(Note: I've edited this post to reflect qualified trading period for note conversion as Q3 and not Q4 like I originally thought.)
Recently I've seen people speculate that Goldman could be propping up TSLA to the $161.88 note conversion target price. I wanted to share my thoughts and try to clear up what I think is some unfounded speculation.
First, here's some docs to review:
- http://files.shareholder.com/downlo...tive Shares for 2013 Convert and Warrants.pdf
- Tesla Motors - Prospectus Filed Pursuant to Rule 424
Alright, let's review the facts. Tesla issued $660m worth of convertible notes (in their May 17th secondary offering). This is separate from their common stock offering at this time (3.39 common shares) and their selling of warrants to generate cash to hedge dilution of the convertible notes (explained below). Tesla received $660m and the note buyers received a note to receive 1.5% annual interest as well as the ability to convert those notes to TSLA shares at a conversion price of $124.52 (ie., $1000 in principal amount of notes could be converted to 8 shares) anytime between March 1, 2018 to March 29, 2018 without restriction. Now, there's a special clause where the note holders can convert their notes early under a special condition:
- stock price is greater or equal to $161.88 for 20 days out of a period of 30 consecutive trading days starting from the 3rd quarter this year, then shares could be exercised the following quarter.
(I originally wrote that the trading period was after Sept 30, 2013 but I was incorrect. I've edited this post. See Curt's reply and below conversation.)
Second, I don't think there's even much motivation for Goldman to manipulate the stock in any significant way. Let me explain.
The total 660m note amount equals about 5.3m shares eventually when converted. First, let's examine why a note holder might convert to stock early. If they don't convert to stock early, then they get to receive 1.5% annual interest payments from Tesla, and then they can convert to the same amount of shares later. So, if they're like to hold TSLA stock they might as well just keep the note and collect interest while getting the same number of shares in in March 2018 as they would right now. It would be like owning shares and collecting 1.5% interest.
Let's examine why a note holder would want to convert early. Most likely, they'd like to convert early in because they want to take some profit and/or feel unsettled about the high TSLA stock price. So, they might convert to shares and then sell those shares on the open market (there doesn't appear to be any restriction on selling those shares after conversion).
So, the danger is that weak long note holders convert their notes early. That could put downward pressure on the stock price since we would have additional shares on the market. The total potential amount of these shares would be 5.3m shares, which is a sizable amount.
How would this affect the stock price? Well, people would anticipate this in some ways so the stock would likely be slightly depressed in anticipation of people converting their notes to stock and selling them on the open market. So, if TSLA is above $161.88 for 20 trading days out of 30 in a quarter starting this quarter (3rd quarter) then approaching the next quarter we could see downward price pressure on the stock as people anticipate a conversion sell-off (since conversion can take place anytime in the following quarter). However, if the stock goes down in anticipation, it could lessen the % of people who do convert as they might just wait for a better time. Or they might convert and just hold the stock to sell later. Or they could freak out and just sell to take their profits. It could present a buying opportunity IMO depending on the actual scenario that takes place.
Now, let's move on to the issue of Goldman manipulating the stock. The main motivation in doing so would be to prop up the stock price so that it holds above $161.88 so that their clients would be able to convert the notes, sell them on the market and book profits. However, this doesn't seem to be very convincing to me. First, these convertible notes are likely in the hands of hundreds and thousands of customers from various institutions. Goldman brokered the deal, but it doesn't mean that they hold these notes themselves or that their own clients hold a majority of them either. It's likely their clients hold 10-20% of them (this is a guess). In that case we're talking about the possibility of converting 1-2 million shares. That's about $162-324m worth or shares.
