1. Tesla pays off the $452 million Dept of Energy Loan, and this improves their political image and in the long-run will help sales.
Tesla's had difficulty in some states selling direct to consumer, and paying of the DOE loan can help them convince conservative lawmakers to vote on Tesla's side in states like Texas and North Carolina (both have bills on the table).
Also, paying off the DOE loan removes ammunition from a lot of critics who have said that Tesla is just leaching off the U.S. gov't.
2. Tesla puts more than $400 million additional cash into their bank account (they already had over $200m), so now it's well over $600m and close to $700m in cash they hold.
This allow them to speed up a lot of the intiatives they have to roll out infrastructure. First, they can open more stores (especially in Asia and Europe). Second, they can roll out more service centers (all around the world). Third, they can roll out more Superchargers stations (around the world).
Finally, Tesla has an upcoming 5th announcement in a 5-part trilogy and I think Tesla might announce battery swapping stations (for long distance travel). Tesla can now more aggressively roll these out as well.
3. Tesla stock gets a boost of confidence from Elon Musk spending $100m to buy common stock.
Elon Musk is putting his money where his mouth is and is basically saying that at the offering price of $92.24 that TSLA stock is not overpriced but is a fair value to himself buying more stock and to investors.
4. Involving Goldman Sachs and Morgan Stanley in brokering convertible notes and stock increases the credibility and perception of Tesla. Big funds are now starting to invest in Tesla after their blowout 1st quarter earnings report (WSJ reported in another article that European funds and large-cap funds are starting to invest). Recently Morgan Stanley sent a client note saying that after the 1st quarter earning report saying that viability was no a problem for Tesla. This opens up TSLA stock to a whole new crowd of investors because Tesla's risk has been dramatically reduced.
Overall, I think this is a great move by Tesla.
* Free use of state-subsidized infrastructure.
* Free use of state-funded research and development. (This is huge.)
* Government contracts.
* For the finance industry, they are backstopped by the government if they are "too big to fail."
* Government limits on liability for many risky industrial processes.
... and so on.
Tesla is threatening the status quo in a stale, moribund industry. That is what people don't like.
Where's the cost/benefit analysis to show that those services you tout (infrastructure, etc.) are actually provided efficiently? For those cases where private examples exist alongside (FedEx/UPS/email vs. Postal Office; SpaceShipOne/SpaceX vs. NASA; Google self-driving cars vs. California train-to-nowhere; Coursera/Udacity/Khan vs. Dept. of Ed) the comparison is not flattering.
But api made no references or comments about the efficiency of government services; he merely stated that companies use government services.
Not to be rude, but it seems like you are looking to start a political debate where there isn't one (and a conversation that has been had over and over again in HN threads).
IF a market is such that it can be serviced by the private sector efficently that's always the better choice. In many cases here the government, if it was in it already, will remove itself over time (USPS is going through this now on a massive scale) But there are multiple examples over the course of time where only something like a national government can rationalize the investment in infrastructure that results in dramatic improvements down the road (Eisenhower's Federal Highways, Massive Power projects, Telecommunications)
> Private road building came and went in waves throughout the nineteenth century and across the country, with between 2,500 and 3,200 companies successfully financing, building, and operating their toll road.
Again, government investment in infrastructure makes a lot of sense, and happens, when the economics do not make sense for a private company.
spending that the private sector would not take on...
The Internet would never...private telephone companies
(dial up) would never...SpaceX would not...only something
like a national government
As for Tesla leaching off the government, it is important to note that $85m of Tesla's revenue in the last quarter came from regulatory credits. The vast majority, ~$67m, came from California's zero-emission program. All told, 15% of Tesla's revenue came from state and federal credits. Forget politics and perception: the impact of regulatory and tax credits on the company's finances and sales prospects over time is something any long-term Tesla investor should thoroughly understand.
2. Tesla is smart to raise capital now while money is still so cheap thanks to an almost unprecedented compression of risk premiums. The odds that capital will become more expensive in the next several years is certainly higher than the odds that it will become much cheaper.
But raising capital doesn't guarantee that capital will be deployed effectively. Celebrating the capital raise without acknowledging that there's execution risk is like celebrating a championship before the season has even started.
