What’s Next, for Tesla?
Based on my study of Musk for the past many years, I find there are two completely different ways people interpret his comments.
Bears adopt the belief that Musk lies, cheats, and cannot be trusted. They feel that anyone who writes positively about Musk or Tesla must be a hypnotized zombie incapable of doing financial math or critical thinking. Fanboys and girls every one.
Bulls tend to understand Musk in a completely different light. As a mechanical design engineer, I know that whenever someone sets off to create something new the path is twisted and the time to the destination is uncertain. People who do not understand this ask, “How long until the Cyber Truck will begin shipping?” or, “How long until you work out the problems with the Model 3 production line?”. or, “How long until the new Chinese design department creates the low cost Tesla Model and begins shipping cars from a new factory in China for which even the vehicle concept doesn’t yet exist.
The point is, the time to realize any development is uncertain. Therefore any time frame given is a best guess, nothing more and nothing less. Being wrong about a guess is not lying, as bears like to pretend. “Elon said production of Model 3 would be such and such, and it’s November and production isn’t happening, so therefore, Elon is a liar”. “Elon claimed we would have Full Self Driving by now, we don’t, so Elon is a liar”.
Bears jump to this ridiculous belief on every statement Musk makes as if he is God spouting lines to be cast in stone. The reality is the Tesla team tackled an enormous problem and it took 6 months to iron out the kinks in the Model 3 production line, Full Self Driving is still being advanced, and the Chinese design team are just getting started on a new vehicle design.
To me, everything seems normal and reasonable and always has. When Tesla was in production hell over the Model 3 line, bears were writing about how Musk had lied and how Tesla would never get the production line running. Neither was true, he isn’t and they did.
Failing to reach a goal, or getting there late, is not lying. It is simply a best guess that was wrong. That’s the best anyone can ever do when we’re talking about something no one has ever done. Musk’s dramatically wrong time predictions are, therefore, reasonable, logical, acceptable. They are part of every new technology development process.
I find that a better way to interpret things Musk says or does is to adopt the belief that he is honest to a fault. Everything he says is what he believes to be true at the time he says them. Indeed, if it would benefit Tesla to lie about something, I believe he is incapable of openly lying.
Musk will tell the truth even when the truth sounds damaging to the company because telling the truth is the right thing to do, always. This is why I saw his mother walk proudly into the Model Y launch event. She knows the real Elon Musk is honest and worthy of her pride.
The entire flap about taking Tesla private at $420 per share seems quaint with the stock price back above $1,000 today. If next week the stock price is above $1,200, I won’t be surprised, and this is what I’m writing this article about.
While the SEC can comment on things Musk says, they can’t control many of the things he does. Musk isn’t responsible if an employee leaks an internal email. But Musk can also send messages using subliminal information cast in plain sight. One such clue that Tesla will turn a profit this quarter, Q2 2020, is his new choice of Twitter image:
Musk changed his personality image from a picture of himself to an image of the flames jetting out of the rocket motors of the SpaceX Falcon Heavy on a launch. You can see the flames in the image icon and then in the actual image below, you can see the same flames to the bottom of the rocketship.
IMO, Musk is telling us to get ready because Tesla as a corporate powerhouse is about to launch.
I expect that the “launch” might be this Thursday July 2nd when Tesla releases Q2 information. The information will make predicting whether Tesla generated a profit in Q2 or not, easier. Tesla reports within 3 days of the end of the quarter. Most likely the report will come out after the end of trading this week. If so, the first trading day after the information is released will be next Monday. Though it is possible the information is released Wednesday making Thursday the first trading day after Q2 number are released.
I began writing this article this morning, Monday June 29th, with the stock trading around $950. Now, in the afternoon, the stock price is already back up to $1,009. But recovering part of previous highs is not “soaring into space” as the new icon suggests.
Of course, trading on a Twitter icon change would be pretty crazy. Or would it? Let’s consider S&P inclusion and what Musk might think about it and how it might affect the share price.
Does S&P inclusion matter to Musk or to Tesla?
A lot of writers, including Tesla bulls, don’t think S&P inclusion matters to Musk. When a company is included, the price is likely to increase as funds buy up stock, and then drop back to a normal trading range. I disagree and think S&P inclusion matters to Musk and to Tesla. Here’s why.
Most people admit that the Coronavirus lowered production and sales and that these have hampered profitability. If Tesla doesn’t make S&P inclusion this quarter, they think, Tesla will just get in next quarter when we don’t have coronavirus as a problem. I disagree.
In my opinion, if Tesla fails to get included into the S&P 500 this quarter, then Tesla will not be included for another year or two. If Tesla is going to maintain the 50% growth pace Musk has said is what he expects, then Tesla needs to begin construction on several more gigafactories that haven’t yet been announced. Tesla also needs to dramatically increase battery production and that is going to require investment right down to the acquisition of raw materials. And getting more raw materials is going to require the creation of new mining operations.
Building and making operational a bunch of new factories will cost a lot of money and will put Tesla back into the mode of losing huge sums of money, quarter after quarter, the same as in the past. So if Tesla fails to make it into S&P 500 this quarter, it wouldn’t make sense to hold back the growth for another quarter. I would expect Tesla to return to rapid growth and dramatic losses as they work to increase production capacity.
