What If....?

[Waiting4M3]

I'm not sure it is that simple.

You are right that Tesla has a strong valuation... Actually, it has a valuation that is by most metrics significantly out of line with forward earnings estimates. That means that, even with the number of shares outstanding, investors are taking on an inordinate amount of risk for a given return... again, based on forward earnings estimates.

The core issue is that in order to raise billions through an equity offering, Tesla will have to issue a significant number of additional shares. Doing that will dilute the value of the shares currently outstanding, which would theoretically drive the price of the equity lower. And since Tesla will need to raise significant capital, they will likely be selling these equities to well-capitalized funds as opposed to individual investors... and many of those funds may already own shares. The proposition that Tesla would be offering to them, then, is this: "Buy more of our stock, in exchange for a probable decline in the value of the shares you already own. It's not a very attractive offer. I'm sure I oversimplify here, but the point is that the appetite for more TSLA in the market may not be as guaranteed as you may think.

Raising a billion $ to build the Model 3 would be ~ 3-4% dilution. If that enables the model 3 to come out en mass in 2017, I would happily pay the 3-4% of the Tesla shares I own.

 

[JeffK]

Didn't the Fiat CEO say that he can make an affordable EV in 12 months if Tesla can make $ on the model 3?...
If Fiat thinks they can do design and manufacture in 12 months, why can't Tesla?

Fiat already has infrastructure in place but I'd argue that FCA as a whole makes subpar ICE cars. I don't think I'd want to drive a fiat EV if it's going to break down all the time...

 

[Waiting4M3]

I doubt that Fiat has all the infrastructure to build EVs. Tesla has the factory floor space, they need to buy more parts, and assembly robots, most of these things are standard for any cars. As long as Tesla can write a check, they can get these things, and I hope 12 months is enough to get those in place (by Elon's July 2017 deadline when they want to have all the parts ready and start building)

The main things that are unique to EV that no one can easily get are the EV drive train and batteries. Fiat for sure doesn't have in-house infrastructure, and I don't know even if such infrastructure exist globally at this point to support 500K cars, outside of Tesla, so Fiat may not be able to source those in high quantity even if they want to.

So to me, the infrastructure argument actually works in Tesla's favor. Without the gigafactory, anyone thinking them to be able to just drop a motor and source some batteries into their own ICE car platform and roll 500K cars out the door may be seriously delusional.

 

[JeffK]

Without the gigafactory, anyone thinking them to be able to just drop a motor and source some batteries into their own ICE car platform and roll 500K cars out the door may be seriously delusional.

cough*Hyundai*cough

 

[ttupper92618]

Raising a billion $ to build the Model 3 would be ~ 3-4% dilution. If that enables the model 3 to come out en mass in 2017, I would happily pay the 3-4% of the Tesla shares I own.

I'll grant you it is not a huge number. It is, however, bigger than you think.

First, I would argue that you need to make this calculation based on the float, not on shares outstanding. Market price dynamics are going to be based on the float, primarily. The float is about 102 million... so at present valuation, the dilution would be closer to 5%.

Second, you are assuming that the present valuation would be the share price at offering, which I think you must acknowledge it probably will not be. As an example, if the price were $143 (see Feb 10th 2016), then raising $1 billion would be about a 7% dilution given the current float.

Third, you are assuming also that the figure Tesla would need to raise is $1 billion. But suppose it is closer to $1.5 billion; at that price, the number of shares required would represent about a 10% dilution.

Anyway, again, I'm not arguing Tesla won't be able to raise money... or even that a share offering is the only way for Tesla to raise capital. Indeed, I think they will be able to raise the funding they need. However, I think it isn't as clean or simple as many would argue, and I think it will dilute valuation more than some people are expecting.

That's just my perspective.

 

[Waiting4M3]

As an example, if the price were $143 (see Feb 10th 2016), then raising $1 billion would be about a 7% dilution given the current float.