3. Elon Musk's obvious confidence in Tesla is a good thing, but you should not oversimplify the details of his stock purchases. Business Insider has more on this at http://www.businessinsider.com/elon-musk-borrows-150-million....
4. Raising capital for companies is one of the things that firms like Goldman Sachs and Morgan Stanley do.
As for Morgan Stanley analysts taking a positive view on Tesla's prospects, consider that in July 2008, Morgan Stanley was advising clients to buy Lehman Brothers stock because "we think near-term risk of incremental write-downs is balanced by solid liquidity and capital footing."
Tesla may or may not be successful long-term, and its stock may or may not be a good investment at current prices, but I think your analysis here is akin to looking at the exterior of the vehicle without examining what's under the hood.
2. Totally agree Tesla was smart to do it now and agree that execution isn't guaranteeing success. But money in the hands of a wise person can really accelerate a roadmap and enlarge success. I personally think Tesla is at an inflection point where the money will be very well spent and will accelerate growth and demand.
3. Regarding Elon Musk's purchase, it's true he's borrowing a bunch of money but even that still signals his confidence in the stock and its current price. And I think that's overall good to ensure investors since the stock has been very volatile of late.
4. It's true investment banks have made terrible mistakes in the past, but still lots of investors and institutions are influenced by the top investment banks. Fidelity owns $1.5b of common stock and Morgan Stanley owns $500m of TSLA common stock (as of 3/31/13, http://www.nasdaq.com/symbol/tsla/institutional-holdings). Lots of institutions and funds are starting to invest in TSLA and this is providing upward pressure on the stock over time (especially if TSLA keeps meeting/surpassing expectations.
The next big milestone for Tesla is reaching 25% gross margin (which is rarely had in the auto industry). Elon Musk is promising they'll reach this milestone 4th quarter this year. If they reach it this year, it is nothing short of miraculous.
I would say so, considering they're at 5% now.
Edit: Strike that. It's actually 2%. Musk had this to say:
"I am highly confident that we will have a gross margin of at least 25%, and — I mean, the emphasis on at least. I think we will do better than those numbers. So, I want to be very clear about that."
The man is all in. I'll give him that.
That said, Tesla clearly has a brilliant track record of putting money to use. They built a frickin fully electric luxury sedan in 2 years on a $450M budget.
The ZEV credits are granted to Tesla by California. By regulation, other car manufacturers have effectively been forced to purchase these, giving them value. Put simply: these credits only exist and have value because of government.
You can play games with semantics, and political pundits can argue about the merits of programs like California's, but those doing due diligence on Tesla should understand the regulations and how these credits may be valued in the future. For instance, if more auto manufacturers develop electric vehicles, the value of the credits will likely decrease over time, perhaps substantially, while the competition in the EV market will at the same time increase. Will Tesla suffer substantially in this scenario? Maybe or maybe not, but I haven't seen many analyses of the company delve into this, at least around here.
As for Tesla's track record: I think one can be truly impressed by what the company has accomplished thus far from a technology perspective without jumping to the premature conclusion that the company's investment has produced a viable long-term business.
Your wording simply suggested to me that you thought these were somehow backed with government money. I'm sorry if I misinterpreted here.
Musk has said in conference calls that their 25% margin target is not predicated (at all) on credit revenue, but he can't magically make money appear, so that remains to be seen.
There is a very worthwhile recap of the regulatory credits systems here:
The whole point of the various laws is to make sure the dealers have a presence and are not cut out by the manufacturers, which is exactly what Tesla is trying to do.
There's nothing different about that, except that Tesla is trying any way conceivable to get around those laws and nobody else is. It's not surprising that they're updating the laws to catch up with Tesla's hacks that clearly circumvent the intent of the laws.
Put another way, not only will the car dealers get pissed, but why would ford, toyota, honda, GM, etc allow Tesla to operate with an advantage? One way or another, Tesla will wind up playing by the same rules as everyone else. And given how local and how dug-in the dealerships' political power is, I'm guessing they will suck it up and sell though dealers.
