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I am always talking about the wonders of SpaceX, TSLA, and how my next car is going to be a model 3.

 

Turns out I am on the order list for a model 3. As an anniversary gift, no 39, my wife put down $1,000 on a model 3.

 

What a wife-- what a gift!! Happy anniversary, and can't wait to hear more about your new car!

 

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I am always talking about the wonders of SpaceX, TSLA, and how my next car is going to be a model 3.

 

Turns out I am on the order list for a model 3. As an anniversary gift, no 39, my wife put down $1,000 on a model 3.

 

What a wife-- what a gift!! Happy anniversary, and can't wait to hear more about your new car!

 

It'll be awhile, hopefully sometime in 2018.

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I am always talking about the wonders of SpaceX, TSLA, and how my next car is going to be a model 3.

 

Turns out I am on the order list for a model 3. As an anniversary gift, no 39, my wife put down $1,000 on a model 3.

 

What a wife-- what a gift!! Happy anniversary, and can't wait to hear more about your new car!

 

 

It'll be awhile, hopefully sometime in 2018.

 

That's great Mike - sounds like a keeper!  Congratulations

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TSLA is a cult stock - built on the greatness of Elon Musk.  It appears like there are cracks in the facade - maybe haters are gonna hate....but piece posted yesterday should give the bulls at least some pause - I thought it was a great synopsis

 

http://jeffcnyc.tumblr.com/post/149083643277/ducks

 

Ducks

 

There’s an old adage: “If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck “

 

A few months ago, something started swimming towards me and quacking.

 

A headline quacked across my screen: Tesla was having customers sign Non-disclosure agreements (NDAs) in exchange for out of warranty repairs. 

 

No other auto company I am aware of asks customers to sign NDAs in exchange for free out-of-warranty repairs. Regardless of what the company says, there is really only one reason to do that – to suppress bad news that might impact the stock price.

 

Elon Musk promptly wrote a blog post – in which he attacked the motivations of the journalist who broke the story –  and claimed that the NDAs were never intended to stop a customer from filing a complaint with the National Highway Traffic Safety Administration (NHTSA).  And then Tesla changed the language of the NDAs at the request of NHTSA.

 

Attacking the messenger, denying the allegation, and then admitting to it.  A crazy red flag.

 

If a company is willing to be unethical when it comes to a small repair – what else could there be?

 

I started doing some research and connecting dots.

 

As it turns out one of Elon Musk’s companies was facing some very significant funding issues. The funding issues at SolarCity were so bad that the majority of a recent new bond issuance was placed with an affiliated entity – SpaceX.  $75mm of the previous $90mm issuance.  Pretty much the entire issue.

 

Quack.

 

Using one investors money to pay off another – an Italian guy named Charles used to that.  But it was even even worse considering another crucial fact. SpaceX has collected some hefty advances on some NASA contracts.

 

So investing the governments money in an affiliated entity that couldn’t access the capital markets. Oh yeah, and the Solar City creditors had retained special bankruptcy counsel:

 

“Each of the Administrative Agent and each Group Agent shall have received opinions, dated no earlier than the Effective Date, of Proskauer Rose LLP, special bankruptcy counsel to the Loan Parties, the Borrower Subsidiary Parties and SolarCity, each in form and substance reasonably acceptable to the Administrative Agent, the Collateral Agent and the Majority Group Agents , with respect to the Subject Fund Transactions.“  (This is directly form the credit agreement amendments filed in the SolarCity 10Q)

 

Quack.

 

Not exactly a great situation. An entity in the zone of insolvency taking investments from an affiliated entity holding large government deposits.

 

So what did Elon propose?

 

Buying that entity with another entity he controlled. Which by the way had just raised $1.7 billion. Run out of money at one company, use the money from your other company, and then when that runs out, use the money from a third company.  Reality was they raised $1.7bn under the guise of building a new car and then proposed merging with a potentially insolvent affiliate.  Oh yeah, and Elon even proposed a bridge loan to said entity on the deal conference call (yes, SolarCity’s funding situation was that bad).

 

Quack.

 

And then another crazy piece of news was disclosed. Just prior to the equity raise, a Tesla owner had died in an autopilot crash. And even though Autopilot deaths were mentioned in the risk factors section of the 10q, Tesla didn’t tell the purchasers of the equity offering.

 

Quack.

 

It just went on and on.  Quacks everywhere.

 

The CEO released a Master Plan 2.0 just as an SEC investigation was disclosed. Quack.

 

The company missed Sales projections and released them on the Sunday of Fourth of July weekend. Oh, yeah, and they had used the projections just a few weeks earlier to sell the secondary. Quack.

 

Nine executives had departures since January 1st.  Quack.

 

The company refused to update Model 3 deposits on the earnings call AFTER updating them multiple times a day prior to the equity offering. Quack.

