Is there any way of knowing what percentage of the 400,000 (or whatever the number) of the Tesla (NASDAQ:TSLA) Model 3 refundable deposits are real?
I ask because I had no problem placing deposits for 20 cars myself, and I didn't encounter any limit, causing me to reasonably assume that I could just have continued - placing 200 or 200,000 refundable deposits - you pick the number.
The ability of any one person or entity - or any combination of such - to place an unlimited number of refundable deposits, seems to go against Elon Musk's statement that the "max of two" is somehow reassuring:
The max isn't two. It's two per form. But you can submit an unlimited number of forms - with one or two refundable car deposits per form. Elon Musk himself could have submitted 200,000 forms with one car each. I'm obviously not suggesting that he or anyone else did, for I could clearly not know, but you get my point: It's eminently technically possible, given what I and others learned who placed more than two deposits.
When I went to place a refundable deposit (the limit is two cars per form) on the Model 3, I got a confirmation splash page immediately upon submitting the credit card form. It read "Model 3, Thank you, Your reservation is complete, You will be sent a confirmation email in 48 hours -- RETURN TO RESERVATION FORM."
Well, why is Tesla encouraging me to go back to the reservation form - in order to place more refundable deposits? How many refundable deposits can you place? I followed the instructions and kept entering more and more refundable deposits. As it turns out, you don't even need a separate email address, separate phone number or even a separate credit card. You can just keep clicking for more refundable deposits. I stopped at 20 cars, figuring that I had long proved my point as soon as I had more than two cars, which was the supposed limit.
Funny thing is, you don't even need to have any net cash available, other than the credit limit on your credit card. If you place a deposit now, you can always get your money back by the time your credit card statement is due, and pay nothing. Depending on where in the credit cycle you are, that gives Tesla 30-60 days to show a really big deposit number.
Of course, if you wanted your deposit to "sit" for more than 30 or perhaps 60 days, when your credit card statement is due, you would have to come up with the money. 200,000 reservations would mean $200 million. At that quantity, the game isn't so much for a single individual, but more suited for an institutional investor or someone in whose interest it is that Tesla raise new equity on as favorable terms as possible, such as an automotive components supplier who is worried about getting paid from Tesla.
Alternatively, to have a material impact on the stock, you could think of 1,000 smaller players willing to put 100 refundable deposits each on their credit cards for a total of 100,000 cars. Then, another 5,000 people putting 20 refundable deposits each - just like I did - for a total of another 100,000. That would be 200,000 - or half the approximate total we are told.
In whose interest is it to jack up the number of refundable deposits?
It's widely assumed Tesla will now move quickly to raise capital after the stock went from $141 to $241. One prominent sell-side equity research analyst covering Tesla believes it could be around $3 billion. If we look at the pattern from Tesla raising new funds from spring 2014 and August 2015, the deal tends to be announced a week or so after the earnings call. That would mean May 11.
One might reasonably assume those who will buy these $3 billion of fresh shares are doing it almost exclusively based on the prospects from the claimed 400,000 reservations. It is after all this "demand" (free/refundable options) that's being used to justify the need for more shareholder capital. However, is there any way to know how many of those refundable reservations are even remotely real?
Clearly, for the people who stood in line on March 31, there is at least some hope. That would include Tesla's own employees, who were able to reserve before the people who got in line. If you assume each of 15,000 Tesla employees booked two, that would mean up to 30,000, so add another 85,000 for those who stood in line that day, for a total of 115,000.
Basically, for those 115,000 people, $1,000 per car is a no-risk free option that they might get their hands on a car that will yield them a $7,500 Federal tax credit for each car. Who wouldn't like that kind of a deal, if you can spare the money for two or so years?
But after those 115,000, it gets iffy. There's just no evidence as to how "real" the rest of the 400,000 number is. It's not like I'm blaming Tesla - how would Tesla even know who entered some credit card numbers on their site? All they did was to enable it, and then arguably encourage it by directing those who already placed two deposits, to go back to the reservation form again.
If I were a potential investor in Tesla's presumed upcoming capital raise, I would demand that the underwriters - presumably Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) - perform a lot more due diligence as to how easy it was for anyone to place a seemingly unlimited number of refundable deposits on Tesla's Model 3 site at least in the first few weeks of Tesla's deposit-taking. You don't want to be asking the question, sometime after this investment round has taken the place, why the deposit number suddenly went down in the next several months, or couple of years.