Third, you are assuming also that the figure Tesla would need to raise is $1 billion. But suppose it is closer to $1.5 billion; at that price, the number of shares required would represent about a 10% dilution

Today's price is already ~10% down from the Model 3 announcement, so maybe the dilution is being baked in as people start crunching #s.

If the PPS goes down to $143 and stays down there, I think dilution is going to the last thing that existing stock holders would be worrying about.

Bottom line is, borrowing a billion or 2 to make model 3 a success is a no brainer, what's at stake is way bigger than the 1-2 billion $.

 

[Waiting4M3]

cough*Hyundai*cough

are you in agreement that Hyundai is delusional? or that they're well on their way to build 500K EV's with enough batteries for 200 mile range in a year?

 

[ttupper92618]

Today's price is already ~10% down from the Model 3 announcement, so maybe the dilution is being baked in as people start crunching #s.

If the PPS goes down to $143 and stays down there, I think dilution is going to the last thing that existing stock holders would be worrying about.

Bottom line is, borrowing a billion or 2 to make model 3 a success is a no brainer, what's at stake is way bigger than the 1-2 billion $.

Ok. Imagine you are a hedge fund and hold a million shares.

"Hey Mr. Hedge Fund - I am going to create 10 million more shares of my company. I would like to sell as many as possible of them to you at a share price exactly the same as the price per share of your existing shares. I must disclose to you that this price is approximately 62 times greater than my estimated forward earnings, assuming I successfully execute on my 18 month plan to scale from building 80 thousand cars per year to building 500 thousand cars per year."

Sound like a good deal to you?

Again, I think they will raise the money. But you aren't looking at this like you have a ton of cash on the line.

 

[Waiting4M3]

Ok. Imagine you are a hedge fund and hold a million shares.

"Hey Mr. Hedge Fund - I am going to create 10 million more shares of my company. I would like to sell as many as possible of them to you at a share price exactly the same as the price per share of your existing shares. I must disclose to you that this price is approximately 62 times greater than my estimated forward earnings, assuming I successfully execute on my 18 month plan to scale from building 80 thousand cars per year to building 500 thousand cars per year."

Sound like a good deal to you?

Again, I think they will raise the money. But you aren't looking at this like you have a ton of cash on the line.

Ok I guess I'm not understanding the problem here. If Tesla offers more stock at market price, why is it a problem for anyone looking to buy Tesla stocks to buy from this pool instead of from existing float? Is there a rule in Hedge Fund industry to "never pay retail"? Maybe there is... wouldn't surprise me, I know as an individual investor I'm probably getting screwed and don't even know it...

 

[JeffK]

are you in agreement that Hyundai is delusional? or that they're well on their way to build 500K EV's with enough batteries for 200 mile range in a year?

Hyundai is totally delusional. They should design a single purpose EV from the ground up.

 

[182RG]

Hyundai is totally delusional. They should design a single purpose EV from the ground up.

Hyundai and LG Chem, 2 of the largest South Korean conglomerates. Are you saying they couldn't pull off the engineering and manufacturing? Really?

 

[JeffK]

I'm saying the Hyundai Ioniq is a joke and they could pull off a real EV if they actually tried. They simply are not devoting themselves.

 

[182RG]

I'm saying the Hyundai Ioniq is a joke and they could pull off a real EV if they actually tried. They simply are not devoting themselves.

Agreed. You can bet they will step up their game. Look at how far Hyundai / Kia has come.

 

[JeffK]

I think everyone would welcome the competition. The girlfriend has a newer Hyundai Elantra and it's actually a pretty cool, plus the Hyundai service center is FAR better than Toyota.

 

[Booga]

I'm not sure it is that simple.

You are right that Tesla has a strong valuation... Actually, it has a valuation that is by most metrics significantly out of line with forward earnings estimates. That means that, even with the number of shares outstanding, investors are taking on an inordinate amount of risk for a given return... again, based on forward earnings estimates.