 

Elon had appointed his divorce attorney as the General Counsel. Quack.

 

Which takes us back to that old adage: If it looks like a duck, swims like a duck, it is probably a duck. Or in this case it is probably a fraud. Can we prove it? No.  Might I be wrong? Yes.  Maybe everything is just a coincidence. Maybe everything is fine, and all the unethical behavior and self-dealing is nothing and Elon’s transgressions are justified in his quest to change the world.  Maybe it is quacking but it is really a bunny rabbit.

 

But the reality is you have an M&A transaction that was designed to avert a potential bankruptcy of an affiliated entity, non-disclosure agreements being handed out to customers, slandering of journalists, people dying from the products and said information withheld from investors prior to a Secondary, selective disclosure (Model 3 deposits) and ongoing SEC investigations. And a legal department run by a divorce attorney. (I am aware of no other $30bn company that has it’s legal department run by the CEO’s divorce attorney. Which means either no one wanted the job or Elon needed a puppet. Truthfully, I don’t even know which is more frightening.)

 

And we haven’t even mentioned the financials. The reality is the financials are bad – without continued access to the capital markets Tesla will fall apart. And they are already losing that access. Tesla maxed out a leasing facility and had to pay down over $400mm in early conversions of debt after the stock borrow made it uneconomical for holders to hold them. 

 

Maybe I’m wrong and it’s not a giant Duck that falls apart as soon as access to the capital markets is removed. But do you really want to stick around as a shareholder to see how this plays out

 

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It's a ridiculous synopsis.  I had to unfollow or mute half of my twitter feed because they kept going on about all these "issues."  My twitter feed is now 10x better for it.

 

No other auto company I am aware of asks customers to sign NDAs in exchange for free out-of-warranty repairs. Regardless of what the company says, there is really only one reason to do that – to suppress bad news that might impact the stock price.

 

No.  I've had out of warranty repairs done on my Tesla, and they have you sign an extra form that prevents you from using that good act against them in the future.  The guy who blew this out of proportion ended up banned on TMC because he started reposting stuff from some weird guy in Australia who was trolling salvage lots to find pictures where wheels had fallen off.  Tried to make it seem like a wide spread problem.  It has nothing to do with bad news on the stock price.  It would have been the stupidest and most non-effective way of keeping systemic bad news out of the markets view.

 

As it turns out one of Elon Musk’s companies was facing some very significant funding issues. The funding issues at SolarCity were so bad that the majority of a recent new bond issuance was placed with an affiliated entity – SpaceX.  $75mm of the previous $90mm issuance.  Pretty much the entire issue.

 

This is one year paper at 5-6%.  If you know any other one year paper at 5-6% (since SpaceX has the need for short-term investments) that is of better quality (Elon knows the lenders, he's always wanted to consolidate them into Tesla at some point anyway) then please give SpaceX a call.  In 2008, Elon was making large checks for payroll out of his own pocket without having any financing lined up.  Maybe Tesla bears should talk about that related party lending.  If he's lending to an affiliate of himself, he at least knows that he can do everything in his power to resolve potential default issues.

 

Using one investors money to pay off another – an Italian guy named Charles used to that.  But it was even even worse considering another crucial fact. SpaceX has collected some hefty advances on some NASA contracts.

 

Again, one year corporate bond paper at 5%.  Give me a freaking break.  You know, I heard Cisco (which sells some products to the government) takes some of their earnings and for corporate cash purposes invests it in short term bonds.  We should really look into that some more.  Guess who bears the consequence of not honoring contracts with NASA?  The owners of SpaceX.  They're allowed to take risks they deem appropriate to run their business.

 

Buying that entity with another entity he controlled. Which by the way had just raised $1.7 billion. Run out of money at one company, use the money from your other company, and then when that runs out, use the money from a third company.  Reality was they raised $1.7bn under the guise of building a new car and then proposed merging with a potentially insolvent affiliate.  Oh yeah, and Elon even proposed a bridge loan to said entity on the deal conference call (yes, SolarCity’s funding situation was that bad).

 

This was a stock deal, not cash.  Who the heck really believes they raised $1.7 billion under the guise of building a car?  He's taken down 400k deposits to start delivering the car next year or so!  There's no freaking way he thought "you know, let's use the $1.7B to buy SCTY and then start building out this Model 3 in 2020 after that decision causes our TSLA stock to be worth $10/share.  I really like these bears shorting my stock and want them to make money." 

 

And then another crazy piece of news was disclosed. Just prior to the equity raise, a Tesla owner had died in an autopilot crash. And even though Autopilot deaths were mentioned in the risk factors section of the 10q, Tesla didn’t tell the purchasers of the equity offering.

