Why Elon Musk Desperately Needs Tesla Stock To Stay Above $360

Summary

• 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.

Source: quartz.com

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 $360

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.

Q4 2015

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.

Q4 2014

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.

Q1 2011 (35:38)

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.

Conclusion

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.

Analyst’s 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.

Comments

[Daniel Joye]

Seems like Elon's tweet was driven by excessive optimism and lack of sleep with the desire to burn shorts. This might actually become the company's downfall. SEC investigation, class action lawsuit. As if they needed more distractions.

[mak999]

(long-time lurker, only one other comment here on SA)

I've been following TSLA from the sidelines for a while now, and have read many articles here from both sides of the camp. It has been a fascinating story to follow. I will admit that in general I like the idea of BEVs (I own a hybrid, which I feel is the best of both worlds, IMHO) and wish that someone (even if not TSLA) could build a quality BEV, at an affordable price for the masses, and still make a decent profit.

But I'm also here on SA to learn about various companies and investing strategies, and have been only long on my investments over my investing career (primarily 401k's since 2000, along with a few Janus funds since sold). And after Musk's tweet and subsequent stock price increase I bought my first short-term put (my second option purchase ever* as I'm just now learning about these) on Aug 8 @ 9:39am and sold it the next day @ 10:49am for a 98% profit.

My only regrets are not selling when it was up 130% at one point, and not buying more than one contract (so I could have essentially been playing with house money after selling one contract). I know I could have lost 100% of my option price, but since it was less than $300 I would have just written it off as a "lessons learned" about the ins and outs of options. But I now better understand how options work and can be used as an overall part of investment strategies.

I certainly will not risk more than a fractional % (<1%) of my overall net worth on options as I don't like to lose money (somewhat irresponsible in my 20's!) and will only risk an amount I can afford to never see again.

* My first option purchase ever was buying a call on IQ (I also own shares in an IRA) earlier that same week which returned 104% in a day. Maybe I should quit while I'm ahead... :)

[Compounding Cash]

Great start... be careful since things will not always go this well, but keep thinking for yourself!

[6269751]

Good luck. You will probably have to learn a few hard lessons. If you can consistently out-perform the S&P index long-term, that would be true success. Don't forget fixed income for the bad times.

[yyzbuckeye]

p.s. You guys might want to catch the latest news on Bloomberg about the Saudis.

Musk loves to drop hints in tweets in advance of things actually happening. He tweets about new products far before they become reality and he has given the shorts a chance to cut their losses with many tweets over the past, not even talking about the recent ones.

To all of you who think Musk is bluffing, you're going to be in for a rude awakening. I am going to throw one hell of a party in honor of Tesla and some of the largest short losses in a company in a long while :)

[Eli Hoffmann]

From Matt Levine's Money Stuff newsletter:

"As a converts guy I find this theory interesting but not ultimately convincing. For one thing, some of Tesla’s converts have to be net-share settled, meaning that even if they “convert” they pay off par in cash and the excess conversion value in stock or more cash. (The converts due in 2019 can be fully share settled at Tesla’s option, though, so Tesla could save cash if they convert.) More importantly, though, convertible bonds do not generally convert early, and the earliest maturity is in March 2019. If there is still no deal seven months from now, Musk’s tweets from this week are not going to have a continuing positive effect on the stock price."

[PGY]

Elon Musk considers himself a visionary. He is nothing more than a snake oil salesman. Investors need to understand that they are speculating not investing. Some will do well and exit with profit. Many more will end up merely end up “catching a falling knife” sharp end first.

[chopchop0]

SpaceX and Tesla create real products, not snake oil.

Sounds like you're another butt hurt short.

[PGY]

Nope. Bought early. Took profits recently. Made money and am really happy. But understood I was in a casino and that I was gambling. He's a smart guy. A good salesman, (too clever). As to his products. I'll bet on Toyota and GM in the long run. Good luck to you.

[Lumaca]

Short tesla has been a nonsense since the beginning. And Musk is a kind of genius...

