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Galileo Russell: Tesla going private would be “a step back” in transparency and liquidity

Discussion in 'TSLA Investor Discussions' started by strangecosmos, Aug 8, 2018.

  1. strangecosmos

    strangecosmos Non-Member

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  2. strangecosmos

    strangecosmos Non-Member

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    #2 strangecosmos, Aug 8, 2018
    Last edited: Aug 8, 2018
    My own feeling at the moment: going private currently looks like a raw deal for retail shareholders, who will most likely be locked out of buying more equity when the deal goes through. We could sell, but not buy. It’s also more complicated and costly from a tax and regulatory perspective to hold private equity rather than publicly traded stocks. The justification for going private has not yet been articulated in enough depth and detail. I could definitely still be persuaded that it’s a good trade-off, but right now I’m skeptical.

    One reason cited is that the stock price is a distraction. However, getting distracted by the stock price is a habit that can be broken. You can choose to focus on fundamentals instead.

    You can also still be distracted when there are no daily stock price updates. There will always be distractions — including negative media coverage, online Tesla/Elon hate groups, right-wing activism, public personalities with loud grudges, UAW campaigning, and so on. These will not abate just because Tesla is private. They have nothing to do with Tesla being a publicly traded company. Journalists typically can’t own stock in the companies they cover. In Elon hate groups and right-wing smear campaigns, SpaceX gets equal attention. The grudges against Tesla I’m thinking of are not related to the stock or financials. Tesla will still employ thousands of factory workers, who UAW will want to unionize just the same whether Tesla is public or private.

    Yes, it’s true that short sellers have a financial incentive to harm the company. But to take the company private and harm retail shareholders in the process is giving a loud minority of short sellers too much credit and too much power. Simply showing a net profit and positive free cash flow for four consecutive quarters would fully transform the narrative on Tesla in financial circles. Media coverage, including financial media coverage, is ridiculously mercurial. News writers seem to be champing at the bit to write about a fall from grace or a comeback. There was a bit of that even with the last Tesla earnings call. If Tesla remains as a public company and reports a profit and positive free cash flow in Q3, the narrative turnaround will begin.

    The market already believes in Tesla as much as or more than it believes in General Motors, even though it’s a much smaller and younger company. Tesla is already being priced as one of the largest auto companies, even though it’s one of the smallest. In other words, the market has already accepted Tesla’s and Elon’s vision of Tesla as the next great auto manufacturer. Even before getting to profit and positive cash flow, and before getting to even 10% the production volume of General Motors. What does Elon have left to prove? The world has already bought in.

    Elon himself has noted that the stock price is high relative to the company’s current financial metrics. Elon has also acknowledged the risk Tesla had to take with the Model 3 ramp. In the financial markets, there are people betting on everything. If some people don’t see the vision that justifies the valuation or want to gamble on the risk, so what? Let them do it and leave them alone. Now that Model 3 production is at 5,000+/week and we’re told profit and positive cash flow are imminent, the risk has mostly passed. The vision will be realized (or it won’t) over the coming years, and the stock will be priced accordingly — even if tomorrow the market suddenly loses faith. If Tesla doesn’t want to raise capital by selling equity in the company, the short-term stock price doesn’t matter.

    You could say the short-term stock price also matters for employees’ stock-based compensation. But not if they hold the stock long-term. Going private is only better for employees (and therefore the company) insofar as the daily stock price is no longer a distraction. Perhaps this is the crux of the matter. Again, this habit can be broken. Employees can choose to focus on the fundamentals instead. And management can trust them to do that, and encourage a culture of long-term thinking. If Elon showed he isn’t concerned about the short-term share price, that would set an example.

    In brief, my thinking is: once you get rid of one distraction, there will be others ready to distract you. Once you get rid of short sellers, there will be other groups of haters, cynics, and critics to get upset about. The actual harm that short sellers can do seems small to me, and will get much smaller as Tesla goes profitable and cash flow positive. Instead, Elon and Tesla ought to work on a culture of focus and long-term thinking. And a culture of selective attention to outside commentary — filtering out as much as possible the haters, cynics, and unpleasable critics. Focusing instead on internal validation and hearing feedback only from people who have earned the right to give it.

    Going private is a corporate restructuring plan that doesn’t seem like it will solve the problems it’s apparently intended to solve, which seem like cultural problems, not problems with the corporate structure. Changing the corporate structure will also harm Tesla’s long-term retail shareholders, who include much of Tesla’s supporters and believers.

    It’s possible that going private could increase Tesla’s operational efficiency, but so far I haven’t heard anyone explain why that would be the case.
     
