is probably too pessimistic.  But the exact dollar amount isn’t the point.)

Arguably, TSLA could simply issue more stock or bonds to raise extra cash.  However, if TSLA were actually seen to be needing a loan, the terms it could expect to get would probably not be as favorable as before.  Another offering so soon after the last equity raising would also risk shattering the investor “dream” of the inevitability of TSLA’s success.

TSLA now expects to turn cash flow positive during 1Q16.  This does not imply that it will be cash flow positive for the entire quarter, or for the quarter as a whole.  Instead, it means that it will begin taking in more money than it spends by March 31st at the latest.  We’ll know more when Tesla reports 4Q15.

what’s wrong with Tesla (TSLA)?

October 13, 2015 By in Current Market Thoughts, Recent Market Action Tags: , , , , Leave a comment

On September 21st, TSLA traded at $270+ per share early in the day.  Yesterday it closed at $215    …and is sliding again in pre-market trading as I’m writing this post.  That’s a loss of almost 20% during a period when the S&P is up about 2%.  What’s going on?

TSLA is an early-stage car company that is still spending money faster than sales revenue is coming in.  That’s why it is forced periodically to raise new capital on Wall Street.  Officially, TSLA is still projecting that it will sell 50,00 cars this year, a figure that would bring it to breakeven on a cash flow basis–meaning sales revenue would be sufficient to cover all its spending.  Recently, however, the company has been making noises that it will fall short of that figure, mostly because it’s having more trouble than it thought with reprogramming its machine tools to handle producing two models on the same assembly lines.

Let’s say TSLA falls 5,000 cars short of its 50,000 goal.  At first blush, this doesn’t sound too bad. But figure that each car would retail for, say, $120,000.  If so, a shortfall of 500 means $60 million less in the bank than anticipated.  It also means that TSLA won’t reach cash flow breakeven until sometime in 2016.

Something similar happened to TSLA this time last year, when bad weather and sales weakness in China made 4Q14 look ugly, however. TSLA has also been hinting for months that the 50,000 goal may be out of reach, even though “officially” it has not changed its production figure.  So this isn’t exactly new news.

I think two other factors are behind TSLA’s weakness.

–Up until about a month ago, Wall Street brokerage house analysts have been writing super-bullish reports on TSLA.  This amped-up enthusiasm is always what happens in advance of a capital raising (in August, TSLA issued about three-quarters of a billion dollars in new shares).  Now, analysts are, as usual, toning down the rhetoric, and conceding that TSLA might indeed be still cash flow negative at yearend.  Par for the course.  Yet this new analyst narrative is causing the stock to fall, in my view.  This suggests research reports are being processed in larger than normal measure by robots who believe everything they read.

–Investors may also be becoming more cautious about speculative stocks like TSLA because they are finally convinced that the interest rate cycle has turned and that rates are on the cusp of a multi-year upward course.  One enduring market metaphor for stocks is that they are a funny kind of bond.  That is, that they can be evaluated by calculating the present value of future cash flows (this is much, much easier said than done).  A speculative stock is somewhat like a zero-coupon bond, with all the value far in the future.  As discount rates rise, the present value of securities like these erodes the fastest.

This is by no means a fatal flaw in the TSLA story, in my view.  It just suggests to me that trading may mimic the pattern of a year ago for a while.  What’s more interesting is the possibility that the stock market is finally beginning to factor into prices the idea of higher interest rates.

 

capital raising by Tesla (TSLA)

August 17, 2015 By in Autos, battery power, bond market, securities markets, Stock ideas, stock market, Technology Tags: , , , , , , Leave a comment

the offering

Last Friday, TSLA filed a final prospectus with the SEC, indicating that it is selling up to 3.099 million new shares of common stock (including underwriters’ over-allotment) at $242 a share.   This will net the company close to three-quarters of a billion dollars, which it needs to fund ambitious expansion plans–the Gigafactory to make batteries the chief among them.