I hope I'm wrong. I would love to see manufacturer-run car stores.
It is the middleman's job to remain relevant in changing economies, not resist changes so that relevancy is guaranteed. I think competition laws should be encouraged.
I keep wondering where I can find an example of a person who clearly is not an owner/employee/etc of a dealer who genuinely feels protected. There are probably far more people who enjoy going to the Apple Store (which was created by the same guy who now works at Tesla to set up Tesla's showrooms) than who enjoy the dealership experience.
Also, in a lot of the rest of the world, there apparently are no independent dealers, and that seems to be pretty non-disasterous.
But the price of Tesla is not based on such things like cash flow and future profits. So I'm not sure it is bad - for now.
Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted.
Financing a company may create dilution and still put the shareholder in a better spot ultimately. For Tesla, a high-growth capital-intensive business, you can bet on the dilution part happening (they have to get the money from somewhere). The better off part is still an open question.
No, this isn't true at all. If it were, companies would never issue new shares, since shareholders wouldn't allow it.
No. This is wrong. Dilution is the reduction in percentage of ownership of the company, not a reduction in the stock price. It may reduce, increase, or leave the price of the stock unchanged depending on whether or not the market thinks the company will make good use of the incoming money.
Owner a has 50 shares. Owner B has 50 shares. Total is 100 shares. They decide they want to give Jim Bob some shares for his birthday. They issue 50 more shares to do so. Owners A and B have been diluted and the value of their shares has decreased. That is dilution.
You cannot increase the number of shares in a company without decreasing the value of the shares. This is a hard, mathematical relationship.
Dilution is not financing. Dilution does not change the value of a company. Dilution is bad. When someone way up this thread quipped "yeah, it's great except for the dilution" (paraphrased), that is what he meant (I think - forgive me if I misread). In other words, "Yawn. Tesla is still in business".
Everyone seems to be confusing the definition of dilution with the reasons someone might choose to be diluted.
There does indeed seem to be some confusion. The problem is you're the one who is confused.
>Owner a has 50 shares. Owner B has 50 shares. Total is 100 shares. They decide they want to give Jim Bob some shares for his birthday. They issue 50 more shares to do so. Owners A and B have been diluted and the value of their shares has decreased. That is dilution.
The part where they issued new shares is dilution. But the part where they give them away, guaranteeing a drop in the price of the stock, is not.
In the real world corporations don't give stock away. They will sell those 50 shares on the open market and use the money to, say, buy capital equipment. In most cases the price of the shares will remain unchanged, because the value of the company's assets have increased by a corresponding amount. The price is absolutely not guaranteed to go down.
Issuing new shares has no more effect on the share price than raising capital through other means like borrowing from the bank or issuing bonds.
Cash on a balance sheet almost never gets a one to one value in a public corporation. In fact quite the opposite, it almost always gets a significant discount.
If you need a great example of this, take a look at how the market valued Apple's cash vs market cap as their cash exploded to the moon rapidly while their market cap imploded (or Microsoft's similar demonstration a decade prior). Berkshire Hathaway has also regularly demonstrated this principle in action over the last 20 years. Cisco has been demonstrating it for a decade as well. None of these companies have seen their market valuations well supported or increased by huge cash positions, their cash is and was always heavily discounted (in the case of MSFT and AAPL it's not viewed as particularly valuable because it can't or won't likely be used to fuel growth, but rather discharged gradually as a modest dividend, or left to rot on the balance sheet earning very little; in the case of Berkshire, the market would rather see Buffett doing acquisitions or holding equities to boost the return (both of which he prefers to cash)).
There are a lot of companies that are publicly traded, where if you calculated their cash as part of their market valuation, they'd be trading at extremely low discounts (eg AAPL at 6 times earnings). The market is simply telling you in those cases that it does not believe their cash is very valuable.
Good point. It all comes down to the (perceived) return on investment that a company can get using its cash.
In cases where companies are selling stock to raise cash it's usually perceived that the company will be able to get a decent ROI. So in most cases where a company raises cash (through funding or sale of stock) their market value will stay constant or increase. This is Tesla's situation.