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  3. Kristoffer Helle

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    Nah, Tesla can't share much now, because shorters will use anything to talk down Tesla.
    "Model S hit by a train, people walked away without injuries " =" Tesla model S saved the life of a potential serial killer"..
    We all know how they turn everything around...
     
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  4. Sean Wagner

    Sean Wagner Member

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    Trent, thank you for a well-reasoned contribution that encompasses several very valid points.

    I'll admit to being at a loss for why this must happen now, just before a couple of quarters of solid execution that should and need to be trumpeted and tweeted around the globe.

    Solid execution and moves towards underlying profitability would not hinder Tesla in the least.

    It would rather very likely save a lot of time and angst and money by further improving the methods that need to be duplicated on two continents for Tesla's worldwide output to take the next leap.
     
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  5. J1mbo

    J1mbo Active Member

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    It is probably happening now because the price is low. After a couple of quarters of incresing profitablilty, the price may get too high for this kind of thing.

    Also: 420 on Pineapple Express day :cool:
     
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  6. T3SLA3

    T3SLA3 Member

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    Removing the large random short term price movements from TSLA will allow Tesla employees to focus on delivering the long term goals. As clearly Elon stated.
    As investors we have been offered a golden opportunity to follow Tesla as it goes private.
    Presumably we can still add to our investment annually.
    Take or leave it, I strongly suspect the majority vote is already 'in the bag'.
     
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  7. strangecosmos

    strangecosmos Non-Member

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    Why not just stop checking the share price? That achieves the same outcome with less harm to retail shareholders.

    Law dictates that only millionaires can buy shares of private companies. Perhaps there is some workaround, but I haven’t heard of one yet.

    I wonder about the large institutional investors that own over 60% of Tesla. Not all of them are allowed to own shares in private companies. If they want to hold onto their Tesla shares, they may vote against the proposal.
     
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  8. dondy

    dondy Member

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    public companies are locked in "free cash flow" nonsense. You will not find any investment heavy company which succeeded to grow in the public space.
    ""Accountability" is a myth.
    As practice shows same numbers can be interpreted in any way possible.
    On the other side accounting reporting costs and the costs of keeping production cycles in 1/4 year time frame are real.
    Financing overhead costs in public investments are real. Access to public money is controlled by the Wall Street and the choices they make are arbitrary. Can somebody explain Moody rating of Tesla?
    Musk buddies don't do public investments. In fact nobody with real money does.
     
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  9. STARR X

    STARR X Member

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    Yea, it is to be seen how this all plays out but if I can hold my ‘private’ shares in the accounts I have, I feel the upside better.
     
  10. strangecosmos

    strangecosmos Non-Member

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    Tesla is already planning to start generating free cash flow starting in Q3 and then indefinitely from there. On the most recent earnings call, Elon said that Tesla is approaching a phase where capital won't be the constraint to growth — others things like time, or labour supply will be the limiting factor. Elon seemed to be saying that internally generated cash will be sufficient to fund most future projects. One big exception is the Chinese Gigafactory, which Tesla is borrowing money from Chinese entities to build.

    In any case, Tesla isn't planning to be free cash flow negative going forward. So that can't be a reason to go private.

    Plus, the public stock market does have room for fast-growing, cash flow negative companies — like Tesla, which had its IPO in 2010. Netflix is another example: in 2017, it had a negative free cash flow of $2 billion. Amazon had positive free cash flow from early on, but was unprofitable for years and invested heavily in growth.

    Tesla doesn't have to think short-term, or make short-term goals. Especially if it has positive free cash flow (as it's planning to soon) and doesn't need to raise money. The market values Tesla more than Ford (a company ~10x bigger by revenue), and shareholders have voted overwhelmingly in support of what the Board of Directors has recommended. The public market has actually been pretty good to Tesla!

    If Tesla wants to think long-term and set long-term goals, that's up to Tesla. The public market isn't forcing it to do otherwise.

    Elon says Tesla won't need to raise much capital long-term. But if Tesla does want to raise capital, it's a lot easier to do so on the public markets. Needing capital is a reason to stay public, not to stay private.
     
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  11. dondy

    dondy Member

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    He also was saying that Fremont is full, and they need to look elsewhere for a factory building Model Y and semi's.
    Financing from free cash flow would put all these plans on hold.
    Tesla need desperately to improve dramatically their service network, they need to upgrade their "suppliers" network to build sufficient storage of spare parts. The need, they need they need....