 

This is also ridiculous.  The risk that is mentioned is boilerplate language, wasn't included in the equity offering, and mentioned the tech as a risk if it did not work as expected.  Not to mention that the autopilot in that accident had sadly worked as expected.  There are certain objects it just can't see, and that truck was one of them (the way it was up a hill, making a left turn, big space under the vehicle).  Has that death resulted in customers no longer asking for autopilot as a feature?  No.  Has it hurt sales? No.  Has it resulted in a fleetwide shutdown of the feature? No.  It was one accident where a guy was watching Harry Potter (or fell asleep) and drove under a big rig making a left turn on a highway. 

 

The CEO released a Master Plan 2.0 just as an SEC investigation was disclosed. Quack.

 

The guy is getting crapped on by everyone, so he does a blog post to outline his vision.  Not because of the SEC, but because people are wondering why he's buying SCTY. It's not the first time he's outlined his vision.  And what better time than when everyone is twisting what he says and does?

 

The company missed Sales projections and released them on the Sunday of Fourth of July weekend. Oh, yeah, and they had used the projections just a few weeks earlier to sell the secondary. Quack.

 

This is just an accusation of fraud/misconduct without evidence.  Like when Morgan Stanley upgraded TSLA before the offering.  Everyone was saying how the analyst was in cahoots with Morgan Stanley to get the deal off easily.  I think Matt Levine had a great article on why this is a terrible argument.

 

Nine executives had departures since January 1st.  Quack.

 

Ever work with someone with Aspergers?  Don't expect to have a good time working with Elon.  I've met a few of these executives who left and they have all been extremely burned out.  He's on a mission to change the world, don't expect the environment of a Google campus.

 

The company refused to update Model 3 deposits on the earnings call AFTER updating them multiple times a day prior to the equity offering. Quack.

 

Elon was excited the first week.  He's spent the last ten years building up for this one moment.  Why wouldn't he talk about how successful the reservations went?  It's a validation of tremendous work the entire organization has accomplished.  I waited in line at the Century City location the first morning to reserve the Model 3.  He came by and was high fiving and thanking everyone.  This was a big deal to him.  Of course he's no longer going to be updating the reservation number all the time, you can track the rough number in the 10Q if you'd like.  But if it drops down to 50k, then yeah I'm sure they'll mention something because that's material.  The lack of exponential growth in deposits isn't a reason to start attacking him over full transparency.

 

Elon had appointed his divorce attorney as the General Counsel. Quack.

 

Okay?  Not even going to bother with this one.

 

Everything Elon is doing is extremely difficult.  SpaceX and Tesla are not the kind of companies that are easy to manage. But everyone expects him to behave like other public companies when that type of behavior would have likely killed off Tesla and SpaceX long ago.  Is there a big risk involved with Tesla and SpaceX?  Absolutely.  The probability of failure is still fairly high.  Could it end up being that Tesla is a crappy business and the move the EV/sustainable doesn't work?  Sure.  But all this arm chair quarter backing about what he should or should not be doing is coming from people who have had absolutely no experience running a rocket or car company.  Elon shouldn't get a pass on everything but he deserves some respect.

 

One of these Tesla bears that went on CNBC the other day was recently posting on twitter that Elon deserved to get bullied in grade school.  There's something mentally wrong with some of the most vocal short sellers.  They've been shorting it since the IPO but somehow all their cost basis is in the high $200's.  I'm sure if Tesla goes to $1000, they all covered in the $100's.

 

Which brings me to the latest argument.  "They aren't Amazon, Amazon didn't have to issue lots of stock to fund their growth."  I don't understand why that automatically disqualifies Tesla from being very similar to Amazon.  Tesla is running up against various time constraints (coming out with better EV's before others do) and this is the most capital intensive and difficult industry you can possibly imagine.  It doesn't mean that they will always be this capital intensive.  If Tesla is going to be more successful more quickly by raising capital then they should be tapping the capital markets.  That's what the capital markets are there for.  They are not just there for companies to constantly repurchase shares and lower investment in their own business. 

 

All that said, if Tesla ends up worthless I don't think it will be for the reasons all the bears state.  I think it will be that the Tesla mission was simply too difficult to accomplish and Elon bet the ranch on a hail mary that failed. 

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I think the more interesting (and maybe widely known) issue is that Tesla currently exists only because people are willing to ceaselessly provide it with capital. If and when that stops, it's bad news bears for Tesla -- which creates a certain "opportunity" for reflexivity.

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I don't completely buy the argument that Tesla only exists because investors are willing to ceaselessly provide it with capital.  It's certainly been a factor in accelerating the outcome, but they've been able to raise capital because they are showing tremendous results.  The bulk of the capital investment required to launch the Model 3 has already been raised.  If it turns out that only some early tech adopters want the cars and EV fizzles out, then it won't matter that capital was/is cheap, the company will fail.

