Short-Term TSLA Price Movements - 2016

[Cattledog]

How many times do I have to remind some TMC members that issuing new shares around the current price for the purpose of investing the money received in growth opportunities is not harmful "dilution"? The money received belongs to all shareholders; it's not burnt and turned into smoke. It's used to generate far more income than can be earned from fixed income investments.

I think you'll need to keep reminding people until they have nothing better to do with the money than burn it up - probably a long time! So true and a great reminder.

Let's all remember that Elon had 6 more months to exercise his options but is doing it now. He did it in late January/early February too when he had a sense the the 1xx price was undervalued compared to what he knew - namely that Model 3 was going to be pretty great. Now he knows there are $375K reservations and that there will be a part 2 to the reveal that will pull more demand levers. He may know part 2 is Model Y, or introduction of an Uber-like Tesla service, whether autonomous or not. He knows Model X production hiccups are on the mend, he knows how well the Model S refresh is taking hold, he knows how many cars he can produce at Fremont, he knows how much he can charge large scale customers for PowerPack, he knows if there are some good battery chemistry improvements coming from Canada, he knows how well the uptake is moving in China, he may know the location of GF2 and F2 - he knows a lot of things that tell him $205 is a screaming deal.

 

[Xpert]

Can we expect more analyst upgrades after the GS upgrade, and capital raise de-risking?

Sure thing, GS counterpart, MS, will do their upgrade tomorrow to complete their underwriting duty

 

[maoing]

maoing and mmd, are you saying you it's news to you that Elon would exercise those 5.5 million options costing him $6/share?

I fully understand EM's option execise. But it can't change the fact that TSLA share base has been diluted.

 

[Bgarret]

That is cool, but it should be noted those are tax withholdings. He will be receiving a very large tax refund, because donations of appreciated stock are counted at FMV rather than cost basis. One of the biggest tax loopholes I am aware of.

I think that's so funny. Even if he got every dollar back on taxes, he still gave away 44% of his profit. Because you get 25-35% break on your taxes doesn't minimize the fact you just gave away a quarter of a Billion dollars.

"Oh, he gave away a quarter of a Billion, but he gets free breakfast at Denny's for the month of June, so it's a selfish move." Give the guy some props for stepping it up.

Does Musk giving away $250 million speak to a man who is feeling some confidence in his liquidity and financial situation going forward??

 

[dandurston]

So you were the one.

I don't see what is misleading about it. In the first sentence you correctly state what Tesla wants to avoid (the perception that Elon is cashing out), then in the second sentence you talk about something else (the perception that Elon is pouring money in the company).

Nowhere in Tesla's release is the second interpretation ever implied, so there is no intent to mislead anyone.

In previous equity offerings from Musk companies we usually see Elon also pitching in to maintain his share of the company. If he owns 25% and they're selling 100m, then they might sell 75m to the public and 25m to Elon so he maintains his 25%. This is usually described as Elon buying in to maintain his share.

Here Tesla's emphasizes that he's again maintaining his share, which creates the impression that he's also buying in as part of the equity raise, when actually he's exercising options to add shares without the cost of doing so. Admittedly these mechanics are obvious in Tesla's press release and "Misleading" is probably too strong of a word. My point was just that in an effort to avoid the impression that Elon is cashing out, a quick skim reads creates the opposite impression that Elon is actually buying in more ("increasing his stake").

Also, Elon sort of is cashing out. The 1.2 million shares he's donating will create an enormous tax return for him. Obviously not as good as selling the stock outright, but getting ~40% of the money while avoiding bad optics for Tesla might actually be the smartest way for Elon to cash out a bit.

 

[FredTMC]

Unless I read it wrong, I think there might be extra shares available for the underwriters to sell if they want. In other words, if they get oversubscribed on the new share offering. Should be interesting to see if 'over subscription' happens.

I seem to recall that's happened in the past

 

[MikeC]

Interesting that these are all shares and not the convertible bonds that they seem to usually do. I wonder if it has anything to do with Jason Wheeler being CFO now instead of Deepak. Elon had mentioned a combination of equity and debt on the call.

 

[Bgarret]

In previous equity offerings from Musk companies we usually see Elon also pitching in to maintain his share of the company. If he owns 25% and they're selling 100m, then they might sell 75m to the public and 25m to Elon so he maintains his 25%. This is usually described as Elon buying in to maintain his share.