Gee, I wonder why!
Of course, it could be possible to continue to replace existing deposits with new ones, allowing each "round" of deposits to "float" on credit cards 30-60 days at a time. That way, credit card companies would be passing the hot potato forward theoretically forever - or at least until the cars are supposed to be delivered. It would be like bad loans carried on the books of Japanese banks in the 1990s - carried forward at peak value until the eventual evaporation.
Morgan Stanley to Tesla: Allow us to scrub the number, please
There are number of entities who ought to be performing due diligence into how easy it was for anyone to place what could be an unlimited amount of deposits for the Model 3 until at least the last few days:
- The presumed bookrunner, Morgan Stanley
- The presumed co-lead manager, Goldman Sachs
- The co-managing underwriting banks
- The counsel to the underwriters
- The equity research analysts working for the underwriters
- The unfortunate equity analysts who aren't on the deal
- Panasonic (OTCPK:PCRFY), who might be allocating capital for new battery cell production capacity
Whether you are going to be somewhere on the upcoming financing deal or not - perhaps you're simply a journalist with the most basic research skills - shouldn't you have tried to see how many deposits you can place on the Model 3? After all, given the paramount importance of this refundable deposit number, the people who are about to buy newly issued stock ought to know whether it's theoretically possible for the 400,000 (or whatever the number is right now) number to be inflated.
Motivation: In whose interest would it be to inflate the deposits?
There are at least three main categories of people who would benefit from Tesla being able to report a larger number of Model 3 refundable deposits:
Shareholders: Internal and external.
Those who depend on Tesla's liquidity to get paid or be employed: Employees and suppliers.
Competitors. Yes, you read that right. Let me expand.
Let's say you are a competitor to Tesla, and you have figured out that Tesla will lose $20,000 or whatever, on every Model 3 delivered. At that point, you might simply want Tesla to run a Kamikaze mission to make as many of these loss-making cars as possible, so that you speed up the time when Tesla runs over the bankruptcy cliff. For every 100,000 cars you cause Tesla to build, Tesla would lose $2 billion.
At a minimum, as a competitor you might want Tesla to go on a Wild Goose Chase to build factories for demand that won't really be there "thanks" to hundreds of thousands of refundable deposits that will vanish just in time for those refundable deposits to turn into orders come 2018, 2019 or 2020. That would certainly be a most creative way for a competitor to walk Tesla off the financial cliff.
Of course, while it should be obvious, I am not accusing anyone of having done any of these things here. There is - obviously! - no way that I could know. I am merely pointing out that it seems perfectly possible to place an unlimited number of refundable deposits, and there are plenty of people with ample motivation to do so. That doesn't mean it's happened. But neither I nor you know this, without a forensic examination of the deposit book.
Rather, it is for Morgan Stanley and Goldman Sachs to hire such experts to ensure that the 400,000 number is accurate, seeing as the entire rationale for the presumed capital raise is this one magic number.
The bottom line: Do the due diligence, please
If you are part of the underwriting team for Tesla's next financing deal, if you are a supplier to Tesla, or even if you are journalist or investor, you should have done your due diligence to see for yourself how easy it was to place more than two refundable deposits. Whether you place 3 or 10 or 200 of them, doesn't really matter. As long as you see how easy it is to place more than two, you have proven the point.
One would think the investment banks involved in raising money on such an upcoming deal, would be particularly required to perform this kind of most basic due diligence. Obviously, their bankers should be doing it, but so should their equity research analysts. Perhaps they can offer an opinion or estimate to the investing public as to what percentage of the 400,000 alleged refundable deposits are real.
It's entirely possible that over 99% of the deposits placed to date are indeed as legitimate as one could hope. As it stands, there is no way for me or you to know. I did not even get into the issue that has been discussed on these pages previously - and will surely be discussed extensively over the next couple of years - of those who simply change their minds about the Model 3 for competitive and other reasons. Those are the people who will discover other products - whether electric cars or non-electric cars - and decide to buy one of those instead.
The Tesla Model 3 refundable deposit saga has surely just begun.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in TSLA over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: At the time of submitting this article for publication, the author had no positions in any company mentioned in the article. However, positions can change at any time. The author regularly attends press conferences, new product launches and equivalent, and sometimes the travel logistics to those events are covered by the hosts of those events.