 

In fact Elon has approached the capital raising of Tesla in this manner from the beginning.  He said we're going to make this roadster and if it's successful we can launch the luxury sedan.  When it worked, he was able to raise capital for the Sedan.  He didn't just raise capital for the Gigafactory at the start.  When the sedan sold like hot cakes, he had something to show for the mass market vehicle and can raise capital because the market can see the increased probability of success in the next phase.  When/if the mass market car does well, then he can raise capital for the next phase.  So I don't think it's a function of cheap money.  He's proving out the mission and earning the capital at each step of the way.

 

And keep in mind that it's not easy to get nearly half a million deposits on a product that is two years away and no one had seen in person.  If I could do something like that on a $40k item, I'd probably be able to raise a lot of capital too.

 

It reminds me when people said Amazon only exists because they could pay for employees with inflated stock.  The stock they issued to employees looked like a cheap source of capital at the time, but it was actually very expensive in hindsight.  The stock they issued is now 10x more valuable.  But that's only if you ignore the benefit of having the right talent to get Amazon to where it is today.  IMO the capital Tesla has raised will look very cheap if they fail, but expensive if they succeed.  And I think they've earned the ability to raise that capital so it's hard to know whether it's cheap or expensive financing until we see their results in the future. 

 

Which is why I think a lot of Tesla bears have started to shift their thesis to outright failure in the future.  Such as the deposits being fake, or competition stealing away EV share, etc.  Capital will remain available to Tesla as long as they show evidence of success.  It's too hard to get a flight of capital without people also running away from their cars.

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I'm not sure you and I are in disagreement, Picasso.

 

Let me rephrase my original statement a little, since I was probably not as clear as I should have been. Ceaseless was probably too strong a term.

 

Tesla's current (and future) valuation rest pretty heavily on their ability to raise capital (equity, debt, deposits) in order to fund their operational and technological advancements. (In engineering parlance, this would be the breakpoint for the system.) This is, of course, because they are unable to fund their plans via internally generated capital -- which is a very different situation than Amazon, which IIRC only raised equity once and (arguably) has lots of internally generated capital to plow back into their investments.

 

Without the ability to continually raise capital (up to some unknown point in the future when they can internally generate capital), they can't achieve their goals, and I'd say their current valuation is largely based on achieving some part of those future goals -- so their valuation would look inflated if this is as far as they get. That's what I mean when I say that this creates the potential for some reflexivity in their results. If and when they are unable to get access to that capital, Tesla fails, plain and simple. (Not necessarily a zero, but maybe -- depending on the capital structure, etc.)

 

For instance, I think there's a decent likelihood that they will need more capital before they're able to launch the Model 3 (and I suspect they'll need some capital going forward for Solar City) and, if for some reason or another, they are unable to raise that capital, that's bad news bears for the company.

 

Moreover, if you were a particularly adamant bear with some, let's say, "market heft" behind you, you might be able to push on the system hard enough that you can take advantage of the reflexivity. That's a real risk because the market price in this instance does have some feedback into the fundamentals.

 

Tesla has done amazing things, no doubt. (I've test driven the Model X and found it to be fantastic.) But that doesn't mean that the dependence on capital markets isn't their weak link.

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I'm not sure you and I are in disagreement, Picasso.

 

Let me rephrase my original statement a little, since I was probably not as clear as I should have been. Ceaseless was probably too strong a term.

 

Tesla's current (and future) valuation rest pretty heavily on their ability to raise capital (equity, debt, deposits) in order to fund their operational and technological advancements. (In engineering parlance, this would be the breakpoint for the system.) This is, of course, because they are unable to fund their plans via internally generated capital -- which is a very different situation than Amazon, which IIRC only raised equity once and (arguably) has lots of internally generated capital to plow back into their investments.

 

Without the ability to continually raise capital (up to some unknown point in the future when they can internally generate capital), they can't achieve their goals, and I'd say their current valuation is largely based on achieving some part of those future goals -- so their valuation would look inflated if this is as far as they get. That's what I mean when I say that this creates the potential for some reflexivity in their results. If and when they are unable to get access to that capital, Tesla fails, plain and simple. (Not necessarily a zero, but maybe -- depending on the capital structure, etc.)

 

For instance, I think there's a decent likelihood that they will need more capital before they're able to launch the Model 3 (and I suspect they'll need some capital going forward for Solar City) and, if for some reason or another, they are unable to raise that capital, that's bad news bears for the company.

 

Moreover, if you were a particularly adamant bear with some, let's say, "market heft" behind you, you might be able to push on the system hard enough that you can take advantage of the reflexivity. That's a real risk because the market price in this instance does have some feedback into the fundamentals.

 

Tesla has done amazing things, no doubt. (I've test driven the Model X and found it to be fantastic.) But that doesn't mean that the dependence on capital markets isn't their weak link.

