Elazar Advisors, LLC

Friday, August 10, 2018

Tesla: Musk's Ability To Raise Funds Is Suddenly In Question?

Elon Musk had among his most famous tweets on August 7th saying, "Am considering taking Tesla private at $420. Funding secured."

Now the media, bears, shorts and even some bullish investors, and even the SEC are questioning whether that last statement, "Funding secured" was true.

Wait a minute, wait a minute. