Elon Musk, in a recent interview leading up to the Gigafactory "grand opening" event, hinted that another capital raise is on the horizon.
Of course, any time the words "capital raise" pass Elon's lips, we know one is imminent. This is true when he is saying another will not be needed, and it is all but guaranteed to be soon when he acknowledges a need exists.
This isn't really news, though. Most people paying attention to the financials, especially when considering Tesla's (NASDAQ:TSLA) lofty ambitions, knew this was coming. Most didn't think it would be this soon, but we knew it was coming eventually.
The question investors should ask themselves is why does Tesla really need more money? In other words, rather than simply toeing the company line, ask yourself what is really going on.
In order to answer this question, we need to examine the recent history of Tesla's capital raises and where the money has actually gone, not just where it was supposed to go.
The closest Tesla has come recently to what I view as an honest capital raise was two offerings ago (soon to be 3), in August of 2015. The company was fairly candid that it simply needed more money, not for any new or grand plans, but because the Model X was harder to build and bring to market than anticipated. Fair enough.
Granted, investors had been told earlier in the year this would not be necessary. Indeed, on these very comment boards, the pro-Tesla, Musk-would-never-lie crowd was crowing that no equity raise would occur right up to the moment it was announced.
However, as Elon has admitted, many design features of the Model X were mistakes. Fortunately, the world is nothing if not forgiving when someone owns his mistakes. Need a few hundred million to fix them? Sure, no problem.
It is important to note that this money, combined with new production and delivery of Model X, was supposed to get Tesla over the hump and through 2016 without needing more. Don't worry. We'll get to that.
In early 2014, Tesla sold $2 billion in convertible bonds, an amount equal to its proposed investment in the Gigafactory, with the stated intention of using the funds largely for this purpose.
So, how was the money actually spent?
Well, as of March 31, 2016, Tesla had spent approximately $380 million on the Gigafactory. It also had $1.2 billion in cash and cash equivalents on the balance sheet. Well, that makes sense. $1.2 + $.38 billion is close to $2 billion.
However, this was the balance after the Q3 2015 influx of $740 million from August 2015.
Some basic math tells us that, of the $2+ billion raised for the Gigafactory, $380 million was invested there. Based on what was left in the bank at EOQ12016, and what was raised in the interim, more than half of that Gigafactory money is gone, a victim of Tesla's operations (not to mention the rest of what was in the bank when that $2+ billion came in).
For those paying attention, that is well over (cue Dr. Evil voice)... (Image from New Line Cinema's Austin Powers series)
...raised for, but not spent on (and now gone forever), the Gigafactory.
The $1.7 billion raised in May of this year is, perhaps, the most disingenuous of all. But to see it for what it was, we have to do a small amount of critical thinking.
We first must examine the Tesla justification for the raise. The main idea is that Tesla was caught off-guard by the crazy, off-the-hook demand for the Model 3.
No one at Tesla expected so many people to be willing to put down deposits on this exciting new vehicle, and production planning had to be accelerated to meet this unexpected demand.
Elon told us as much on the conference call announcing the raise:
"As far as the increased capital raise, well, obviously if you double your plan volume, you can't expect the capital to stay the same"
But let's think critically about what this means for a moment.
First, it is important to note that several members of Seeking Alpha who pay attention to these things made remarkably accurate estimates regarding the number of deposits that would be placed.
Even noted Tesla bear Montana Skeptic offered his (incredibly accurate) estimate of 300,000-400,000 deposits.
Here are a few excerpts from his pre-Model 3 event statements:
"Tesla will raise $300 million or more in Model 3 deposits.
"Tesla will likely secure at least 300,000 Model 3 reservations within a month of the March 31 prototype reveal (which would translate to $300 million in deposits). Indeed, I would not be surprised to see 400,000 reservations, or more, during Q2.
"The resulting $400 million in cash will be most welcome. Tesla is likely to incur further operating losses during Q1. Assuming that during the balance of the year the company can break even on operations (which I define as operating cash flow plus cash flow from leasing, but excluding capex and ABL or other financing), then $400 million in Model 3 reservations would cover almost 30% of Tesla's promised $1.5 billion in 2016 capital expenditures."
Yet, we are supposed to believe that Elon Musk, the man who investors trust to lead Tesla Motors -- to gauge demand and respond accordingly with production planning -- was so caught off-guard by the deposit numbers that Tesla's plans had to change?
But this obvious contradiction isn't even the most damning piece of evidence.
Let's recall when the Model 3 event was timed to occur: March 31, 2016. This was the last day of Q1. Could that be a coincidence?
Of course not.
Tesla knew very well that the Q1 delivery numbers would disappoint (which they did), and that those would be reported shortly after EOQ. Something had to be done to distract the world from those terrible numbers, and what could be better than lines of enthusiasts anxiously awaiting an opportunity to lend Elon $1000?
Nothing. It was a perfect plan, and it worked perfectly.
Which means Tesla had a pretty good idea of what it would be looking at in terms of deposits, and it used the excitement around the Model 3 to generate enthusiasm in preparation for poor delivery numbers and even worse financial ones.
And why did Tesla need that distraction? Because it needed more money. Not for an unplanned production ramp, but to keep the story going and the lights on at the factory. Maybe not immediately, but soon and inevitably, Tesla would need the money.
Either that, or somehow the man running the company is less capable of forecasting demand than his harshest critics.
The reality is that a big chunk of the money raised during this most recent offering will either go directly to SolarCity, or will be used to fund the enormous costs associated with the merger (or both).