The core issue is that in order to raise billions through an equity offering, Tesla will have to issue a significant number of additional shares. Doing that will dilute the value of the shares currently outstanding, which would theoretically drive the price of the equity lower. And since Tesla will need to raise significant capital, they will likely be selling these equities to well-capitalized funds as opposed to individual investors... and many of those funds may already own shares. The proposition that Tesla would be offering to them, then, is this: "Buy more of our stock, in exchange for a probable decline in the value of the shares you already own. It's not a very attractive offer. I'm sure I oversimplify here, but the point is that the appetite for more TSLA in the market may not be as guaranteed as you may think.

Dilution in and of itself is no issue though.

For example, would you rather have 50% of $200 or 100% of $10? Let's say you started a business that you own outright and is worth $10. An investor says to you, "hey, take my $50, and give me half of the equity. Together, we'll make this firm worth more. Your original $10 of value becomes worth $100 and my $50 becomes worth $100."

In this example, the firm needed capital to create value, and it was good to raise money... Despite dilution.

Now, let's say the situation is the same, but not the prices. The investor says that he will invest the $50, but wants 95% of the company. The owner, seeing a value of $200, gets attracted and does the deal. They invest it and the firm is indeed worth $200. The original owner now still has $10 of value while the investor is worth $190.

The point here is that just changing the number of people you share the earnings with isn't the only part of he equation. You have to know what happens to the numerator.

 

[1000Down]

I can't see any scenario in which Tesla just gives up on the Model 3. This is exactly what their mission statement has been all along: a sustainable energy car for the masses (granted, $35k isn't affordable to everyone, but certainly much more so than $80k). Maybe there'll be delays, maybe there'll be a higher price than announced. But it'll happen. And people will buy it. And Tesla will continue to innovate and create ways to make their next model even more affordable. And people will buy it.

I think this sums it up. There is no turning back for Tesla. They have taken in $400 million in deposit and will likely raise additional capital soon. They are fully committed to the M3 and being a major car producer. I do not think they could survive as a niche producer of the S and X.

If it is determined that they can't sell the M3 for 35K with a positive margin, then they will definitely raise the price. Selling the M3 at a loss isn't really an option. They need to demonstrate that they can operate cash flow positive with the M3 at full production.

This is what scares me about Musk. He does too much. Just give me a nice car, on time at a price that allows Tesla to make a profit....nothing more. I do not want to own the next Edsel or Delorean.

 

[1000Down]

Today's price is already ~10% down from the Model 3 announcement, so maybe the dilution is being baked in as people start crunching #s.

If the PPS goes down to $143 and stays down there, I think dilution is going to the last thing that existing stock holders would be worrying about.

Bottom line is, borrowing a billion or 2 to make model 3 a success is a no brainer, what's at stake is way bigger than the 1-2 billion $.

I think you are not that far off base. The market knows there will be capital raise, but it doesn't know the size or structure of the deal. $1B,2B,3B....more? Will it be equity, convertibles, debt or a mix? The markets hate uncertainty. Tesla really needs to determine the structure and size of the deal and make the announcement so the markets can quit trying to price the unknown.

Everyone is excited about the M3 reservation volume so the markets will digest a sizable capital raise, just spit out the details already.

 

[Dan Detweiler]

One thing I will say for Hyundai, they put more features and technology into the roomiest cars for the price. We just bought my wife a Sonata Hybrid and she is thrilled with it.

Now, when it comes to pure EVs that's another conversation. I think if they really committed themselves to being a player in the EV marketplace they could do great things...but they don't appear to be very committed to that direction.

Dan

 

[Jason Bourne]

This is what scares me about Musk. He does too much. Just give me a nice car, on time at a price that allows Tesla to make a profit....nothing more. I do not want to own the next Edsel or Delorean.

You realize that Edsel and Delorean went out of business right? .... or maybe that's exactly your point.

 

[JeffK]

This is what scares me about Musk. He does too much. Just give me a nice car, on time at a price that allows Tesla to make a profit

That's what he's been trying to do the entire time. To make a fun affordable EV you need research, capital, and infrastructure. These things take time. As a company everything Tesla has done has lead up to this point. The Model 3 is the culmination of all efforts as well as the spur of competition in the marketplace to inevitably make the world a better place.