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Another day, another handful of Tesla (NASDAQ:TSLA) stories. Up for discussion today are a few topics surrounding the company and the man behind it.
- Tesla increases the price of full self-driving.
- The capital raise which was laughed off last year and announced this week ramps up how much cash it’s going for.
- Cap raise filing shows that Elon is personally in debt over half a billion dollars to Tesla’s bankers.
Tesla Car Pricing Structure
Tesla is a complete oddity. Cars are long term purchases which owners typically keep for years and which are often purchased on finance. Today however marks yet another price policy change for Tesla as it begins the process of increasing the price of its full self-driving technology, part of how it claims that its cars will be “appreciating assets”. The trouble is, things don’t really work like that. There are a lot of appreciating assets in the world and they usually have something in common, namely that they are somewhat supply constrained and with demand that exceeds supply. Rolex Daytona watches and other fanciful products spring to mind when thinking of this kind of scenario.
The difficulty with Tesla is that it’s in the business of making cars and unless Elon is going to start pursuing a drastically different business model, the chances of someone being willing to pay more for a Model 3 used than they are willing to pay for a Model 3 new from Tesla are pretty low.
Elon confirmed as much in a tweet when he stated that the price of Tesla’s full self-driving option will increase substantially over time and when asked explicitly whether that was what he meant when he referred to Tesla cars being appreciating assets, said yes.
Please note that the price of the Tesla Full Self-Driving option will increase substantially over time
— Elon Musk (@elonmusk) April 13, 2019
Another problem here of course is that the world of full self-driving is now no longer the province of Tesla alone. Audi in fact had the world’s first Level 3 autonomous vehicle in the form of the new A8 and of course other manufacturers are also working on their own iterations. This coupled with the fact that most jurisdictions regulators don’t yet allow for full self-driving mean that Tesla’s in house chip can’t be put to full use yet.
Additionally, NVIDIA (NASDAQ:NVDA) also recently confirmed that Tesla’s statement about having the most advanced chip for self-driving was incorrect and NVIDIA has the most powerful self-driving chip. It’s hard to see how Tesla will be able to charge a fortune for self-driving when every other manufacturer can just go to NVIDIA and get one of their standard priced chips to enable self-driving in their cars.
Tesla Cap Raise
The Tesla capital raise which we covered this week (here) also took on new momentum today as it was announced that the raise is increasing from the initial $2 billion to $2.7 billion as investor appetite seems strong. The mix of new stock and convertible debt offering seems to have been well received by the market, hence the increase. Musk seems to think he may as well get as much money as possible while the getting is good. A bigger buffer doesn’t hurt and since Tesla has a habit of not meeting its own milestones and targets (whether production numbers of revenues), better to take the money now and give it some more time to hit break even.
The market seemed to like the news with the stock jumping almost 4.5% today so lead underwriters Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C) must be doing a reasonable job of drumming up interest. That’s despite their analysts currently both rating Tesla a Sell. This is unconventional to some degree but given the Chinese wall’s that exist in these areas to prevent conflicts of interest not entirely surprising.
The concern however is that Elon himself is personally in debt to the banks (Morgan Stanley NYSE:MS takes up the rear on the book run behind the other two) to the tune of over half a billion dollars. These loans are all backed by Tesla stock of course and Elon’s personal stake is worth about $8 billion, while he’s piling into the capital raise for an extra $25 million in equity. However the terms of his loans state that if the value falls, Elon will effectively be on margin call and may need to sell some of his stock. Given that he owns 20% of the company, this could obviously lead to downwards pressure on the overall value of Tesla.
Some could argue that this represents a conflict of interest given that the banks lending Elon the money are effectively hyping the deal to investors as they have so much at stake if the firm falls flat now. This isn’t necessarily a bad thing as it means they have skin in the game so to speak and Elon has effectively made them party to Tesla’s success or failure (along with his personal success or failure), however given the highly litigious state of investing these days, it may be that the risk becomes too much to bear at some point.
For now, Elon seems to have the faith of the market, his investors and bankers and that is probably all that’s needed to keep the show on the road for at least a while longer. If the company keeps burning through cash at its current rate however, even with its new cash reserves, it’ll struggle to hang around for more than a couple of years. Better hope that sustainable demand and profitability come along for real this time…