In contrast Apple/Google/Cisco have shown very little ability to get a high return on investment on any additional cash, because they already have so much. This ROI is perceived by investors to be lower than what the investors could get on their own, which is why the cash is discounted.
edit: to further explain what I have apparently not (judging by the speed with which I got the first downvote), what I am saying is that Tesla trades at a massive premium to any normal way of valuing a public company - far more than the dilution of another offering. Clearly, the people investing in Tesla are not worried about dilution, and are betting on the Big Plan and the ability of Elon Musk to create something absolutely freaking massive. Either that, or they're just not doing the math. But I'd bet on the former.
Elon seems more interested in accelerating EV adoption than making his shareholders rich, so we'll probably see more of these secondary offerings if they can happen on terms Tesla finds reasonably good.
Also note that a large part of this money was raised in convertible debt, where shares won't show up in the float for many years (certainly in Tesla-time-periods).
Dilution by secondary offering does not require shareholder approval, up to a threshold. On the NASDAQ, the threshold is 20%. A company could, if it felt like it, dilute by 20% every single year for twenty years, and leave the original shareholders with 4% of the company.
The theory is that because the secondary offering will take place at fair market value, the cash raised will adequately compensate the existing shareholders for the dilution.
The value of a stock is determined by what people are willing to pay for it on the market, and if a company simply issues more stock, its entirely possible that the price of the stock will go up, go down, or stay the same.
This is of course only true for public companies, and in the case of private companies dilution is a completely different issue.
This is one of the most common forms of funding for young (or weak), publicly traded biotech and pharma companies.
It was very frequently done during the dotcom bubble days.
I've often wondered why Things Needing Money (cities with budget deficits, states with budget deficits, caltrain, etc) don't develop startup-like things they can sell.
From one point of view, the answer is obvious: nobody wants to make someone else rich when they can make themselves rich . But, from the other point of view: people do that all day every day. The majority of people don't understand (and don't want to understand) the complexities of corporate ownership, acquisitions, and payouts. They just want enough to pay for housing, food, support their family, and buy some toys a few times a year.
Could those Things Needing Money work it out by advancing internal EIR positions with enough funding to hire subordinates as necessary?
: The valley does provide a way around "constantly working to make someone else rich." At large places (Cisco in the old days, Google now, probably Facebook too) you see people work the system. They can leave their company, start a startup of basically what they were working on at Big Corp, then have Big Corp aciqhire them back for a few million dollars. Or, they make a startup, get acquired by a Big Corp, vest their buyout, then immediately leave and re-create their original startup they sold, but better (maybe more sustainable or more IPO-like the second time around, but it's the exact same thing as the first time around).
If it is even legal for a government organization to make something to turn a profit, in many cases it isn't, the chances that an organization run like that would produce even the stupidest of successful money making apps is unlikely. On the off chance that they did succeed the cry from private industry would be so incredulous it wouldn't last long.
It'd be a good place to get a job if you wanted to cool your heels for a bit, but long-term I think I'd get really cynical and depressed. The thing that really hurts is that people who do go above and beyond don't get more than a token reward, and usually don't end up making more than the paycheck-suckers. Like you said it's all seniority. You'll see one or a handful of people busting their butts and doing really good work, and dozens or hundreds of people coasting, and the former are not given raises.
"Pure" meritocracy is a pipe dream. It's an idea that sounds good in rhetoric but is near-impossible to even define, let alone achieve, in reality. In the real world attempts at pure meritocracy often devolve into stress-inducing 80s Wall St. films. But absolutely flat anti-meritocracy sucks worse. The optimum is probably somewhere... hmm... maybe 2/3 of the way to an attempt at pure meritocracy? Enough incentive and accountability to motivate and reward, but enough flex and forgiveness to not burn people out.
Without even considering the impact of luck, there can be no doubt that building "startup-like things" takes enormous effort and dedication - and those can only rarely exist as secondary concerns in another organisation.
Meta: I like your style of writing! Do you have a blog that I can follow?
I think this is the quote of our generation, at least. It manages to summarize a huge part of what's wrong with the economy, politics, and the human condition.
Reminds me of a short, succinct, techie version of this:
I think we should take it as a call to arms.
I wouldn't pretend to know all the best minds of my generation, but I believe that I know a statistically meaningful sample. A few of them are working in finance, which does make me sad, but the vast majority of them are working on really cool stuff, both in academia and in industry. Only one of them is trying to get people to click ads.
This isn't to say that there aren't some great minds working on getting people to click on ads, just that they represent a tiny fraction of the "best minds of our generation".
Even if they were all working on "getting people to click on ads", I think that's still an improvement on "building the atomic bomb", which we could have said about a previous generation at one point in time. (And just like the bomb gave rise to some wonderful physics, I have no doubt that getting people to click on ads will lead to some wonderful insights into cognition, psychology and economics).
Actually, come to think of it, I think you probably are correct. But a more accurate quote would be "the most well paid best minds of my generation are busy getting people to click on ads." I do know of people doing incredibly cool stuff in industry and academia, and none of them are making what the ad-analytics and finance people are making. In many cases they are making a graduate stipend (read: vow of poverty) and have poor employment prospects post-graduation (if they actually want to use their degree).
It is better for example to create some social mobile games, and then get valuated in a crazy bubble.
For example the company Gungho, they got 273 million invested on them at march for about 60% of the company (do not remember the exact number), then released a single game named Puzzles and Dragons, and now they are valued on the Tokyo Stock Exchange for about 15.1 billion USD yay!
And yes, that is more than Nintendo, for a single game. Perfect example of investor rationality.
I think it's a bit dishonest of Elon to claim there were no plans to go back to the public markets in last quarter's earnings call, only to raise more money a few weeks later.
On the flip side, this shows us that space flight is not as hard as people commonly think it is, and that the reason it stagnated post-Apollo had more to do with NASA and the DOD's bureaucratic bumbling than with the inherent difficulty of it. Two things happened post-Apollo to hamstring space flight. One, Nixon cancelled the Saturn program and pushed the Shuttle, a stupid white elephant that ate up NASA's budget for 15+ years. Two, congress turned the space program into a pork program for influential districts, constantly moving goal-posts and creating and then scuttling programs to keep the pork flowing.
There is a need to ensure that the vehicles can be produced in mass production versus a one off. This includes quality control and specialised tooling for their production line. It might even include a new production line / facility.
I don't think it's middlemen increasing the cost.
They will need some new tooling for the new Model X parts.
Most of those years were spent creating technology and prototypes. Falcon 1 became commercial usable in 2009, Dragon in 2012, and as far as I know they are still working on the VTOL (or is it VTVL?) vehicle.
It's probably not a coincidence that those two countering signals are being sent at the same time.
Lots of companies are actually taking loans they don't need just to lock in rates, and then pretty much just sit on the cash. That's part of the reason that the amount of dollars in circulation has gone up by a huge amount over the last few years while causing negligible inflation.
If you're MSFT or AAPL and can issue bonds at 1% and buy other comapnies' bonds at 3%, that's a pretty easy way to lock in a spread.
Interest rates are virtually guaranteed to rise in the next 3-5 years. Bernanke's previous quote is for interest rates to remain low until 2015, and Pimco has proclaimed that "the 30 year bull run in bonds is over".
Gross: Here -take my money Mr Lew, Buffett, Ballmer, Cook. I’m ur beast of burden - provider of ur free lunch - a non-thinking bond investor
Note that these are convertible bonds, not regular bonds. The interest rate is reduced by the implied price of the warrant.
For example, a lot of manufacturers are already developing electric vehicles for masses, just that they don't want to get their feet wet and they want someone else to do it first , so they can just jump in and join them if the market is actually ripe.
Mass adoption of electric vehicles is what most manufacturers fear and which is a valid concern, which is why Tesla's move is particularly so important.
Automotive industry is one industry where nobody is 'too late' for the party. As of now, I personally want to see Tesla succeed.
Nissan, Toyota, Mistubishi, Chevrolet, Hyundai, BMW, Audi, etc. all have EV's in their roadmaps, some are budget EV's too.
