Tesla-The Worst is Yet to Come

Markets

Tesla is a Sale

Cowen has a 12 month price target of $160.
The SpaceX rocket disaster
The dissection of Elon Musk's Companies (included below) as a government sponsored Keiretsu

Notes

Tech that is used in innovating existing products do not have a protective moat
Tech that is used in tech (like google) has one in the form of electronic incumbency
That is part of why PAYPAL succeeded too.. The relationship with EBAY had electronic incumbency and network effect aka "demand scale"
Tesla: Scale of production is supply related- Tesla needs lower cost to get this
PayPal: Network effect is demand related and he was locked in with ebay early
He’s attempting to create the ebay and paypal here.. but these are not cyber products.- He needs to sell more cars to be able to get costs down to sell more cars (downstream)
Solarcity has same model- dependent on production scale
SpaceX was the cash cow that didnt collected money prior to giving service
SpaceX lost credibility and thus cash flow for financing Tesla- Peter can no longer be robbed to pay Paul
"Running a real company is hard"
Tesla is a sale

And Now, The Death of Tesla's Price Margins

Ultimately, we feel that Tesla is a TBTF company for the Government. But recent events have given us pause even on that cynical view. From our notes on Protective Moats and Early Adopters

What will Make Tesla Fail?

It is the free market and his utter lack of protective moat on the auto drive thing. Which is itself a “shiny” distraction from his lack of production scale so far.

Here is the tech piece that is like a GPS autodriver.. a Garmin GPS concept being sold for $999… soon to be at Costco I bet.

The First Person to Hack the iPhone Built a Self-Driving Car. In His Garage

This is how it looks now

This is how it looked last year. some progress huh?

A product like this kills any chance Tesla has of keeping profit margins as they try to get production scale up to snuff so they can sell downstream. And the next product will be even better.

So what is Musk’s business like? Palm Pilot.

Musk is the classic early adaptor who gets overrun by the cheaper tech before he gets production scale and a protective moat in place.
Similar to PALM on so many levels. They actually wanted the Pilot to be all things at once.. camera, phone, pda etc.. and they were right. But it was cheaper to build one at a time.
I remember the ceo demo-ing snap on pieces for the pilot to make it a phone.. then a camera.. It was like a lego thing. Who is going to carry all that around with them?

Updated Sept 16, 2016

Update Sept, 7: Analyst Initiates Tesla Coverage, calls for a 20% decline

The Death of a Shell Game?

In July we reported that Tesla, SolarCity, and SpaceX were an America Keiretsu if not a shell game. All three companies are controlled by Musk, financed by the taxpayer's money and owners of each other's debt in a shell game surprisingly dependent on the positive cash flow of one company, SPACEX. Today SpaceX may have lost all its future prepaid revenues on the failure of a rocket to launch at Cape Canaveral.

SpaceX is the Financial Linchpin in Elon Musk's Government Subsidized Empire

Space X had positive cash flow because it collected revenue for a service to be provided in the future. So its current expenses of production were minimal compared to SolarCity and Tesla. It helps to understand how revenue is earned at each company

Tesla- good product, capital goods, negative cash flow that needs production scale to survive
SolarCity- fee based "rental" business that is a cash burner needing production scale to keep costs down and survive
Space-X- takes in revenue NOW for promises in the future of services.

[VIDEO]SpaceX Rocket Explodes

-Soren K and Vince Lanci

The Tesla chart: government subsidized technology is developed and Musk cashed in. Then cashed out. Then left stock holders holding the bag. It's like the Simpsons monorail episode.
In light of Tesla's earnings miss and Musk's admission of the firm's cash crunch just a month after Tesla announced it would bail out its weaker cousin, Solar City, We ask you: how can a visionary such as he not see 30 days down the road?
Tesla Misses, Burns Nearly Half A Billion, Warns It Has Hit "Funding Limit" With A Bank-ZH.

Here is a repost from our observations just 3 weeks ago on the likelihood of fraud at Tesla and Musk's other companies.

Summary

Businesses cannot stand on their own feet without some form of Government aid. Whether that be in QE form or direct subisidies, the marketplace is no longer a "Free Market". Tesla and its dependents are an example of what is wrong with our capital market system.

Elon Musk is using the Government as a backstop for his businesses. He is depending on easy money to support companies that would otherwise fail from debt. In short, the business structure of Tesla, SolarCity and SpaceX is a microcosm of the problem with our current capital markets.

- By Soren K. with contributions by Vince Lanci, Doug and Dinsdale Piranha and the CFO of a prominent hedge fund that has no position in the stock.

The Business of Crony Capitalism

Overview

Elon Musk has controlling stakes in 3 companies: Tesla, SolarCity, and SpaceX. Tesla and SolarCity are publicly traded. SpaceX is not publicly traded. This document's focus will be soley on the financial interdependencies of the companies. There are also incestuous business practices, and nepotism within the leadership of each company Musk controls.