Here Tesla's emphasizes that he's again maintaining his share, which creates the impression that he's also buying in as part of the equity raise, when actually he's exercising options to add shares without the cost of doing so. Admittedly these mechanics are obvious in Tesla's press release and "Misleading" is probably too strong of a word. My point was just that in an effort to avoid the impression that Elon is cashing out, a quick skim reads creates the opposite impression that Elon is actually buying in more ("increasing his stake").

As Dundurston points out, they issued 6.8 million new shares, which is the share amount that is considered the amount of the capital raise/"dilution" and the increased float, not MMD's and Maoing's magical 12 million shares number, as that is not how the accounting goes for outstanding shares. Elon has a net 1.5 million more shares in the company, or roughly 25%... Could have had 2.7 million additional shares, or 40%, but decided to give 1.2 million shares and $250 million to charity.

This is good for Tesla and TSLA. The market hates uncertainty. The source of capital for moving up the Model III ramp was uncertain and therefore, by definition, bad. This is not the last time Tesla will raise capital - it may not even be the last time they raise capital this year, but they may go different directions to do it - debt, partnerships come to mind.

Land a freaking spaceship on a postage stamp in the middle of the ocean and then lecture us all on the way one "should" approach capital markets to fund disruptive and transformative technology. I think the first part of the equation required more planning, intelligence and finesse than the latter part. I think Wheeler and Elon have a good handle on this.

 

[sundaymorning]

I haven't heard of any billionaire who pays $600,000,000 in taxes. A great short term play for Elon, getting rid of two birds with one stone. I'm glad this capital raise happened, M3 tooling can start pronto. Anyone who thinks this is bad for TSLA is delusional.

 

[Intl Professor]

From # 16936: "And none of you seem to be realizing the real culprit here: taxation."

The Republican candidate for President and Supreme Court Justice, Charles Evans Hughes, once said "every time I pay taxes I think I'm buying civilization." Just a thought from the 1930s. How far we've come. Oprah Winfrey did a show about the social benefits provided by government in Denmark. She included a round-table discussion with a number of women over tea (or Tuborg, I don't remember). She asked, "aren't all these benefits socialism?" They replied, "We don't know. We call it civilization." The Republican President (and Democratic-controlled Congress) presiding over our second war with Iraq was smarter than all predecessors who raised taxes to pay for them. They just borrowed the money, ultimately about $3 trillion. But mission accomplished was so sweet.

The mods should delete this and the previous (16935).

 

[Intl Professor]

Ulmo might agree with me that we do have the best Congress money can buy and that the tax code is riddled with excrement (trying to placate the mods, here).

 

[mmd]

How many times do I have to remind some TMC members that issuing new shares around the current price for the purpose of investing the money received in growth opportunities is not harmful "dilution"? The money received belongs to all shareholders; it's not burnt and turned into smoke. It's used to generate far more income than can be earned from fixed income investments.

This is only partially true. Any new capital raised helps the bond holders and preferred stock holders more than the common shareholders, who come last. In case of a hypothetical default, the common stockholders won't be getting back the capital that was just raised. See Tesla's own financial statements to see how the stockholder's equity changes over time (with nearly $735 added to it by cap raise during Q3 of 2015).
Also, money used to cover losses are indeed lost from the stockholder's equity forever.

Tesla stockholder's equity ( in thousands)
Q1 2015: 825,997
Q2 2015: 715,934
Q3 2015: 1,314,656 <- $735M added from cap raise
Q4 2015: 1,088,944
Q1 2016: 970,364

 

[mmd]

Interesting that these are all shares and not the convertible bonds that they seem to usually do. I wonder if it has anything to do with Jason Wheeler being CFO now instead of Deepak. Elon had mentioned a combination of equity and debt on the call.

Not surprising. Tesla bonds were rated junk by S&P afetr last debt issue, and are trading at 14% discount. Who will pay full price for any new debt issued? Going forward, equity will be the way, unless the bonds recover.

 

[ggr]

I fully understand EM's option execise. But it can't change the fact that TSLA share base has been diluted.

You continue to willfully misrepresent "dilution". Yes, there will be more shares out there. But at the same time, the value of the company increases by $1.6B. Each share will still be worth about the same as it was before the offering.

When people worry about dilution, it's not because of the stock price, it's because of control. But Elon is actually increasing his shareholding!

 

[maoing]

You continue to willfully misrepresent "dilution".