So, to Tesla investors the world over, which of those is the more appealing option? Is the CEO of Tesla Motors incompetent, or is he intentionally dishonest?
If you have a defensible third option, I'm open to hearing it.
Bold Prediction #1: Timing the Next Round
As we discussed earlier, Elon just tipped his hand regarding the need for another equity raise. He is going back to the same well he has used successfully in the past: Gigafactory and expedited production plans.
Interestingly enough, investors are probably going to be asked to believe on this go-round that Tesla didn't consider the need for Gigafactory expansion when it did the last raise just three short months ago (to support the Model 3 ramp, right?).
Either that, or it will be positioned as necessary to begin the process of working on all the ridiculously ambitious goals outlined in Master Plan Part Deux. And it isn't what you heard before, but the brilliance of MPPD that will catapult TSLA to its rightful valuation of $1 trillion, right?
But in considering the timing, we have to take into account two key upcoming events. First, the closing of the merger with SolarCity. Second, the end of Q3 and required reporting.
Let's take a positive approach and assume, as some Tesla bulls believe is possible, that Tesla is non-GAAP profitable or even nearly break-even in Q3. This leaves us with the SolarCity problem.
As I've stated before, I strongly believe SolarCity is going to need cash sooner than later. Whether it can hold on until the merger is complete or not is really the only question. Either way, that money has to come from Tesla.
Even assuming the promised "synergies" between the companies are more real than imagined, it will still take time and money to merge these two cash incinerating companies into a single, giant furnace.
The liquid assets of both companies aren't going to be sufficient to get the combined entity through another half year, particularly now that Gigafactory expansion appears to have begun again in earnest.
Which brings us to the reporting of Q3 numbers. I started off with a very optimistic assumption of Tesla showing something close to non-GAAP profitability and pleasing the investment community.
However, I don't consider this likely at all. Worse, the Q3 delivery numbers will almost certainly put the final stake in the heart of the 2016 annual delivery guidance. Tesla will have to make a decision in Q3 whether to pursue the low end of its guidance for 80,000 deliveries OR show decreasing losses.
Yes, those two options are mutually exclusive.
Why? Because the only way Tesla approaches its delivery targets is by slashing prices (read: margins). And the only way Tesla improves its profitability is by maintaining margins. It is Sophie's choice for Tesla, and either way there is some bad news coming.
Which leads us to the September/October timeframe as the logical choice for the next equity offering. I'll go one step further. If it looks like the Q3 delivery numbers will be awful, the raise will occur before the end of September. If the delivery numbers look ok, but the losses continue to mount, it will occur in October before the Q3 financials are released.
Of course, it is also possible that Tesla will leverage the excitement around the Gigafactory "Grand Opening" and the recently pumped up share price and just do it ASAP.
Personally, I'm hoping for Halloween, as I believe I have the perfect costume for Elon this year:
Bold Prediction #2 for the Next Funding Round
In an effort to distance himself from the self-serving nature of his personal participation in the last funding round, I predict Elon Musk will buy a portion of the additional equity being offered.
Remember, he has done this before (most recently in August 2015), to show the world that the equity will continue to grow in value despite the obviously negative perception created by going back to the well he said he wouldn't need to revisit.
However, for those who paid attention, Elon walked away from the last follow-on offering with ~$125 million in his pocket. He could use a paltry 20% of this sum and reinforce his "commitment to shareholders" by adding to his share count, while still walking away with an eight figure payday.
It would surely please the faithful and the press would delight in how selfless and committed Mr. Musk is to seeing his vision through. The adoration would be crazy off-the-hook.
It's probably even a no-brainer!
Elon has tipped his hand and already begun preparing the faithful for the terrible news that Tesla is going to need more money soon. This for the second time in a year that promised no further capital raises.
Of course, the faithful who choose not to think critically and swallow whole whatever they are fed will not object. Some will be surprised initially, but come around to whatever explanation Elon comes up with to justify this one.
However, there will be those who, as many did when the SolarCity merger was announced, will begin to cast a skeptical eye toward the heroic and infallible Elon. In reality, it is the merger that will make Elon's previous statement of not needing money in 2016 a falsehood twice over.
Tesla stock trades on faith in Elon, and only on faith in Elon. Tesla has terrible financials, no commanding market share, no first-mover advantage, and no technological advantage over any of its competitors. Its one differentiating asset, the charging network, could be quickly and easily replicated by any single one of its well-heeled competitors when it perceives the time is right.
I won't offer judgment on whether Elon is lying with intent or simply doing so out of a terrible mix of exuberance and incompetence, but the net result is the same. Tesla investors are being deceived.
This fact, coupled with the slow awakening of the faithful's senses (previously dulled from the intoxication of early 10x paper returns), has the potential to bring the entire house of cards crashing to the ground.
Author's note: All of the opinions expressed in this article are mine and are not intended to serve as investment advice. These opinions drive my own investing strategy, and mine alone. Please do your own due diligence and consult with a professional advisor before making any investment decision.
Added context to Seeking Alpha standard disclosure: While I currently have no position in this stock, I have decided to begin playing its volatility with a small portion of risk capital. Over a longer time horizon, I believe Tesla is an excellent short candidate, but I would be unlikely to wager on near-term price movements to the short side. While I don't believe the "story" will support the stock forever, it does so very effectively in the near-term. I'm currently waiting for a good entry point for a short-term position on either side of the trade. Current pricing does not appeal to me in either direction over the next few months.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in TSLA over the next 72 hours.