But what's the profit potential of trying to manipulate the stock to hold the $161.88 earlier than it might do so on its own? I think it's very minimal. Look at TSLA's chart. It's very likely sooner or later TSLA holds for $161.88 for 20 out of 30 consecutive trading days. There's really no need for Goldman to try to manipulate it to get there. Further, it's very costly to manipulate the stock. They would need to do some massive buying and then hold it (or else it would sink again). I can see them trying to lift the stock of one or two of the days it's $0.50 under the $161.88 level, then they could buy up a few hundred thousand shares and try to lift the stock price. That might be worth it to them. But even 200k shares would cost $32.4 million to lift the stock temporarily $0.50. Now, for Goldman to lift the stock $5, that would take probably hundreds of millions of dollars and that would be just for a temporary lift of $5 (ie., 1 day lift but would go back down the next day or so). For them to artificially lift the stock $5 for a month, that would take probably over a billion dollars IMO (but probably much more). TSLA has just too much liquidity and shares traded for someone to easily manipulate the stock via buying and/or selling.
Further, what would Goldman or Goldman's clients really gain for the chance to convert their notes a few months earlier than what they would naturally be able to do so? Well, they could liquidate about 162-320m in assets (converting 1-2mm shares worth $162 for example). But how much would that really save them? Well, if TSLA drops $15 after that, then they save $15-30m. $15-30m is chump change to these big banks. Why would they go through billions of dollars and try to prop up TSLA stock price by $5-10 dollars to get above the $161.88 price point for 20 out of 30 consecutive trading days, only to gain $15-30m for their clients? Doesn't seem very likely.
I just don't see a lot of motivation for Goldman or for any bank to engage in serious price manipulation via buying to prop up TSLA's share price for the purpose of note conversion. It doesn't make any financial sense. It also doesn't make any sense since they have a very bearish price target set by their lead auto analyst Patrick Archambault.
However, like I mentioned earlier I do see them motivated to prop up the stock by $0.50 if on one or two of the 20 trading days the stock is trading under $161.88 by a bit and they want to see it a bit above that for note conversion. That could make sense. But otherwise, I think it's an error to think Goldman will have a significant role in buying up TSLA's price in the coming months for the sake of note conversion.
Now, there's another misunderstanding some people have and that is with warrants. Tesla issued warrants for 2018 where warrant purchasers could exercise their warrants for TSLA stock at a strike price of $184.48. The warrants are completely different than the convertible notes. The warrants act like an option call for the purchaser. So, think of it like Tesla sold option calls to generate cash. They then used the cash generated from those option calls to buy hedges to offset dilution caused by the note conversion (thus the note conversion doesn't dilute total effective shares). So, in the end it's only the option calls (warrants) that Tesla sold that will dilute shares.
The warrants (ie., acting like option calls) have an expiry date of March 2018. Think of them as March 2018 LEAPs at a strike of $184.48. Tesla sold $50.9 million worth of these warrants (think of each warrant as costing about $25 each for the purchaser, so it would be like giving Tesla $25 for a Mar18 184.48 strike option call). When exercised this will dilute TSLA's shares by 2 million shares.
For the warrants, I don't view early exercise as a big concern or risk. Think of it as if you're in the purchaser's shoes. You bought a Mar18 184.48 option call for $25, and now it's worth a lot more. Why would you want to exercise it early? That would be like exercising a LEAP option call early. Rather than exercising it early, you'd rather just sell it. Thus, I don't foresee many of these warrants to be exercised early and view it as a non-issue for TSLA price action. Further, even to exercise it early TSLA stock price would need to be at least $184.48 + $25 (purchase price) in order just to break even. But at that point, the warrant (ie., option call) is worth way more just to sell it because of the time value and the leverage the warrant brings. My conclusion, the warrants are inconsequential to TSLA's stock price action until maybe after their exercised in March 2018.
So, in conclusion. I think it's highly unlikely that Goldman is doing any significant price manipulation to get the stock over $161.88. If they really wanted to prop the stock, they ought to just raise their price target with an updated analyst report. That would be much easier and a whole lot cheaper. It doesn't make any sense why they would keep their price target so low (ie., under $100) if they really wanted to prop the stock above $161.88.
