- Elon Musk told everyone through Twitter that he's thinking about taking Tesla private at $420/share.
- I see little substance about his announcement as there's no financing commitment and there's no definitive offer.
- I believe that this was an attempt to drive the stock price above $360.
- A stock price above $360 would mean that Tesla would not have to repay $920 million of debt due in March 2019 with cash.
- If Tesla is forced to repay the debt with cash, the company will likely have to do another capital raise, contrary to what the management team promised in Q2.
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Tesla’s (NASDAQ:TSLA) CEO has become more and more “spontaneous” in recent quarters. But between putting down analysts on conference calls and attempting to rescue kids trapped in a cave in Thailand, Elon Musk has at least stayed true to his passion of “burning the shorts.”
In perhaps the most brazen attempt to “burn the shorts,” Musk has announced on Twitter that he intends to take the company private at $420/share, a 23% premium over the market price prior to the announcement.
I believe there's little substance behind this announcement as Musk has failed to provide more details about funding commitment (other than that it has been "secured," whatever that means), and he further stated that he's only “considering” going private on the blog post that elaborated on his proposal. The lack of commitment signals to me that the announcement is merely a ruse designed to increase the stock price in the short term, with $360/share being the critical level.
Perhaps you don’t agree with me regarding Musk’s true intention, but I believe that you still need to understand why $360/share is important to Tesla.
On Tesla’s Q2 conference call, Musk promised that there's no need to raise capital as the company would be “cash flow positive for every quarter going forward.” However, I believe that he missed an important caveat: The stock price must be above $360/share by March 1, 2019, that's eight months from now.
From the chart above we can see that only on several occasions has the stock crossed $360/share, thus if the average price over the past year holds, I believe that Tesla will be forced to raise more capital.
Why is $360 the magical level? That’s the conversion price for $920 million of convertible debt due on March 1, 2019 (indenture). If the stock price does not cross $360, the company will have to repay bondholders with cash instead of shares. A quick glance at the balance sheet would tell us that the company could afford this payment at present as the company had $$2.24 billion in cash at the end of Q2. However, we must also take future capital investments and the ongoing operational cash burn into account.
The company decreased its 2018 capex guidance in Q2 to under $2.5 billion. Having spent $1.27 billion thus far, the company would likely have to spend another $1.2 billion in 2018. That leaves ~$1 billion cash on the balance sheet at the end of the year before any incremental capital investment (more on this later) or any cash outflow from operations. If we stop there, perhaps the $920 million bond won’t be a big concern, but can you trust the management’s promise about becoming cash flow positive?
Both Musk and the CFO have assured investors that the company will be cash flow positive in the coming quarters, and even claimed that they will be paying off the $920 million with “internally generated cash flow,” implying that Tesla could actually make $920 million over the next several months.
Of course, this is not the first time that the management has misguided investors. Here I will be highlighting several instances where the management had promised positive cash flows.
CEO: And then something I'm personally quite excited about is that we expect to be positive cash flow starting next month and then continuing on into Q2 and beyond.
Analyst: Just to be clear on that, when you say you’re going to be cash flow positive by the end of the year, that’s after capex?
CFO: That’s our - yes, that is expectation and I think we got to have focus on the long term, while this is a short-term issue in terms of timing of capex vs. revenue.
CEO: But yes, - but to answer your question, yes, even in the face of significant capex, we expect to be cash flow positive in Q4.
CEO: Yes. It's worth knowing that - based with the capital we have on hand and the DOE loan, we do have enough capital, based on our projections, to reach cash flow positive and profitability without ever raising another dollar.
Could Tesla pull off cash flow positive quarters from now on? As an investor I know that I can never rule out any possibility, but based on first half’s operational cash outflow of $528 million, I find management’s assurances to be disingenuous.
If the company is able to slash cash burn to $100 million a quarter, again that’s before any capital investment beyond this year’s ~$2.5 billion, the company would still be several hundred million dollars short by the time the bond comes due toward the end of Q1 2019. This outcome would force Tesla to raise additional capital to refinance the debt if the stock is not above $360.
As I mentioned earlier, the math above assumes no further capital investment, but we know that this is not realistic if the company intends to increase sales. An obvious recent example would be the planned production center in Shanghai, China, which is estimated to cost $2 billion. Considering that the company would be strapped for cash already if it does somehow pay off the March 2019 bond with its own cash, it would be virtually impossible for the company to cough up another $2 billion on its own.
When we take all the factors above into consideration, it's clear to me that having the stock above $360 is the minimum requirement for the company to avoid another capital raise.
I believe that Elon Musk has no intention of actually taking the company private, however, his “consideration” has successfully pushed the stock over the critical $360/share level. If the stock does stays above this level, then Tesla will likely not need to tap the capital markets for additional funds over the coming quarters.
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