    People keep asking why Nissain after finding that termo-management and BMS are a must still keep producing inferior autos.
    The answer is "free cash flow" restrain. Any significant change in Leaf production cycle would mean significant costs and they cann't afford it.
    "Frozen" models typical for all manufacturers come from the same problem. they can not afford extra investments.
    It would break their already immense debt levels.
    In case if it stays public.
    Netflix is MBA'ed, i.e. is going to get milked and die, Amazon is very special case which deserve special discussion elsewhere.
    They need a lot of capital. Elon says he is not going to ask Wall Street.

    it is a myth. Netflix is actually a very good example.
     
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  12. neroden

    neroden Happy Model S Owner

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    So there's a middle ground. Tesla can remain a "public company" for reporting and accounting purposes -- any company with more than 2000 shareholders has to be "public" for this purpose -- but Tesla can delist from all the stock exchanges and get a right of first refusal on the sale of any shares, essentially shutting down trading and eliminating liquidity.

    Thsi is totally legal. It's quite likely that retirement plans and non-accredited investors would still have trouble holding the stock, but all the concerns about transparency and about number of investors would go away.
     
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  13. Brando

    Brando Active Member

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    #13 Brando, Aug 9, 2018
    Last edited: Aug 9, 2018
    Public company - Tesla
    Private company - SpaceX

    Elon has done both for more than 15 years. He needs to convince 2/3 of the owners (stockholders) to take Tesla private. He owns ~20% (maybe 22% ?).
    You get your vote (if you are a stockholder) - IF the board decides to go forward, right??

    I don't own any stock, but I trust Elon's judgement much more than most anyone.
    Especially more than most ANY of the analysts I've heard. Even more than Bob Lutz. seriously
    Sandy Munro did surprise me as he changed his story when he actually had more facts.
    Even Jack Richard got more impressed with Tesla over time. Known Jack since early 90s and he is pretty full of himself and is one of the last ones to pass along credit.
    Still waiting for the "rest" of the auto industry to show us how much better they can do - or at least make anything competitive with a Tesla - or fill a niche Tesla doesn't make yet. Plenty of opportunity, right?

    Let the electrification begin !
     
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  14. Tam

    Tam Active Member

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    It is not ideal for a trader who needs the freedom of selling and buying any company stock at any time.

    Going private would demand loyalty to the brand because a private investor just can't keep selling the stock and jump back in at a later date.

    That means stability to the brand.

    The public can buy 1 share of Tesla and could have the podium demanding vegan.

    Don't get me wrong. I am not a vegan but I do admire their zeal!

    That's a lot of power from the public! And more power to them!

    Nevertheless, private companies don't have to answer to the public at large so they have more control while the public would lose that control!

    Companies go private to enhance profit for private investors and not to worsen their investments. That's no longer about what good for public investors but it's about how to increase value for private investors.
     
  15. adiggs

    adiggs Active Member

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    I think the reason this needs to happen now, and ideally for the people trying to pull this off, before the Q3 earnings report, is stated in the second quote - to enhance the profits for the private investors.

    I see the Q3 earnings report as the start of Tesla's second unmoored revaluation by the market (first one being 2013, when the stock went from ~25-35 trading range, to ~130-180 trading range over several months). The beginning of permanent (and fast growing) free cash flow is going to make increasingly clear how much leverage there is in the business, and increasingly obvious just how profitable Tesla will be (while still growing at ludicrous levels). If I had the billions to underwrite the go-private opportunity, and with my view of what I am convinced will be happening over the next 3-9 months, I WOULD underwrite the go-private opportunity myself.

    I consider $420 to be a significant underpay. I would take my shares private with the company, given that opportunity actually comes to pass, at $840. At least at $840 I consider it to still be a good deal, without being a significant underpay.


    At $420, I see this as a straight up wealth transfer (even if I get the hinted opportunity to go private with the company and therefore am benefitting from the wealth transfer).

    Not advice - just a view of a random guy on the Internet.
     
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  16. neroden

    neroden Happy Model S Owner

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    I agree entirely with adiggs. This is a lowball, underpriced offer. James Anderson of Baillie Gifford agrees.

    Sadly, the continued low stock price raises the chance that the offer will actually go through. I think enough shareholders will be able to follow Musk into the private company, and enough will be happy with the $420 buyout, to make it pass the vote. If the stock price rose well above $420, I think that would be likely to sink the offer; even if it could still pass the vote, it would be *actual* lawsuit grounds for the people who are squeezed out (and I am quite sure *some* people would be squeezed out, such as Canadian RRSP holders).
     