I presume the precipitous decline of TSLA shares over the past ten days or so was triggered by underwriters soliciting indications of interest in this offering from hedge funds and other institutional investors.  Two bullish signs:  the offering was initially pitched as being 2.1 million shares, but raised to 2.7 million on Friday (not counting the underwriters’ allotment, which will have been bumped up as well).  As I’m writing this prior to Monday’s open, TSLA shares are trading at around $255 each.

my thoughts, (somewhat) randomly presented

  1.  TSLA made what I consider a firm-transforming offering of $3 billion in convertible bonds (at a conversion price of $350 (!!!) a share) last year.  This says something about how professional fixed income investors feel about the attractiveness of straight bonds.  More important for TSLA, the successful offering took talk of building the Gigafactory out of the realm of fantasy and placed it solidly into reality.
  2. The automobile world has changed significantly over the past year, with the plunge in oil prices and the rise of ride-sharing services like Uber.  The former may mess up the economics of electic vehicles; the latter calls into question the highly operationally leveraged corporate structure of traditional car companies (translation into English:  if they need to run at, say, 80% of plant capacity to break even, will that be possible if Millennials en masse use Uber instead of buying a car themselves.  Will the car industry be a replay of the current commodities debacle).
  3. My guess is that these shifts: (i) increase TSLA’s attractiveness to stock market investors vs. conventional car companies, and (ii) make Teslas relatively more attractive abroad, where petroleum products are more expensive than in the US.
  4. It seemed clear to me from the outset that the 2014 bond offering didn’t totally solve TSLA’s need for capital.  Another offering had to happen in 2015.  I’d expected more bonds.  Why stock instead?  Market etiquette says that a new offering should be at a higher price–here meaning a higher conversion price–than previous ones (otherwise last year’s buyers look like idiots).  Also, potential lenders periodically want companies to prove that they still have enthusiastic equity backers.  This is a combination of lenders not wanting financial leverage to be too high, their not wanting to be the only ones holding the bag if things go sour, and their knowledge that bonds are going to be under pressure as interest rates begin to rise.
  5. Last year’s offering signaled a near-term top for TSLA shares.   My instinct is to think that this offering establishes a near-term bottom.  I own a small position in the stock, however, so I may have an interest in thinking this is the case.

 

Tesla (TSLA) or Solar City (SCTY)–which to choose

May 6, 2015 By in Autos, battery power, Energy, family owned companies, Industry Analysis, securities markets, stock market, Technology Tags: , , , , , , , , Leave a comment

TSLA and SCTY are terrestrial companies run by Elon Musk.  TSLA makes electric-powered cars; SCTY generates electric power with solar cells.

what they have in common

Both are publicly traded.

Both are speculative stocks, in the sense that assessing their value involves projecting results far into the future.

Both are trying to transform staid industries that have been around for a long time.

Both are big users of capital.

Both face substantial regulatory barriers to their success.

–For TSLA, it’s the regulations in many states that prohibit a car manufacturer from selling its products direct to the consumer.  Instead, the carmaker has to use an independent dealer network.

–Because at present they generally have no ability to store power on-site, SCTY clients generally sell the power generated by their solar panels to the electric utilities and purchase power from the grid as they need it run their electrical devices.  Utilities would, naturally, like to buy at 2 and sell at 4.  Regulations, however, force them to trade both ways at the same price, but only so long as solar is a tiny percentage of their business.  In addition, electric utilities are the ones who inspect any local power storage batteries that a household/firm may install.  The utilities aren’t falling all over themselves rushing to do this.

I have small positions in both.

how they differ

Personally, I find SCTY the more conceptually interesting company.

On the other hand, I feel much more comfortable with TSLA.

Why?

It isn’t the industry or the capital structure.

It’s the gigantic battery factory that Musk is in the process of building.

Both TSLA and SCTY can be seen as different ways to create demand for highly sophisticated batteries.  Both are certainly radically dependent on having cutting-edge battery technology.  Arguably, batteries are the main source of value in the products of either firm.

But who owns the battery factory?  TSLA.  To me, this means that Elon Musk’s main economic interest likes in TSLA, not SCTY.  History says an investor wants to have his money in the same place as the entrepreneur he’s betting on.