Tesla could do the same with their supercharger network, where they offer free charging. Although I think (and hope) that eventually they'll let other car manufacturers "license" access to Tesla's network, and this way they'll be able to not only pay for the maintenance and cost of the network, but also make a bit of money from it, too. They shouldn't charge too much, though. Maybe $100 per car.
By turning the network into an actual business and not just a "cost", they would have to incentive and capital to expand the network all over the world as fast as possible.
And that's how we all get free charging for all cars, forever. Goodbye oil industry.
And co-incidentally, I am reminded of the Tesla-BBC fiasco...
(You doesn't literally mean you, but BBC in this case)
If he started being objective and serious, the show would be cancelled. As it in fact was before he pitched the new, less serious, format and convinced the BBC to relaunch the show.
Tesla will have to move down market, that will seriously restrict their profit per car. Where they are now with the S is in a price range which is less than twelve percent of the market but provides the majority of many automakers yearly profits. Get down to that below 40k mark and they are going to be in the same boat with everyone else. I doubt we will see a sub 40k car from them for years.
The sales figures of Leaf vs Tesla seem to suggest that people bought the Leaf when the Model S wasn't yet available and the Leaf was the best EV available, and largely lost interest after that.
It seems entirely possible that the legacy automakers' EV plans could turn out to be too little, too late.
I think you can buy existing bonds on the market through more normal channels including discount brokerages.
edit: Public Service Announcement - don't trade in bonds, because you're virtually guaranteed to get taken advantage of hardcore by Wall Street bond traders, even the "flow traders" that do the transaction for you. One example is the broker giving you a price (via the trader) that reflects the bank's own book instead of the actual open bond market (you can check the discrepancy by demanding to see the Bloomberg data on the security). The bond market is still even to this day nothing like the stock market. Visibility & transparency (in the stock market) are your friend.
This advice, of course, ignores the second order effect that someone skilled might pretend to be a mark....
The NYT accords the quote to Billy Waters.
I'm not implying anything political with this comment, just genuinely curious.
The New York Times had a fantastic article on this: http://www.nytimes.com/2012/12/02/us/how-local-taxpayers-ban...
And a visualization here with some data: http://www.nytimes.com/interactive/2012/12/01/us/government-...
Re-reading it, makes you wonder how profitable all these industries would be without all these subsidies/tax breaks etc baked in.
Several of GE's businesses are propped up by government subsidies. All I'm saying is that GE is not really different - Tesla simply happens to be in a sector that's particularly high profile and politically charged, and its claiming of those things are out in the open.
And before someone gets upset, I'm not saying that's bad or that it detracts from Musk's vision or skill. It just is.
Does this basically constitute a "cash out" for Tesla, and will this have a deflating effect on the stock?
It is a signal that they believe that their stock is highly valued (or even over valued, but they would never say that) if they are raising equity - otherwise debt might be a more attractive offer. In the end, it's all a balancing act between taxes, cash flow, dilution, and market demand for securities.
Any time you raise money, you dilute ownership (or lower cash flow in the case of debt), which has the direct effect of devaluing the stock. But you wouldn't do that unless you thought you could increase the value of the stock by investing that cash and increasing future cash flows. (Incidentally, this is why everyone is so pissed at Apple, who has way too much cash to invest properly - they should be giving it back to shareholders to invest themselves if they can't figure out what to do with it).
The cynic in me says, "beware - this stock is overvalued and they're just taking advantage of that with this offering." The optimist says, "great then- they can raise money at a low cost and increase their chances of making it big". On this one, I'm siding with the cynic. This is highly speculative. Besides, do you want to be the one who is permitting them to raise money so attractively? (That's an open question - akin to paying a stupid valuation for a hot startup because it will not matter one day when it sells for 100x.)
I'm reminded of the time when AOL bought Time Warner with it's insanely overvalued stock. Didn't turn out to well for Time Warner shareholders.
And Brazil governments owns Petrobras, so it is very much against its interests to people ditch petroleum before Petrobras find some new business model...
Hopefully this means that we'll have a "Model Y" in the 25k-30k range in another 5 years!
However I agree that $45k is likely incorrect, and in practice it's hard to imagine they'd make it much cheaper than Model S, if at all.