We hope to illustrate simply and clearly the immense risk the US government has taken with your money by giving it to a man who is essentially telling them what they want to hear while picking their pockets doing it.

Background

Tesla borrowed Venture Capital (VC) money from Elon Musk at VC rates. It borrowed VC money from taxpayers at non-VC rates

Tesla needed $500MM to get started in 2008. The US Government lent $465MM to Tesla at 3% interest under its push for Green Energy. Elon Musk lent the company $38MM at10% interest plus stock options. Here are the profits on those loans:

Elon Musk’s $38MM generates profit of $1.4BB, or 3,600% ROR- a VC payout
Taxpayers’ $465MM- generates profits of $12MM or 2.6%ROR- not a VC Payout

Taxpayers took VC risk without VC returns. The table is set for Elon to arbitrage the Government’s largesse much more. All in, the US Government committed about $4.9BB to finance Tesla’s operations

Musk Gets More Government Money

Using Government loans, Elon Musk creates 2 more companies; SolarCity and SpaceX. He now controls three government sponsored clean energy companies financed by taxpayer money.

The Companies

Tesla- makes electrical cars, develops technology for same. Loses money hoping for future profits

Loans money to SolarCity via its own stock
Borrowed $465MM from Gov’t at 3% and $38MM from Elon Musk at 10% plus stock options
Does not make money

SolarCity- makes and leases solar panels to homeowners. Loses money hoping for a back-end profit

Borrows money from Tesla
Borrows Money from SpaceX
Does not make money

SpaceX- will provide future service related to satellite launches. It makes money via prepaying customers

Loans money to SolarCity at approx. 10%
Borrows Money from Government at approx. 4%
Makes money

Elon Musk now has 2 companies that do not make money. He has 1 that makes money from prepayments for services yet to be given. All are financed by the US taxpayer at ridiculously below market rates. The table is now set for financing using inflated currency (sound familiar?) in the form of Tesla stock to get real cash in Mr. Musk's pockets.

Analyst Initiates Tesla Coverage, calls for a 20% decline

The SolarCity Problem

Despite gov’t subsidies SolarCity still needs money to operate. SpaceX, while not profitable, has cash on hand form prepayments and Gov’t subsidies. Tesla, also not profitable, has no cash, but has highly (over)valued stock it can use as currency or loans for cash. Elon Musk owns major stakes in all 3 companies.

SolarCity borrows $165MM from SpaceX at market rates of about 4.4%
SpaceX uses govt loans (2.0%?) to lend $165MM SolarCity
SolarCity borrows another $90MM from SpaceX to avoid defaulting on first SpaceX loan

Yet SolarCity is still in trouble. It needs cash. Government subsidies are on hold. Its stock price is sinking and it is in danger of defaulting on existing loans. Enter Tesla and Elon Musk

Tesla and Musk Bail Out SolarCity

Elon Musk and Tesla loan stock to SolarCity. SolarCity margins that stock for cash so they can make their loan payments to SpaceX.

Elon Musk used money loaned to him at 2.6% to generate 3,600% from Tesla stock sales
SolarCity was failing. If It failed, it likely would take SpaceX with it.
Elon Musk and Tesla used his govt sponsored inflated currency (Tesla stock) to prop up a failing SolarCity.

Not Enough

But that was not enough money. Tesla then makes a bid outright to buy all of SolarCity at above market valuations using Tesla stock. This essentially ensures a payout to himself and his partners at SolarCity while eliminating the SpaceX debt. Now it all depends on the price of Tesla stock. And Tesla has been punished by the market since the announcement.

Finally there is the loaned stock by Elon Musk to SolarCity. If Tesla drops enough for amargin call, it is all over in our opinion. what we have not covered includes the valuation offerred to buy SolarCity. Public shareholders of Tesla should be incensed atthe price being paid for SolarCity. Meanwhile, much of SolarCity's stock is still in the hands of Musk and family members.

If Tesla stock drops enough, it could take out potentially all 3 companies. Essentialy Musk is at the center of an American Keiretsu.

Conclusion

The interdependent relationships between the 3 government subsidized companies Elon Musk owns or has a controlling stake in are an abuse ofgovernment largesse towards Green Energy. Taxpayer money is being used at market risk without market returns to prop up 3 unprofitable companies. While we do not debate the technology Tesla has developed, we question the leverage with which these companies are able to operate under. If something were to go wrong, we feel an eventual Solyndra Greenmail situation would occur. Tesla would be TBTF to the Government and have to pay. We feel Elon Musk knows this and is will play that card if need be.

Not Discussed: Business practices, Neoptism, valuations used for buyouts and other in depth proofs of what we are merely glossing over for now.

In a Graph

Here is a simple flowchart of the cash-flow situation between the 3 companies and the Goverment. None of these companies make money. Only SpaceX has positive cash flow from prepaid "orders". The"currency that supports it all is the Tesla's stock Price