I guess that's the case for yourself. Assume you buy and hold the same share base before and after the secondary offering, then you'll find your ownership % will decrease by about 9% (on top of your ownership) due to this capital raise. I.e. more investors will share the same pie with you. Capital raise is no guarantee for company value increase. The most recent counter example is offering @ 242 in last summer.

 

[SteveG3]

I fully understand EM's option execise. But it can't change the fact that TSLA share base has been diluted.

maoing I don't think you understood my point. the cap raise was news. it adds 5% more shares (7% if Goldman Sachs sells the extra allotment). the fact that Musk had options for 5.5 million shares with a $6 strike price that were fully vested was not news. analysts may or may not have had the additional 5% of shares from the secondary in their valuation models... however, any analyst with a passable ability to value the company already had the addition of shares for Musk's options in their models.

think about it... they all base their valuations on points of time beyond 2016. Musk's options expire in December 2016. if any analysts did not have those 5.5 million shares already in their share count at the post 2016 point in time they use for their valuation models that would be due to their oversight, not a change in what's publicly known about Tesla Motors.

 

[Causalien]

Do you think they should finish off the Roadster aerodynamics/range updates? Which seem to be forgotten about...

No. With Model 3. Tesla is back to Do or Die mode due to the % of asset that is now at risk from one production model. It is back to when Model S first launched. If the launch fail, then Tesla will fail. This is not like the Model X where a failed launch will see Model S make up the slack. A failed Model 3 launch will see their cash deplete in such a way that sales of Model S and X will not be able to make up the shortfall.

The other option is a slower ramp up of Model 3 by boot strapping. But this option will see the other manufacturer take over the EV space and Tesla falling back to $150 as a boutique car maker.

I would've like to see them put more of those money raise previously for Model 3 actually being used for Model 3 and the production line build out further ahead than where we are currently, but that money has already been diverted to Model X so there's not much we can do. So if they do not have the attitude of all hands on deck for Model 3 and only Model 3, they will suffer from Hubris again.

This is why, I believe all the pet project needs to be put on hold. So that Model 3, don't suffer the same engineering creep that Model X suffered.

 

[Johan]

No. With Model 3. Tesla is back to Do or Die mode due to the % of asset that is now at risk from one production model. It is back to when Model S first launched. If the launch fail, then Tesla will fail. This is not like the Model X where a failed launch will see Model S make up the slack. A failed Model 3 launch will see their cash deplete in such a way that sales of Model S and X will not be able to make up the shortfall.

The other option is a slower ramp up of Model 3 by boot strapping. But this option will see the other manufacturer take over the EV space and Tesla falling back to $150 as a boutique car maker.

I would've like to see them put more of those money raise previously for Model 3 actually being used for Model 3 and the production line build out further ahead than where we are currently, but that money has already been diverted to Model X so there's not much we can do. So if they do not have the attitude of all hands on deck for Model 3 and only Model 3, they will suffer from Hubris again.

This is why, I believe all the pet project needs to be put on hold. So that Model 3, don't suffer the same engineering creep that Model X suffered.

I think they've signaled pretty clearly that they're going all in with Model 3 now. While I'm not 100% confident they will execute perfectly I am 100% confident they've got their priorities straight at this point.

 

[maoing]

maoing I don't think you understood my point. the cap raise was news. it adds 5% more shares (7% if Goldman Sachs sells the extra allotment). the fact that Musk had options for 5.5 million shares with a $6 strike price that were fully vested was not news. analysts may or may not have had the additional 5% of shares in their valuation models... any analyst with a passable ability to value the company already had the addition of shares for Musk's options in their models.

Steve, If Musk execises his 5.5M options to shares was unknown until today. Another option for him is to take the cash value directly. So to answer your question, analyst might factor in some of the dilution from Musk's option execise, but I doubt they assume all of 5.5M options will be converted to shares.

 

[SteveG3]

Steve, If Musk execises his 5.5M options to shares was unknown until today. Another option for him is to take the cash value directly. So to answer your question, analyst might factor in some of the dilution from Musk's option execise, but I doubt they assume all of 5.5M options will be converted to shares.

I do not know what you are referring to. my understanding of options is that you exercise them, or they expire worthless. it seems you are suggesting that Musk had some other manner of benefitting from the potential $1 billion value of his options other than exercising them. is that indeed what you are saying? if so, could you share what this alternative is?