[6269751]

I still hold with the sour grapes theory. Most of the shorts were unable to pull the trigger and buy at IPO. Instead of popping some pop corn and enjoying the show from the sidelines, they try to justify their initial inaction by pursuing short plays. This intensified their plight, because the odds were in their favor, but the short thesis has not paid off the way it should have.

Another tableau of this sort played out on Seeking Alpha with Herbalife. You had a huge pack of rabid shorts, constantly attacking with both real and fake news. Herbalife was not a tech company, but involved the now professionally deceased Bill Ackman. In place of an IPO for a kickoff, it was the pronouncement (and bankrolling) of a "going to zero" campaign. Instead of ignoring a technology*, the shorts had to ignore the twenty-five year profitable track record of a company with solid financials. It ended badly for the shorts in that campaign that is now consigned to the record books.

* please do not comment that electric cars are not a new technology. Neither were cellphones a new technology when Apple introduced the iPhone.

[streetrantmaybehomless]

All this assumes that a cash raise would be so negative for the company. I could see how the bond holders would get nervous, but this is TESLA. The brand is everything, reminds me of young apple.

[Kevin Sloan]

I am rethinking my positive comment on this article. Your premise is that Musk did this intentionally to keep the stock above a key $360 level that must be maintained for March 1, 2019. That is 7 months away and this is a stock that goes up and down 3-5% seemingly every other week. The mere fact that it trades at $400 5 days ago has literally zero bearing on where it will trade March 2019. Please explain your logic. If the date was September 1 I might understand where you are going. This article just went from a 9/10 to a nothing burger 0/10.

[Kevin Sloan]

Would sure love a response to this. I could be missing something in this article.

[General Expert]

@Kevin Sloan A presumable fake takeover rumor (announcement?) would create a floor in the shares. You can go on some sites and bulls were (are?) all over this deal.

Of course, this beautiful illusion is being destroyed by the SEC.

[Kevin Sloan]

A fake takeover rumor would create a floor in shares for a 7 month period!? Do you even follow this stock!? And the illusion is not being destroyed by the SEC....Musk made a big tweet, SEC has a duty to look into it, all standard and nothing more. But good job trying to blow it up into something it's not like a typical short.

[Longlonebull]

A bond that has to be repayed on March 1, 2019.
Why start now with as the author claims is manipulative to keep the price above the limit!
Sorry, don’t get the logic?

[Chancer]

General Expert:

Musk better have the "funding in place" that he claims that he has. If he does not, this sure looks like stock price manipulation. Per WSJ, the Tesla board members seem to know nothing about the going private claim; seems that board would know if funding has been secured. Board members only said that Musk has recently discussed the "going private" idea.

If "funding secured" is false and SEC concludes that Musk was just pumping the share price, what could be the penalties?

Certainly, a fine. But could Musk be suspended from any role in a public company for like one year? That would certainly affect the Tesla share price, production, operations, and cause an equity raise at cheap prices (dilution). What is a cult without the cult leader?

[General Expert]

@Chancer I agree Chancer, the wording of the brief response from the board was extremely vague and failed to address anything substantial.

[PETERLAISHSG]

Can you enlighten why the $360 stock price affect the $920 million of convertible debt due on March 1, 2019 and the rationale behind it ?

Thanks & regards
Peter

[Percheron1]

Did you read the article?
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.

Paying that debt in stock is just more dilution of the stock...whereas if the share price is below...the debt has to be paid in HARD CASH...

[Percheron1]

And now we know the reason for St Elon's Tweets...get the stock by hook or crook above above $360 to keep tesla from having to repay $920M in cash...Time for the SEC to investigate...:(

[depsee]

Is Musk committing fraud? Is he making fake announcements to manipulate the stock price?

[ispen91]

The other thing coming of age in late 2019/early 2020 - Porsche Mission E.

This car is sick, and I think it ill wipe out a significant portion of prospective Tesla buyers. Priced at $85K, 500K plus range w charging stations, not to mention Porsche's legendary reliability and customer service - backed up by behemoth VW parent group.