Why Tesla will want to lose money starting Q3 2020
Tesla had $8 billion in cash equivalents at the end of Q1 2020.
While inclusion into the S&P 500 would be a nice feather to stick into Yankee Doodle Tesla’s hat, it isn’t worth dramatically altering the corporate path to obtain. It looks good, but isn’t really substantive. It is important to demonstrate the company can turn a profit if it wants to. But if the company didn’t need to prove anything to the shorts or the bears, then delaying growth to prove a point wouldn’t be worth it.
That said, once demonstrated everyone will know that Tesla is able to generate a profit by simply pulling back on the “growth reigns”.
Where S&P 500 inclusion will be important is that when Tesla reaches this goal of having demonstrated that it is able to generate profits if desired, inclusion will require numerous funds to purchase the stock. Funds that claim to represent the mix of companies on the S&P will need to add Tesla stock to their portfolios. The share price may rise to $1,200 or higher next week or after the Q2 Update Letter is published.
This would enable Tesla to sell equity at $1,000 per share or higher. This high share price would enable the company to raise a large amount of cash for a small dilution.
Tesla will probably raise funds later this year.
Tesla is likely to raise funds in the second half of 2020 (or in 2021) in order to build more factories. Tesla may do this via borrowing the funds. But given the enormous stock price, if I were running Tesla I’d offer 40 million shares and raise around $40 billion.
I would do this in part because Tesla can. But in part I’d do this if I were Musk because raising a quantity of cash greater than the entire value of GM ($36 billion) would deliver a hard smack down to ICE vehicle manufacturers.
Musk claimed he was developing the Roadster 2 to deliver a “hardcore smackdown to gas-powered cars“. Raising $40 billion would dilute Tesla shareholders by only 40 million shares. That would be an 22 percent equity dilution. If the purpose for the raise was to build more factories and develop more vehicles, I think people would be on board. This move would help move the stock price toward $2,000 to $4,000 and the dilution would be viewed as strategic to shift the focus of the entire industry.
|Factory Location||Production Capacity, Known|
|Fremont Model S, X, 3, Y||2k+2k+7k+5k/wk =800k/yr|
|Shanghai Model 3 & Y||5k/wk + 5k/wk = 500k/yr|
|Berlin Model Y||10k/wk = 500k/yr|
|Tulsa or Austin???||10k + 10k = 1M/yr|
|Production Rate by Q4 2022||= 2.8M/yr|
|Revenue Rate by Q4 2022||~ $140 Billion|
(Source: Author Estimates)
Currently Tesla is building factories that will hopefully be capable of building around 2.8 million BEVs per year by 2022. But to put an end to ICE vehicle construction the auto industry as a whole needs to build far more than 50 million vehicles per year.
The auto industry, however, is dragging their feet and unwilling to get off the ICE vehicle teet. They know how to build ICE vehicles, their ICE vehicles are profitable and their BEVs lose money. So they are reticent to kill their profit center and replace it with money losing (for them) BEVs. This means to drive the transition to BEVs, Tesla is the only company actually building vehicles to realize the goal.
This means, to me, that Tesla needs to build factories to build 50 million Tesla BEVs per year as quickly as possible. Tesla needs to build more than 20 times the number of vehicles the factories currently under construction might be capable of building by 2022. Raising $40 billion should enable Tesla to build factories enough to fabricate around 12 million BEVs per year. So even $40 billion will not be enough to fully transition the entire auto industry, but it will be a good beginning.
If Tesla raises $40 billion in 2020 then the company is likely to build more than 10 million cars by 2025. Raising that money would kick the entire legacy auto industry in the butt and get them moving on developing their own factories. A $40 billion equity raise would signal a clear and present danger of bankruptcy for any legacy auto firm that chooses to remain focused on building ICE vehicles.
Raising that level of cash would do more for speeding up the resolve to transition to ICE than the entire past ten years of Tesla BEV development.
Tesla claims it’s mission is to speed the transition to renewable energy and to end our dependence on fossil fuels. I suggest that the fastest way to achieve that goal has finally come into reach of Tesla. Therefore, because I believe Musk is honest to a fault, because I believe he is smart, this possibility will be realized by him and his team.
Sure there are different, even smarter ways to finance the growth for Tesla. Selling $40 billion in equity will be considered stupid and indeed, unnecessary by many. But, I can think of no faster way to get GM, Ford, Fiat Chrysler, BMW, VW, Audi, and the rest of the legacy auto industry off of their duffs. There is no faster way to wake the legacy companies and get them to race their BEV entrants into the market place than the fear of death by disruption.
Is this a dramatic tactic? Yes. Would it work? I think so. Will Tesla / Musk take this action? Who knows, probably not, but we’ll see.
If Tesla continues advancing at a 50% annual growth rate, Mary Barra and the rest of the CEOs will stick to their thinking that this BEV disruption will take several decades to play out. If they follow that path GM will be selling perhaps 200,000 BEVs by 2025 and their goal of 1 million will be in shambles.
If instead Tesla raises $40 billion in Q3 2020, then by Q4 2020 the rest of the legacy auto companies will be feverishly and earnestly working on BEVs. They will all be working with the fear of rapid death in their minds and survival in their hearts.
Disclosure: I am/we are long TSLA. 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.