Recently I've seen people speculate that Goldman could be propping up TSLA to the $161.88 note conversion target price. I wanted to share my thoughts and try to clear up what I think is some unfounded speculation.
First, here's some docs to review:
- http://files.shareholder.com/downlo...tive Shares for 2013 Convert and Warrants.pdf
- Tesla Motors - Prospectus Filed Pursuant to Rule 424
Alright, let's review the facts. Tesla issued $660m worth of convertible notes (in their May 17th secondary offering). This is separate from their common stock offering at this time (3.39 common shares) and their selling of warrants to generate cash to hedge dilution of the convertible notes (explained below). Tesla received $660m and the note buyers received a note to receive 1.5% annual interest as well as the ability to convert those notes to TSLA shares at a conversion price of $124.52 (ie., $1000 in principal amount of notes could be converted to 8 shares) anytime between March 1, 2018 to March 29, 2018 without restriction. Now, there's a special clause where the note holders can convert their notes early under a special condition:
- stock price is greater or equal to $161.88 for 20 days out of a period of 30 consecutive trading days starting from the 3rd quarter this year, then shares could be exercised the following quarter.
(I originally wrote that the trading period was after Sept 30, 2013 but I was incorrect. I've edited this post. See Curt's reply and below conversation.)
Second, I don't think there's even much motivation for Goldman to manipulate the stock in any significant way. Let me explain.
The total 660m note amount equals about 5.3m shares eventually when converted. First, let's examine why a note holder might convert to stock early. If they don't convert to stock early, then they get to receive 1.5% annual interest payments from Tesla, and then they can convert to the same amount of shares later. So, if they're like to hold TSLA stock they might as well just keep the note and collect interest while getting the same number of shares in in March 2018 as they would right now. It would be like owning shares and collecting 1.5% interest.
Let's examine why a note holder would want to convert early. Most likely, they'd like to convert early in because they want to take some profit and/or feel unsettled about the high TSLA stock price. So, they might convert to shares and then sell those shares on the open market (there doesn't appear to be any restriction on selling those shares after conversion).
So, the danger is that weak long note holders convert their notes early. That could put downward pressure on the stock price since we would have additional shares on the market. The total potential amount of these shares would be 5.3m shares, which is a sizable amount.
How would this affect the stock price? Well, people would anticipate this in some ways so the stock would likely be slightly depressed in anticipation of people converting their notes to stock and selling them on the open market. So, if TSLA is above $161.88 for 20 trading days out of 30 in a quarter starting this quarter (3rd quarter) then approaching the next quarter we could see downward price pressure on the stock as people anticipate a conversion sell-off (since conversion can take place anytime in the following quarter). However, if the stock goes down in anticipation, it could lessen the % of people who do convert as they might just wait for a better time. Or they might convert and just hold the stock to sell later. Or they could freak out and just sell to take their profits. It could present a buying opportunity IMO depending on the actual scenario that takes place.
Now, let's move on to the issue of Goldman manipulating the stock. The main motivation in doing so would be to prop up the stock price so that it holds above $161.88 so that their clients would be able to convert the notes, sell them on the market and book profits. However, this doesn't seem to be very convincing to me. First, these convertible notes are likely in the hands of hundreds and thousands of customers from various institutions. Goldman brokered the deal, but it doesn't mean that they hold these notes themselves or that their own clients hold a majority of them either. It's likely their clients hold 10-20% of them (this is a guess). In that case we're talking about the possibility of converting 1-2 million shares. That's about $162-324m worth or shares.