Forget having to repay debts, Tesla now has to up their product to stay ahead of their first ever major competitive threat.

[chopchop0]

Vaporware that will likely be pushed back well into the next decade.

It's called the Taycan btw:

insideevs.com/...

[On The Drop]

TesTards are like Scientologists. It will be fun watching them crash and burn. EV's are here to stay, but whatever happened to IBM AT and XT computers? Every one said 'Buy IBM', PC's are here to stay. They were, but not IBM PC's. Same will happen here..

[systemBuilder]

Most of this article is false; Tesla has a right to pay off the loan at a level below $359, they just have to give more equity than originally promised (i.e. if the stock is $270, they would pay 33% more stock to the convertible share-owner than originally promised because $270 x 1.33 = $359). The board just has to approve this and the board goes along with whatever Elon Musk asks.

[jsberg]

So it would end up working like a toxic convertible? How Wonderful!

[General Expert]

@systemBuilder, this would be an equivalent of a massively dilutive capital raise.

[doggydogworld]

@systemBuilder - "Tesla has a right to pay off the loan at a level below $359,..."

That's not quite correct. Tesla can adjust the conversion price (within limits) to induce bondholders to convert, but they can't force them to convert.

[jsberg]

Interesting take on the $420 TSLA going private idea. But I think Elon is genuinely exasperated with Tesla being a publicly traded company.

seekingalpha.com/...

[Compounding Cash]

In that case going public was a huge mistake. The $30-50b it would require to take out other shareholders contributes nothing at all to Tesla's working capital. This could have been done far more cheaply years ago, with investments that would actually provide growth capital for the company.

"You thought that losing a few billion dollars was a big deal? Hold my beer and watch this!"

On the plus side, maybe the massive bonus to long-time shareholders will allow them to upgrade from the $35,000 Model 3 that isn't being sold now to something more expensive.

[Compounding Cash]

On top of that the investors who put up all that capital will presumably have to leave Elon in full control, otherwise I don't see it going forward. That would be very unusual.

[Compounding Cash]

I'm considering allowing Elon Musk to cover my short position at $100/share.

[Kevin Sloan]

The first smart and realistic and thoughtful article written by a Tesla short I have seen. Bravo.

[Jerzy_S]

"...Elon Musk Desperately Needs Tesla Stock To Stay Above $360"

Desperate title for a desperate reader.

I never liked the shorts (in any stock).
Frankly - I think shorting should be illegal.
And $12 billion interest in seeing a company fail invites a lot of bad apples to do sad deeds.

Starts at selective reporting and inventive speculation (hello to the author), through downright lies, all the way to sabotage of operations.
People were killed for much less.
Not saying YOU particular shorts would - but out of a thousand - there is always one bad apple, and out of 12 billion......

Shorts don't own anything other than interest in seeing someone/something fail. That is so anti-social - it hurts.

That's my 2 cents for today.

[General Expert]

Jerzy_S, I don't see any untruths in my article.

Also, shorting allows efficient capital allocation, or else any reasonably charismatic CEO can create ponzi schemes on the stock market.

[Jerzy_S]

@General Expert : Looks like my earlier reply to your comment went away - so re-posting....

I agree there is no obvious 'untruths' in your article - I pegged you for 'inventive speculation' - which it is. You may be right, you are most likely wrong. Either way - you are speculating (creatively - for sure).

"shorting allows efficient capital allocation" - that is a feel good line that shorts and brokerage firms came up with, to justify the activity. The fact that brokerage firms are making money lending out stock they do not own, without knowledge or consensus of the actual stock owner, and without sharing the profit with the stock owners, is a highway robbery of its own - but I digress...

"....CEO can create ponzi schemes on the stock market." - the very definition of 'ponzi scheme' makes it inapplicable for share holding. In fact - one can argue that shorting is a variant of ponzi scheme, since it involves a sale of product you do not own.

[doggydogworld]

@jerzy_s - most stockholders don't know their shares are being lent, but they do give consent.