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.

 

 

 

what a good analysis of Tesla (TSLA) would contain

A basic report on TSLA by a competent securities analyst would contain the following:

–an idea of how the market for electric cars will develop and the most important factors that could make progress faster or slower.  My guess is that batteries–costs, power/density increases, driving range, charging speed–would end up being key.  Conclusions would likely not be as firm as one might like.

–TSLA’s position in this market, including competitive strengths/weaknesses.  I suspect one main conclusion will be that combustion engine competitors will be hurt by the internal politics of defending their legacy business vs. advancing their electric car position.  The ways in which things might go wrong for TSLA will be relatively easy to come up with; things that could go right will likely be harder to imagine.

–a detailed income statement projection.  The easy part would be to project (i.e., more or less make up) future unit volume and selling price.  The harder part would be the detail work of breaking down unit costs into variable (meaning costs specific to that unit, like labor and materials, with a breakout of the most important materials (i.e., batteries)) and fixed (meaning each unit’s share of the cost of operating the factory).  An important conclusion will be the extent of operating leverage, that is, the degree to which fixed costs influence that total today + the possibility of very rapid profit growth once the company exceeds breakeven.

There are also the costs of corporate overhead, marketing and interest expense.  But these are relatively straightforward.

The income statement projection is almost always a tedious, trial-and-error endeavor.  Companies almost never reveal enough information, so the analyst has to make initial assumptions about costs and revise them with each quarterly report until the model begins to work.

–a projection of future sources and uses of cash.  Here the two keys will be capital spending requirements and debt service (meaning interest payments + any required repayments of principal).  Of particular interest in the TSLA case will be if/when the company will need to raise new capital.

 

 

Tesla (TSLA), me and momentum investing

Why should a company fundamentals-driven investor have a problem with momentum investing?

Two reasons:

–momentum investing is a reactive strategy, and

–one that focuses on the past price movement of the little pieces of paper (or electronic impulses) that trade in the secondary market.

In contrast, fundamental investing is a predictive strategy based on the idea that the price of the paper/bits will ultimately be determined by the value of the underlying company.  Among fundamental investors, value investors believe that the key is the worth of the company as presently constituted (but perhaps running more smoothly than it in fact is).  Growth investors think the key is in early recognition of novel and unexpected profit positives that will fully emerge only in the future.

 

What kind of a thing, reactive or predictive, is my formula for TSLA of:   buy at $180 and sell at $250?  In a sense, I’ve got some fundamental underpinning.  My back-of-the-envelope figuring suggests nothing is likely to happen inside the company Tesla over the next couple of years that could possibly justify more than a $250 price.  And I’m willing to sell at that price even though the stock is still exhibiting positive price momentum.

But how did I get the $180?

What I’ve really done is to take a chart of the stock and draw a line that runs through the lows of the past four years or so and to conclude that this line forms the bottom of a channel (with something like $250 as the top) that TSLA has been navigating itself through since late 2013.  Yes, at $180 I have better potential for upside than I do at $250.  But that’s more a fact about arithmetic than a deep insight into corporate operations at Tesla.

In sum, then, the fundamental underpinning of at least the buying are pretty lame.

So I guess I have to say that there’s a healthier dose of momentum in my fooling around with TSLA than I might like to admit.  On another non-fundamental note, though, this ensures that my California son and I stay in regular contact.

momentum investing

what it is

Momentum investing is a style, if one can call it that, of buying and selling securities based simply/solely on recent price momentum.  If a given stock is going up, buy some.  If it continues to rise, buy more.  If a stock begins to decline, sell it   …or, for very aggressive players, sell it short.  No fundamental data counts.

Day traders and very short-term-oriented algorithmic players are the main people who use this simple buy-if-they’re-going -up, sell-if-they’re-going-down rule.  In my career, I’m only aware of two “professional” investment groups who have practiced momentum investing as their main strategy:  Wood Mackenzie trading oil stocks in the early 1980s, Janus trading tech stocks in the late 1990s.  The former was an almost immediate disaster; the latter had a surprisingly long period of success before going down in spectacular flames.

recent use

The term has come into recent vogue in the financial press as a description of growth investing.

It isn’t one, although it may reflect the jaundiced view a few (narrow-minded, in my view) value investors have of their growth colleagues.

To be clear, growth investors try to make money by finding companies that are expanding faster than the consensus expects.  This is not momentum investing.  Nor is the style of value investing that requires that a company not only be bargain-basement cheap but that there be a catalyst (reflected in positive price momentum) for change before buying.

why write about this?

A few days ago, a regular reader, Small Ivy, characterized my speculative dabbling in Tesla as momentum investing.  Maybe so, maybe not.  More tomorrow.

 

Tesla (TSLA) at $260: what it means

Yesterday, TSLA shares touched $260 early in the day.  That’s the latest high for a stock that has gained 30% since mid-December, a period during which the S&P advanced by 1.8%.

What does this mean?

–On a personal note, it means I don’t own any more TSLA.  Regular readers might reall that one of my sons and I have been trading TSLA between $180-$200 and $250-$260 for the past couple of years.  I had sold some at $250 this time around and placed a limit order for the remainder at $260 about a week ago.  Yesterday, the stock touched $260.00 for a brief period before falling back to close at $257.48.  (An aside:  I find it strange that the stock peaked at such a round number.  I presume this means there’s a lot of stock on traders’ books waiting to be sold in mechanical fashion–meaning with no attempt to entice buyers higher–at $260.)

–The main message, though, is that there’s a lot more going on in the US stock market than the post-election Trump rally–which seems to me to have already exhausted itself anyway.

I’m driving a Kia Sorrento these days, after my Hyundai Veracruz gave up the ghost late last year.  I can imagine my next car being a Tesla.  Nevertheless, TSLA is to my mind the ultimate concept stock.   Yes, the merger with SolarCity is behind it and the death of a driver using the Tesla self-driving feature seems to have been operator error rather than a flaw in the car.  Those are plusses.  On the other hand, the company is still struggling with cash flow breakeven.  And the Wall Street consensus, for what that’s worth, is that it will lose $1 a share in 2017.  So finances continue to be a serious risk.  To my mind, the rally is all about the hoped-for success of the Gigafactory, Musk’s reimagining the car manufacturing process, and the triumph of software over hardware and batteries over fossil fuel.  TSLA’s gains are a testimony to the rude health of the stock market, with or without a Trump tailwind.

–Areas of interest other than aspirational tech or hoped-for tax reform and infrastructure spending?   What about Millennials worldwide?  economic strength in the EU?  regular old tech?  Mexico??  (I haven’t held Mexican stocks for over twenty years, although I’ve had exposure from time to time to that economy through multinationals.  I think it’s too early to make a major commitment, but not too soon to be fact-finding.)