 

This is how I felt in regards to both TSLA and NFLX. Both companies are entirely dependent on capital market access to survive in their current condition. They're burning through hundreds of millions each year (and more if TSLA acquires Solar City). Some of that is funded internally through car sales, pre-sales, etc., but not enough of it. That' doesn't mean they're not good companies - they're companies that desired to do A LOT very quickly and the only way to fund that was through becoming completely dependent on capital markets instead of internally generated cash flows.

 

If not for stock sales, TSLA would have to lean out and greatly diminish R&D and CapEx which would prolong the timeline for them to develop new products/models, limit production amounts, and increase the period for investors to get paid back which would likely drop the multiple they are willing to pay on the stock...which would further exacerbate the problem.

 

This is all Merkhet is saying by reflexivity. Both companies benefit from having a high stock price and access to capital markets because they issue a little stock at a massive premium and fund their expansion efforts. It's a virtuous cycle upwards (positive reflexivity). In the event of a recession, capital markets may become more closed limiting their ability to fund with stock sales at premiums meaning:

 

1) They fund it with stock sales at a discount and incur major dilution OR

2) They greatly diminish cash outlays and extend production goals further into the future

 

Or...a vicious cycle downwards.

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There's also a major arms race to be the first auto company that turns a previously highly depreciating, nonproductive asset into a productive one.  Where your car produces a cash flow stream by transporting people around, etc.  When that happens any auto company that doesn't have that product will effectively be worth zero.  So part of the valuation on Tesla ($33B or maybe more if the convertibles get exchanged for stock) includes some probability that Tesla will be that company.  Which is why I think a lot of the bears have attacked their technology to say there is nothing special about what they have done.

 

My view on the matter is that their source of capital is "cheap" if you think the product is doomed to failure.  It's not cheap if they are successful.  I don't think the company considered their IPO @ $17 for 15 million shares, or the follow on's at $28 for another 14 million shares as an inexpensive source of capital.  That was $6 billion of value they gave out to investors based on the current share price. 

 

Also, let's just say Tesla needs another $3B to close the gap to mass market.  At current prices it's less than 10% of the market cap.  If it drops in half maybe it goes up to 20%.  But if the source of capital takes them to the next phase, it doesn't seem like they are nearly as dependent on capital as they were in the past.  As a percentage of the market cap, new issuance is getting smaller and smaller.  Not to mention Elon has participated in buying additional stock in most of those offerings.

 

And again these capital raises aren't done in a vacuum.  They have created the best autopilot package of any car company, the safest sedan, nationwide charging infrastructure, and so on.  It takes a lot for someone to pay $100k for a car.  People aren't buying because they're electric, but because they are simply better cars.  It makes me wonder what valuation we'd see on this company if it were instead private.  I get the sense it would be raising capital at even higher levels than the public markets. 

 

I didn't think we were disagreeing on the reflexive nature of share issuance at Tesla, but I think it's substantially less of an issue today than it was several years ago.  The numbers are big but nowhere near as bad as 2009/2010 etc.  And if they could survive that it makes me wonder what will kill them now.  The model 3 would really have to flop and/or they couldn't get this autonomous thing to work out.

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And again these capital raises aren't done in a vacuum.  They have created the best autopilot package of any car company, the safest sedan, nationwide charging infrastructure, and so on.  It takes a lot for someone to pay $100k for a car.  People aren't buying because they're electric, but because they are simply better cars.  It makes me wonder what valuation we'd see on this company if it were instead private.  I get the sense it would be raising capital at even higher levels than the public markets. 

 

Well said. He is building an entire new standard and ecosystem but lot of people want to see him through the Detroit prism which he pretty much shattered.

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Nine executives had departures since January 1st.  Quack.

 

Ever work with someone with Aspergers?  Don't expect to have a good time working with Elon.  I've met a few of these executives who left and they have all been extremely burned out.  He's on a mission to change the world, don't expect the environment of a Google campus.

 

The company refused to update Model 3 deposits on the earnings call AFTER updating them multiple times a day prior to the equity offering. Quack.

 

Elon was excited the first week.  He's spent the last ten years building up for this one moment.  Why wouldn't he talk about how successful the reservations went?  It's a validation of tremendous work the entire organization has accomplished.  I waited in line at the Century City location the first morning to reserve the Model 3.  He came by and was high fiving and thanking everyone.  This was a big deal to him.  Of course he's no longer going to be updating the reservation number all the time, you can track the rough number in the 10Q if you'd like.  But if it drops down to 50k, then yeah I'm sure they'll mention something because that's material.  The lack of exponential growth in deposits isn't a reason to start attacking him over full transparency.

 

Elon had appointed his divorce attorney as the General Counsel. Quack.

 

Okay?  Not even going to bother with this one.

 

 

 

Reasonable responses to the other points, but I think you're overlooking significant issues on all three of these points.