But what's the profit potential of trying to manipulate the stock to hold the $161.88 earlier than it might do so on its own? I think it's very minimal. Look at TSLA's chart. It's very likely sooner or later TSLA holds for $161.88 for 20 out of 30 consecutive trading days. There's really no need for Goldman to try to manipulate it to get there. Further, it's very costly to manipulate the stock. They would need to do some massive buying and then hold it (or else it would sink again). I can see them trying to lift the stock of one or two of the days it's $0.50 under the $161.88 level, then they could buy up a few hundred thousand shares and try to lift the stock price. That might be worth it to them. But even 200k shares would cost $32.4 million to lift the stock temporarily $0.50. Now, for Goldman to lift the stock $5, that would take probably hundreds of millions of dollars and that would be just for a temporary lift of $5 (ie., 1 day lift but would go back down the next day or so). For them to artificially lift the stock $5 for a month, that would take probably over a billion dollars IMO (but probably much more). TSLA has just too much liquidity and shares traded for someone to easily manipulate the stock via buying and/or selling.
Further, what would Goldman or Goldman's clients really gain for the chance to convert their notes a few months earlier than what they would naturally be able to do so? Well, they could liquidate about 162-320m in assets (converting 1-2mm shares worth $162 for example). But how much would that really save them? Well, if TSLA drops $15 after that, then they save $15-30m. $15-30m is chump change to these big banks. Why would they go through billions of dollars and try to prop up TSLA stock price by $5-10 dollars to get above the $161.88 price point for 20 out of 30 consecutive trading days, only to gain $15-30m for their clients? Doesn't seem very likely.
I just don't see a lot of motivation for Goldman or for any bank to engage in serious price manipulation via buying to prop up TSLA's share price for the purpose of note conversion. It doesn't make any financial sense. It also doesn't make any sense since they have a very bearish price target set by their lead auto analyst Patrick Archambault.
However, like I mentioned earlier I do see them motivated to prop up the stock by $0.50 if on one or two of the 20 trading days the stock is trading under $161.88 by a bit and they want to see it a bit above that for note conversion. That could make sense. But otherwise, I think it's an error to think Goldman will have a significant role in buying up TSLA's price in the coming months for the sake of note conversion.
Now, there's another misunderstanding some people have and that is with warrants. Tesla issued warrants for 2018 where warrant purchasers could exercise their warrants for TSLA stock at a strike price of $184.48. The warrants are completely different than the convertible notes. The warrants act like an option call for the purchaser. So, think of it like Tesla sold option calls to generate cash. They then used the cash generated from those option calls to buy hedges to offset dilution caused by the note conversion (thus the note conversion doesn't dilute total effective shares). So, in the end it's only the option calls (warrants) that Tesla sold that will dilute shares.
The warrants (ie., acting like option calls) have an expiry date of March 2018. Think of them as March 2018 LEAPs at a strike of $184.48. Tesla sold $50.9 million worth of these warrants (think of each warrant as costing about $25 each for the purchaser, so it would be like giving Tesla $25 for a Mar18 184.48 strike option call). When exercised this will dilute TSLA's shares by 2 million shares.
For the warrants, I don't view early exercise as a big concern or risk. Think of it as if you're in the purchaser's shoes. You bought a Mar18 184.48 option call for $25, and now it's worth a lot more. Why would you want to exercise it early? That would be like exercising a LEAP option call early. Rather than exercising it early, you'd rather just sell it. Thus, I don't foresee many of these warrants to be exercised early and view it as a non-issue for TSLA price action. Further, even to exercise it early TSLA stock price would need to be at least $184.48 + $25 (purchase price) in order just to break even. But at that point, the warrant (ie., option call) is worth way more just to sell it because of the time value and the leverage the warrant brings. My conclusion, the warrants are inconsequential to TSLA's stock price action until maybe after their exercised in March 2018.
So, in conclusion. I think it's highly unlikely that Goldman is doing any significant price manipulation to get the stock over $161.88. If they really wanted to prop the stock, they ought to just raise their price target with an updated analyst report. That would be much easier and a whole lot cheaper. It doesn't make any sense why they would keep their price target so low (ie., under $100) if they really wanted to prop the stock above $161.88.
Last edited:
