Short-Term TSLA Price Movements - 2015

[jhm]

I think the basic thing people should keep in mind about any sort of capital raise, whether debt or equity, is that it matters most what that capital will be used for. If there is a rate of return on that capital in excess of the cost of capital, then shareholders gain value. So if debt, the return on that must be higher than the interest rate. If it is equity, then the return needs to be higher than the rate of return equity investors would otherwise require. That is a pretty tall order for a pure equity capital raise. It is much easier to get a return in excess of interest on debt. However, bond investors may feel more confident buy bonds where there is more equity, skin in the game. So a large bond offering may be accompanied with equity offering as well. The combine cost of capital is somewhere between debt and equity, thus the business can potentially get a return on capital in excess of the cost of capital.

So in economic term dilution only happens when the capital acquired fails to generate a return in excess of the cost of capital. So what we should really focus on is what that capital might be used for. If it just sits in the bank, that dilutes shareholder value. But if you put that into a new factory that is well utilized and empowers the business to grow faster than it otherwise would, then it is a damn go investment and it build shareholder value.

Specifically, if Tesla Energy product take off $400M in 2016 and $2B or more in 2017, then a debt and equity capital raise for a second gigafactory will definitely be with it. Gigafactory 1 with 15 GWh set aside for TE product only supports about $4B in TE revenue. To go beyond that will cut into capacity needed to support 500k vehicles worth about $35B in TM revenue. Yet TE has the potential to reach $20B to $40B by 2020. But to reach this market TE will need 150 GWh of gigafactory capacity by 2020. While the cash flow from TE will be huge and can self-fund much of this expansion, I suspect Tesla may need to raise about $3B. But raising $3B to move aggressively into a $40B business with 15% to 25% GM strikes me as a damn good investment. If Tesla wants to issue shares for this, I'd be happy to buy more.

 

[sahanim]

I think the basic thing people should keep in mind about any sort of capital raise, whether debt or equity, is that it matters most what that capital will be used for. If there is a rate of return on that capital in excess of the cost of capital, then shareholders gain value. So if debt, the return on that must be higher than the interest rate. If it is equity, then the return needs to be higher than the rate of return equity investors would otherwise require. That is a pretty tall order for a pure equity capital raise. It is much easier to get a return in excess of interest on debt. However, bond investors may feel more confident buy bonds where there is more equity, skin in the game. So a large bond offering may be accompanied with equity offering as well. The combine cost of capital is somewhere between debt and equity, thus the business can potentially get a return on capital in excess of the cost of capital.

So in economic term dilution only happens when the capital acquired fails to generate a return in excess of the cost of capital. So what we should really focus on is what that capital might be used for. If it just sits in the bank, that dilutes shareholder value. But if you put that into a new factory that is well utilized and empowers the business to grow faster than it otherwise would, then it is a damn go investment and it build shareholder value.

Specifically, if Tesla Energy product take off $400M in 2016 and $2B or more in 2017, then a debt and equity capital raise for a second gigafactory will definitely be with it. Gigafactory 1 with 15 GWh set aside for TE product only supports about $4B in TE revenue. To go beyond that will cut into capacity needed to support 500k vehicles worth about $35B in TM revenue. Yet TE has the potential to reach $20B to $40B by 2020. But to reach this market TE will need 150 GWh of gigafactory capacity by 2020. While the cash flow from TE will be huge and can self-fund much of this expansion, I suspect Tesla may need to raise about $3B. But raising $3B to move aggressively into a $40B business with 15% to 25% GM strikes me as a damn good investment. If Tesla wants to issue shares for this, I'd be happy to buy more.

that was really well said and you did a great job explaining what others have been trying to say.

also we cant forget about GF1 hosting more than 50GWhs. probably 1.25-1.5 times more from how confident Elon and JB sounded on the ER but thats just my opinion!

 

[Johann Koeber]

I think the basic thing people should keep in mind about any sort of capital raise, whether debt or equity, is that it matters most what that capital will be used for. If there is a rate of return on that capital in excess of the cost of capital, then shareholders gain value. So if debt, the return on that must be higher than the interest rate. If it is equity, then the return needs to be higher than the rate of return equity investors would otherwise require. That is a pretty tall order for a pure equity capital raise. It is much easier to get a return in excess of interest on debt. However, bond investors may feel more confident buy bonds where there is more equity, skin in the game. So a large bond offering may be accompanied with equity offering as well. The combine cost of capital is somewhere between debt and equity, thus the business can potentially get a return on capital in excess of the cost of capital.

So in economic term dilution only happens when the capital acquired fails to generate a return in excess of the cost of capital. So what we should really focus on is what that capital might be used for. If it just sits in the bank, that dilutes shareholder value. But if you put that into a new factory that is well utilized and empowers the business to grow faster than it otherwise would, then it is a damn go investment and it build shareholder value.

Specifically, if Tesla Energy product take off $400M in 2016 and $2B or more in 2017, then a debt and equity capital raise for a second gigafactory will definitely be with it. Gigafactory 1 with 15 GWh set aside for TE product only supports about $4B in TE revenue. To go beyond that will cut into capacity needed to support 500k vehicles worth about $35B in TM revenue. Yet TE has the potential to reach $20B to $40B by 2020. But to reach this market TE will need 150 GWh of gigafactory capacity by 2020. While the cash flow from TE will be huge and can self-fund much of this expansion, I suspect Tesla may need to raise about $3B. But raising $3B to move aggressively into a $40B business with 15% to 25% GM strikes me as a damn good investment. If Tesla wants to issue shares for this, I'd be happy to buy more.

Thank you, now I (sort of) understand it.

But what is the cost of equity? No interest paid. No dividends paid?

I would vote for an equity raise if the efficiency of the additional cash is equal or greater than the return on the existing equity. In that case: no dilution. If the new equity capital is put to less efficient uses, then that is the dilution.

For debt it is easier to calculate the cost - it is the interest paid.

What is the cost of equity? I guess the expectations of the shareholders in terms of future dividends, future value of the company etc play the main rolls and are difficult to grasp. Where to look to find out about these expectations? They are reflected in the share price.

So offering new stock at current share price does not dilute (short term). Medium and long term it depends how efficiently the cash is put to work.

 

[Johan]

Thank you, now I (sort of) understand it.

But what is the cost of equity? No interest paid. No dividends paid?

I would vote for an equity raise if the efficiency of the additional cash is equal or greater than the return on the existing equity. In that case: no dilution. If the new equity capital is put to less efficient uses, then that is the dilution.

For debt it is easier to calculate the cost - it is the interest paid.

What is the cost of equity? I guess the expectations of the shareholders in terms of future dividends, future value of the company etc play the main rolls and are difficult to grasp. Where to look to find out about these expectations? They are reflected in the share price.

So offering new stock at current share price does not dilute (short term). Medium and long term it depends how efficiently the cash is put to work.

What you're saying is true. And why would we expect Tesla to not be able to put capital attained now to good use in the future? If we didn't expect this we should all get out of the stock, since it's in one sense valued quite highly (with regards to traditional measures such as P/E ratio etc.).

In economic theory the pricing of a stock reflects all future earnings and dividens of a company. Obviously the market is putting a lot of belief in Tesla's ability to make a lot of future profits.

 

[hobbes]

That was a while ago. Probably just house keeping because Tesla should be the one controlling the information and keeping a single version of the truth.

So you don´t want an open discussion? From my point of view, there is never a single truth but many different perspectives that should be allowed to discussed. Also see my post in the other thread.

 

[Drax7]

Well said JHM, the return on the capital raised increases the value of the enterprise.
Adding a production line for model 3 is where the capital may be deployed.

The shorts want to create a panic when a new capital infusion is necessary,
though as long as the capital is invested productively it is not a drag.

 

[aznt1217]

Well said JHM, the return on the capital raised increases the value of the enterprise.
Adding a production line for model 3 is where the capital may be deployed.

The shorts want to create a panic when a new capital infusion is necessary,
though as long as the capital is invested productively it is not a drag.

For me this was a given, the main point of contention was the purpose of the capital raise. Some of the posts here (and shorts) would have potential investors believe that the capital raise is mandatory for Tesla to stay afloat when this is simply not the case. I don't think anybody minda a capital raise when its to usher in the next stage of growth.

- - - Updated - - -

So you don´t want an open discussion? From my point of view, there is never a single truth but many different perspectives that should be allowed to discussed. Also see my post in the other thread.

Open discussion is fine its a forum. We don't know everything that's happened or who the source was. For all we know there was a gag order with legal ramifications for both parties (supplier and Tesla). We can discuss but things have a way of spiraling out of control and we all know the press looks at this forum. The fact that there was no way to substantiate evidence or even verify the source smelled fishy enough.

He could've lost his job and this was revenge or something. We really don't know. That, and if Tesla was lying it would leave then open to shareholder lawsuits. Simply not the case. That post was in mid july about the delays. Model X is coming in September and configurator goes live in August. This is printed information from a primary source, this is what we hold Tesla to.

 

[jhm]

Thank you, now I (sort of) understand it.

But what is the cost of equity? No interest paid. No dividends paid?

I would vote for an equity raise if the efficiency of the additional cash is equal or greater than the return on the existing equity. In that case: no dilution. If the new equity capital is put to less efficient uses, then that is the dilution.

For debt it is easier to calculate the cost - it is the interest paid.

What is the cost of equity? I guess the expectations of the shareholders in terms of future dividends, future value of the company etc play the main rolls and are difficult to grasp. Where to look to find out about these expectations? They are reflected in the share price.

So offering new stock at current share price does not dilute (short term). Medium and long term it depends how efficiently the cash is put to work.

That is a good question. It is actually quite hard to pin down. Historically for the market as a whole, the return on the market is about 8%. So under CAPM theory, a stock with beta of 1 has cost of equity to the market, 8%. But in general for a stock with beta, CostEquity = RiskfreeRate + beta (8% - RiskfreeRate ). So that's textbook CAPM, but given that beta for Tesla is less than 1 but there is a ton of idiosyncratic risk, no one really should accept CAPM in this case. There are other approaches like relating a company to the rate of return of other companies in its industry. But alas industry comparisons are problematic for Tesla since it is such a disruptive player. So some will just compare it to high tech, whatever that is. So many analysts attempt to put there on cost of capital on Tesla. It is the discount rate they use in their discounted cash flow models. So in the midst of all this ambiguity, investors must simply ask themselves what rate of return on the stock would justify my investment in the stock. Suppose you thought the stock was priced such that you expected the stock to grow only 8% in the coming year. Would you buy or continue to hold the stock? If not, the the cost of your capital is greater than 8%. Suppose longterm investors believe that the stock price should be well priced at $350 in twelve months. What's the highest price today at which long term investors would hold equity? Let's say this is $280, that is at that point longterm investors are happy to sell shares to short term traders, which will tend to break upward momentum allowing the price to fall back below $280 at which point investors start buying back their shares. 350/280 = 1.25, this implies that the coat of equity is about 25%. I actually think that fir Tesla this is about right. My subjective impression as a longterm Tesla is that the market puts about a 25% cost on equity. Utiimately the cost of equity is whatever the market thinks it should be, whatever expectations are needed to attract buyers. From this lens, when an equity raise increases the share price, this demonstrates that the market believes the capital raise is antidilutive. Of course , this leads us right back to the messy business of tracking short term price changes and arguing about what they mean. So I prefer the subjectivity approach, every investor should decide what their own expectations are and what they are willing to pay for it.