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Jay, I don't know how one can draw too many conclusions from the executive departures or general counsel issue.  My understanding of the previous general counsel (never met him but have seen him do a couple presentations) was that his previous life involved working in DC at firms like Hogan & Hartson.  I remember him saying that the move to Tesla was something he had to really talk over with his wife because it was the polar opposite of what he was used to.  Now given that he went to Faraday which is the China backed competitor to Tesla, I have a hard time drawing conclusions since he's also (probably) of Chinese descent?  I really have no idea, but it seems like a weird rabbit hole to go down to point out red flags.

 

As far as the deposits, I believe Elon sent a tweet saying he would update on the reservation/deposit tally for one week.  Which he did.  I don't think anyone expected him to constantly provide investors with an on demand tally of reservations?  I have heard some people ask for an audit of the deposits.  Why is Tesla held to such a higher standard than other companies?  I have not seen any evidence of consumers saying they're pulling deposits.  You can go through the 10-Q and work out the rough number of deposits.  I think someone tried reserving 20, called out Tesla on it, Tesla purged any orders greater than two, and it was a non-event. 

 

I don't see investors looking at GM factories, trying to nit pick how many Bolts they have in production, troll the GM boards for problems with the Volt, and go to the extreme of calling out nuances of the CEO's private life.  It's just sort of implied or assumed that GM is on the up and up and they'll sell enough Bolts to hurt Tesla. 

 

Now, Elon has his quirks.  I heard him say in an interview that the only maintenance on a Tesla is to replace the tires.  That's clearly not true.  He's been known to embellish things.  But the vast majority of tasks he's set for himself have been accomplished.  Focusing on the few things (relative to the entire story) is going to give off a lot of warning signals.  It's like having a cop follow you around everywhere.  You're bound to get tickets all day long.

 

All that said, I think the higher standard that everyone puts Tesla/Elon to is probably going to make Tesla a better company.  Elon is probably the type of guy that would do some crazy things if there were no checks in place.  And I think he gets better at what he does the harder things get.  But at a certain point there should be a limitation to the kinds of criticism that one can put on a company.  (Theranos or Valeant being the exceptions :)) This blog post on Tumblr is the equivalent of saying "Listen, I'm not saying your spouse is cheating on you but he/she works really late, is too tired to hang out, and is constantly texting on the phone.  But again maybe it's just a coincidence, but maybe not.  Just saying."

 

I thought Jay Leno made a great comment in this regard on CNBC.  “I don’t understand why people attack this car. It is made in America, by Americans. It is built local. You know we are becoming like the British — we like noble failures more than we reward success.”

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Ever work with someone with Aspergers?  Don't expect to have a good time working with Elon.  I've met a few of these executives who left and they have all been extremely burned out.  He's on a mission to change the world, don't expect the environment of a Google campus.

 

Sure he is trying to change the world and is super driven. But at some point people overworking and burning out becomes an issue. Especially in situations where quality/reliability has to be nine nines or something. And if people burn out and leave, you have to train new ones and stop them from making errors previous ones already knew to avoid.

 

Anyway, this is not an argument to short Tesla or that Tesla will fail. It's just an argument that it's not healthy to maintain the startup mentality and non-stop-sprint for years. And BTW most startups that do the all nighters are not building things where a crash costs lives. Honestly, I am surprised that Tesla/SpaceX don't have more failures. It's either quality of people or good controls or both.

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Just out of curiosity, who is long Tesla (other than owning the car)?

 

I bought 100 shares a while back, for similar reasons as the person who posted that it is just to support what Musk is doing and to force me to follow the stock more closely.  I have no plans to ever buy more, nor to ever sell.

 

I thought about doing something similar with Amazon about 15 years ago, but I never did

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Jay, I don't know how one can draw too many conclusions from the executive departures or general counsel issue.  My understanding of the previous general counsel (never met him but have seen him do a couple presentations) was that his previous life involved working in DC at firms like Hogan & Hartson.  I remember him saying that the move to Tesla was something he had to really talk over with his wife because it was the polar opposite of what he was used to.  Now given that he went to Faraday which is the China backed competitor to Tesla, I have a hard time drawing conclusions since he's also (probably) of Chinese descent?  I really have no idea, but it seems like a weird rabbit hole to go down to point out red flags.

 

As far as the deposits, I believe Elon sent a tweet saying he would update on the reservation/deposit tally for one week.  Which he did.  I don't think anyone expected him to constantly provide investors with an on demand tally of reservations?  I have heard some people ask for an audit of the deposits.  Why is Tesla held to such a higher standard than other companies?  I have not seen any evidence of consumers saying they're pulling deposits.  You can go through the 10-Q and work out the rough number of deposits.  I think someone tried reserving 20, called out Tesla on it, Tesla purged any orders greater than two, and it was a non-event. 

