Seeking Alpha
Special situations, event-driven, arbitrage, contrarian
Profile| Send Message|
( followers)  

"When do I get my money back?" A simple question. Finance professionals have a lot of different metrics that they use to justify their existence, but the reality is P/E, P/B, EV/EBITDA, TAM, growth rates and a whole host of fancy terms are really just overly complicated explanations of a simple concept. The proof is in the private sector - if you have ever been involved in a private company investment, it generally is the first thing that comes up. Conversations usually go something like this:

"Jeff, I'd like you to invest in my movie."

"That's great! When do I get my money back?"

"Jeff, I'd like you to invest in my nail salon."

"That's great! When do I get my money back?"

"Jeff, I'd like you to invest in my restaurant."

"That's great! When do I get my money back?"

For most private companies, it is a pretty simple exercise, and one that makes sense. We make some assumptions, put together a model and figure out when we're going to get our money back. And then when I get my money back, I go out and do it again.

So what happens when we ask this question and apply some simple logic to Tesla (NASDAQ:TSLA), everyone's favorite electric vehicle company? Blogs and research reports throw around fancy terms and make comparisons to GM (NYSE:GM) and Ford (NYSE:F) in an effort to prove or disprove the valuation of Tesla, but for the most part they ignore the most simple piece of analysis there is.

"Jeff, I'd like you to invest in Tesla."

"That's great! When do I get my money back?"

So lets figure it out. Tesla is currently valued at around $21 billion. By some analyst estimates, Tesla is on track to sell 25,000 cars in 2013. Or to put it another way, the market says that each car Tesla sells in 2013 is worth $825,000 in the future, or to put it another way - if Tesla was a private company, an investor wouldn't get their money back until Tesla made $825,000 for each car they sell in 2013.

Great. So by now you're bored and you're thinking:

"So what's your point Jeff? Elon Musk is a demi-God and the Tesla Model S is awesome. Of course they can make $825,000 for each car they sell right now. It's a lay-up. "

Let's look at the math and mechanism behind the lay-up. Tesla is currently selling a luxury vehicle, but at some point in the future plans to sell a $30,000 Electric Vehicle. When that happens, it is probably safe to assume that the average Tesla sale price will be around $50,000. Automotive Industry profit margins are very low, but let's give Tesla the benefit of the doubt and assume they can earn 2-3x the industry average and make 10% on each car they sell - or $5,000 per car.

(click to enlarge)

So how many cars do they need to sell you to get $825,000 back? 165. Or put a different way - for the investor to get back their money, Tesla needs to sell 4.1 MILLION cars.

"But Jeff, You're a moron and your analysis is pointless. I don't care that Tesla needs to sell 4.1mm cars to make back $21 billion. Elon Musk is a demi-God and is investing his own money in the company. And besides, Telsa is not a private company and to get my money back all I really need to do is sell my shares."

"All I need to do is sell my shares to get my money back." Think about that for a minute. And then think about a ponzi scheme. All you need is another investor with more aggressive assumptions to get your money back. Sound familiar.com?

The reality of Tesla is that the valuation has become so divorced from reality that an investor today is basically either making a bet that Tesla will be able to sell 4.1mm cars sometime in the future for every car they make now OR that someone else will assume they can sell even more than 4.1mm cars at some undisclosed point in the future. If you're a Tesla long, which are you willing to make?

Personally, I'm not making either. I'm buying puts and waiting for the bubble to pop. Buying today at $170 a share is akin to buying at twice the breakeven assumed when Elon Musk participated in the secondary equity offering (around $90 in May). He needed 2.1 million cars. You need 4.1 million. And by the way, the Mr. Musk didn't even use his own money. He borrowed it. And he owes Goldman Sachs $275 million dollars. From the Telsa prospectus:

"Mr. Musk has borrowed funds from affiliates of our underwriters and pledged shares of our common stock to secure these borrowings. The forced sale of these shares pursuant to a margin call could cause our stock price to decline and negatively impact our business.

Goldman Sachs Bank USA, an affiliate of Goldman, Sachs & Co., has made extensions of credit in the aggregate amount of $125 million to Elon Musk and the Elon Musk Revocable Trust dated July 22, 2003, or the Trust, a portion of the proceeds of which Mr. Musk used to purchase our common stock. Goldman Sachs Bank USA has agreed to make additional extensions of credit in an aggregate amount of $150 million to Elon Musk and the Trust, which together with the currently outstanding $125 million would total $275 million. Mr. Musk will pay the purchase price for up to 487,857 shares of common stock he has indicated a preliminary interest in purchasing in this offering and the 596,272 shares of our common stock being purchased in a subsequent private placement with a portion of the proceeds of these additional extensions of credit to be made by Goldman Sachs Bank USA. Interest on these loans accrue at market rates. Goldman Sachs Bank USA received and will receive customary fees and expense reimbursements in connection with these loans. As a regulated entity, Goldman Sachs Bank USA makes decisions regarding making and managing its loans independent of Goldman, Sachs & Co. In addition, Morgan Stanley Smith Barney LLC, an affiliate of Morgan Stanley & Co. LLC, has made a loan to Mr. Musk in the aggregate amount of $25 million. Interest on this loan accrues at market rates. Morgan Stanley Smith Barney LLC received and may receive customary fees and expense reimbursements in connection with this loan."

Source: What If Tesla Was A Private Company?