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  17. Tam

    Tam Active Member

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    Keith Wright, Villanova University accounting professor agrees. $420 is just too low because of Tesla's current ability to massively collect raw data from its consumer cars for Artificial Intelligence that no others including Waymo have.

    Tesla shareholders who sell if EV maker goes private will be losers for one big reason: A.I. 

    Waymo leads the way in autonomous mileage but it relies on pre-mapped routes so it's currently severely geofenced to a few operating areas of cities.

    Tesla could do a coast-to-coast with a prepared route (as in short Tesla demo's tape) but Elon Musk does not like that inflexibility so it delays the coast-to-coast trip until its Artificial Intelligence will be able to do autonomous driving by any route with no preparation needed.
     
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  18. ItsNotAboutTheMoney

    ItsNotAboutTheMoney Well-Known Member

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    Shorts benefit from manipulating the share price downwards.
    Longs benefit from manipulating the share price upwards.
    The share price is a headline.
    The headlines affect consumer, lender and supplier confidence.
    There are stories _every_ _freaking_ _day_ because of this.

    It's just such a waste of intellectual effort. We heard the impact in the Q1 earnings call.

    Not directly, but through other funds. I'm sure they'll try to work it out. They _want_ investors. It's the day-to-day bullshit they'd want to eliminate.

    Elon Musk has 3 companies: Tesla, SpaceX and Boring. Compare headlines with Tesla.

    They might do. Or they might be happy to cash out and move on. Share buybacks are all the rage.
     
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  19. strangecosmos

    strangecosmos Non-Member

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    News articles on Tesla are overwhelmingly written by journalists who aren’t allowed to own shares in Tesla or sell them short. (Exceptions include Electrek and Seeking Alpha.) I don’t see a causal connection there. I think these articles would still get written if Tesla were private. Public interest in Tesla is sky high. I don’t think we can put that genie back in the bottle.

    Tesla is consumer-facing and has a larger and more engaged fan base. Hundreds of thousands of people have driven a Tesla but no one has ever been on a SpaceX rocket. Few people have ever even seen a SpaceX rocket up close — but probably millions have seen a Tesla. Cars are culturally important and get a lot of attention. Autonomy and climate change are big, emotionally charged topics with a lot of public awareness. I think that explains the difference.

    The Boring Company will get a lot more attention if/when members of the general public start riding in a working Loop or Hyperloop, especially if it’s for their practical transportation needs and not just a demo tunnel.

    It doesn’t take much effort to give a one-sentence answer to a question, refer someone to the shareholder letter, or decline to answer — then move on to the next question. It’s a few minutes per year.

    I think the Q1 call is as much about Elon doing self-care (e.g. getting enough sleep and time off work) and developing emotional resilience to criticism as anything else. Those are personal and cultural questions — they’re not about whether the stock is listed on a public exchange. This is my big point: distraction and criticism will always exist. What matters most is how you respond to it (both in terms of your internal thoughts and emotions, and in terms of your actions).

    Tesla doesn’t need retail investors, who own only something like 12% of shares. Other large private companies like Uber and SpaceX don’t have retail investors. There is no business reason to allow retail investors to hold private equity in Tesla. If Elon didn’t have a sense of gratitude and loyalty toward Tesla’s retail investors, there would be no reason for him to make an effort to keep retail investors on.

    There is unavoidable cost and complexity for retail investors no matter what. It seems unlikely that there will be a way for retail investors to buy more shares after Tesla goes private (if it does go private). At least, I’m not aware of any precedent for it. If Tesla tries to allow retail investors to buy private shares, the SEC might prevent Tesla from doing that, since Tesla would be trying to get around securities laws.

    From a tax and complexity perspective, it cheaper and easier for retail investors to hold shares of publicly traded companies than private equity. In Canada, for example, it is easy to buy publicly traded stocks using an online brokerage, and you can put up to $57,500 in shares in a tax-free account. But if the shares are converted to private equity, they become taxable, and I don’t even know how or where to keep private company shares.

    The only way this is good for retail shareholders is if going private makes Tesla a lot more operationally efficient and therefore accelerates the growth of the company’s intrinsic value. I’m open to that argument, and I expect Elon will make it at some point. So far, though, Elon and everyone else has been talking about the distraction of daily stock price changes and criticism from short sellers — not good reasons to go private, in my view.
     
  20. Tam

    Tam Active Member

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    I think all other reasons are secondary but the primary one is control. Elon Musk wants to have a better control of the company.

    Companies don't go private because it gives more opportunities, liquidity, flexibility... for individual investors! It's the opposite.
     

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