 

I don't see investors looking at GM factories, trying to nit pick how many Bolts they have in production, troll the GM boards for problems with the Volt, and go to the extreme of calling out nuances of the CEO's private life.  It's just sort of implied or assumed that GM is on the up and up and they'll sell enough Bolts to hurt Tesla. 

 

Now, Elon has his quirks.  I heard him say in an interview that the only maintenance on a Tesla is to replace the tires.  That's clearly not true.  He's been known to embellish things.  But the vast majority of tasks he's set for himself have been accomplished.  Focusing on the few things (relative to the entire story) is going to give off a lot of warning signals.  It's like having a cop follow you around everywhere.  You're bound to get tickets all day long.

 

All that said, I think the higher standard that everyone puts Tesla/Elon to is probably going to make Tesla a better company.  Elon is probably the type of guy that would do some crazy things if there were no checks in place.  And I think he gets better at what he does the harder things get.  But at a certain point there should be a limitation to the kinds of criticism that one can put on a company.  (Theranos or Valeant being the exceptions :)) This blog post on Tumblr is the equivalent of saying "Listen, I'm not saying your spouse is cheating on you but he/she works really late, is too tired to hang out, and is constantly texting on the phone.  But again maybe it's just a coincidence, but maybe not.  Just saying."

 

I thought Jay Leno made a great comment in this regard on CNBC.  “I don’t understand why people attack this car. It is made in America, by Americans. It is built local. You know we are becoming like the British — we like noble failures more than we reward success.”

 

Thanks for the thoughts. I'm short Tesla because I don't believe his business model will create value for shareholders, and certainly will not generate reasonable returns at this price. However, I greatly appreciate what Elon has helped to achieve. I think we'll look back in a decade and say that while his efforts did not pan out for shareholders, they provided wonderful returns for society at large.

 

To your points.

 

Executive Departures

While you should not read too much into any one given departure, the pattern and sheer volume of high-level departures at Tesla is astounding. Elon I'm sure is a very demanding person to work for/with, but to the extent that personality creates (a) subservience and an unwillingness to challenge and (b) substantial turnover, those are both very damaging to any culture, particularly a start-up manufacturer trying to design and build cutting-edge cars. You cannot honestly believe losing this number of people in nearly all functions of the enterprise is not harmful in some capacity.

 

General Counsel

This to me is a huge red flag. To start, the GC position has seen substantial turnover (to the earlier point), but Elon literally hired and ultimately promoted his divorce attorney, who has zero experience in securities law, as the new GC. To the earlier point regarding unwillingness to question Elon's authority, CFO and GC (both positions with turnover in the last year) I believe are two of the most important positions to have strong-willed, seasoned people.

 

Deposit Updates

In my opinion, Tesla's stock price right now ultimately hinges on the Model 3. Model S sales are slowing, the Model X demand has been underwhelming, and the company thus far has not been able to produce either at a profit. Model 3 deposits are the most critical metric for capital providers. Elon provided daily (at times hourly) updates upon the original launch, and used that fanfare to help sell his follow-on equity offering. The fact that they omit this number from the 10-Q, and refuse to provide an update on the conference call, are also huge red flags in my opinion.

 

We can agree they've greatly altered the landscape for EVs. But as a shareholder I think you need to carefully consider the above points. Yes, Elon is a 20% shareholder, and therefore incentives are aligned to an extent, but he has also sold quite a bit of stock over time, and he has certainly leveraged his holders to finance his lifestyle, so those aren't free and clear holdings.

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Executive Departures

While you should not read too much into any one given departure, the pattern and sheer volume of high-level departures at Tesla is astounding. Elon I'm sure is a very demanding person to work for/with, but to the extent that personality creates (a) subservience and an unwillingness to challenge and (b) substantial turnover, those are both very damaging to any culture, particularly a start-up manufacturer trying to design and build cutting-edge cars. You cannot honestly believe losing this number of people in nearly all functions of the enterprise is not harmful in some capacity.

 

I've had a similar discussion with others because it's something I've always worried about with Tesla.  However this is the same culture that exists at SpaceX and it hasn't prevented them from creating tremendous value, not just for society, for the owners.  Part of this lies in the fact that the key players share a similar mission to Elon and know that he's their best chance of accomplishing that mission.    So the bulk of the best talent stays with him (like Straubel) but some of the others leave.  I've met some of those that have left.  They weren't that impressive.  The head of PR left once before (was exhausted), then ended up leaving again when he had issues keeping a cohesive message across the company.  The heads of the assembly lines created massive issues with the Model X and Model S.  I would see many new production vehicles on the road with trim that was badly misaligned.  Service center costs and wait times went up a lot.  It was a disaster so he fired them.