Good luck!

 

[aznt1217]

So painful. Really need that Model X.

 

[CALGARYARSENAL]

I think this will be the pause that refreshes. Some of us have to realize that Mr. Musk is not a messiah, rather, a smart person. Some would argue a lucky person. I am a fanboy of the stock but I stop short of idolizing Musk. He can and does make mistakes. He took his eyes off the ball with SpaceX and arguably Tesla when the rocket blew up. I actually find the more I listen to him speak, the more annoyed I get - maybe not annoyed but uneasy feeling. Possibly one of the reasons for the post earnings selloff. Once the intense love affair for Musk dies down a bit, the stock will begin to climb the wall of worry. Next time it visits ATH, there will be no stopping it. I do believe Musks 10 year prediction on stock price.

 

[ev-enthusiast]

Currently testing support at the $240 level again.

 

[aznt1217]

I think this will be the pause that refreshes. Some of us have to realize that Mr. Musk is not a messiah, rather, a smart person. Some would argue a lucky person. I am a fanboy of the stock but I stop short of idolizing Musk. He can and does make mistakes. He took his eyes off the ball with SpaceX and arguably Tesla when the rocket blew up. I actually find the more I listen to him speak, the more annoyed I get - maybe not annoyed but uneasy feeling. Possibly one of the reasons for the post earnings selloff. Once the intense love affair for Musk dies down a bit, the stock will begin to climb the wall of worry. Next time it visits ATH, there will be no stopping it. I do believe Musks 10 year prediction on stock price.

I'm not even here for Musk. I'm here for team elon -- to me Elon is the coach that occassionally subs in. As much as I like the guy, I like the team at Tesla equally as much (if not more). I give Elon credit for being in the spot light because it enables his teams to focus harder. He has also evolved as a manager by acknowledging others' works in recent times. Him bringing Deepak up on stage was huge to announce retirement. I also appreciate the JB has been in the spotlight more and you see him developing his management skills (he's arguably the CEO after Model 3). Elon himself even acknowledged that he gets too much credit for things and wish people would focus more on the company and product than himself.

To the same token it wasn't Elon that took his eyes off the ball with SpaceX. That's the procurement team and QA team to test. It's also up to the supplier to test struts. This should've been a non-issue.

 

[CALGARYARSENAL]

Great post aznt1217

 

[drinkerofkoolaid]

I think this will be the pause that refreshes. Some of us have to realize that Mr. Musk is not a messiah, rather, a smart person.

You sure?

View attachment 89813

 

[CALGARYARSENAL]

OMG that is crazy. I guess we are all his "little children."

 

[Lump]

@CALGARYARSENAL

Do you use options? I would be interested to hear if you purchase some PUTS.

 

[aznt1217]

If you believe in technicals, I believe we are officially in oversold territory based on every SMA possible. $240 is the spot. It's also an Options expiration date.

 

[FluxCap]

If you believe in technicals, I believe we are officially in oversold territory based on every SMA possible. $240 is the spot. It's also an Options expiration date.

MAx Pain today is 255, but I don't think that will matter today. I have a feeling we will close in the 230's.

 

[ev-enthusiast]

If you believe in technicals, I believe we are officially in oversold territory based on every SMA possible. $240 is the spot. It's also an Options expiration date.

What do you mean by "$240 is the spot."?
As far as I can see this is currently the 100 DMA at about $240.35.

Yesterday's low was at about $236.12.
Let's see if we stay above that level.

While I added some shares as well as mid and short term options during dips the last weeks (some are currently red), I still have some money left to deploy.
Only question is if this downwards move is sutsainable or only temporarily?!
Just to state the obvious: A $30 drop from the $270 level because of this Q2 ER?!
Opinions much apprechiated

 

[BoerumHill]

So painful. Really need that Model X.

Feeling your pain except Model S