 

As far as the other talent.  If they go to Apple, Apple might scrap the project.  You don't go to GM, you sell your startup to GM.  Maybe they can go to Uber, but that's for those that are focused on the autonomy.  That said, the culture is definitely something to keep an eye on.  But this isn't an easy business to replicate.  Regulatory hurdles, technology hurdles, battery hurdles, servicing hurdles, charging hurdles, you name it.  The business hasn't matured enough yet to really expect this to be a normal Fortune 500 business.  For all intents and purposes this is still a start up.

 

General Counsel

This to me is a huge red flag. To start, the GC position has seen substantial turnover (to the earlier point), but Elon literally hired and ultimately promoted his divorce attorney, who has zero experience in securities law, as the new GC. To the earlier point regarding unwillingness to question Elon's authority, CFO and GC (both positions with turnover in the last year) I believe are two of the most important positions to have strong-willed, seasoned people.

 

This is definitely questionable but according to his profile, he did have experience in securities law before he was a divorce lawyer at Jaffe (granted as an associate)?  Irell & Manella is a great law firm that does a lot of securities work.  Maybe they could be picking better counsels and CFO's but I don't really know the guy.  I'll concede this point to you.

 

Deposit Updates

In my opinion, Tesla's stock price right now ultimately hinges on the Model 3. Model S sales are slowing, the Model X demand has been underwhelming, and the company thus far has not been able to produce either at a profit. Model 3 deposits are the most critical metric for capital providers. Elon provided daily (at times hourly) updates upon the original launch, and used that fanfare to help sell his follow-on equity offering. The fact that they omit this number from the 10-Q, and refuse to provide an update on the conference call, are also huge red flags in my opinion.

 

Keep in mind that Model S sales are slowing because we're about to get the refresh of Autopilot 2.0 (https://electrek.co/2016/08/11/tesla-autopilot-2-0-next-gen-radar-triple-camera-production/), an upgrade to the 100 kWh battery packs, and people are waiting to see what features are included in the Model 3 that will make their way into the Model S.  Or they're just waiting for the Model 3.  If you buy a Model S now you may end up facing larger depreciation.  So the sales you see now might not be representative of something you'll see after the Model 3 launch.

 

A few things about the deposits.  There's a certain limit to how high they would go because of the tax credits that expire in 2017.  So anyone that puts a deposit now isn't likely to get the tax credit and they're just better off waiting for 2017/2018.  Despite that, the number of deposits are staggering.  It would make sense to use that number (it is real demand after all) to raise the next round of capital because the market needs to know there are buyers for something you're going to spend several billion dollars to manufacture.  There has to be a return for that investment of capital coming from the public markets.  So it's not just faith on hype, there's a 1-2 year backlog.  It's just enough to prove out the next phase of their business plan.  If it works, then Tesla will likely be worth a lot more than it is today and those capital providers will get some return on their investment.  And Elon will start working on the next phase.

 

If the deposits have been pulled in mass and it's dropped to 50k, then I would agree that he needs to disclose that.  But if he's seeing a normal amount of churn around the previous disclosures I don't see the problem.  I totally agree that success hinges on the Model 3 (just the sheer scale of it could be costly if done poorly), but it ignores that the car will likely sell perfectly fine and will be one of the best cars for that price bracket we've ever seen.

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^^ I agree with above assessment. Tesla brought the electric car further than anybody else, but I think it won't work out for shareholders either.

 

it is clear to me that Elon likes to live close to the edge and for the better or worse, seems to be completely ignorant of other people's opinion (which is why he churns so many in his business but also in his private life). Tesla has gotten all the access to funding they needed so far, partly due to very accomodating debt and equity markets. However, they are hemorrhaging money at higher rates going forward and if they have to raise money during a downturn, the dilution will be ugly, if they even survive.

 

Of course everything could be peachy forever as well. Either way, I am watching from the cheap seats in the sidelines.

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For what it's worth, I don't own shares of Tesla.  I think it's a tremendous amount of brain damage for a very uncertain return.  I'd rather know that I can compound 25% in various investments than tie up capital in something where I can't reasonably predict the outcome.  Same can be said of shorting the stock.  But I'm not opposed to the idea of buying the stock if the right opportunity presented itself.  I've owned it in the past when they solved the 2013 funding issues.

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Probably phrased that wrong.  If Tesla executes on their vision then the stock could be worth 10x in 10 years.  But there are a lot of "ifs" there and if I wanted to make 25% for the next ten years, it's not like I could just put all my capital in Tesla and roll the dice on those risks.  I don't even know if I could add to the position because risks could show up later and it would be like throwing more money into a fire pit.  So even though I think there is some reasonable chance they get there (maybe 50%, 30%?) it's not an investment for me. 

 

I did post some other ideas that will probably do a lot better than 25% CAGR over similar time frames.  But we'll see.  I don't know what my investments will earn, but I think I'd have an easier time getting a similar return to the Tesla bull case without plowing it all into a stock that will show a very wide range of various outcomes.

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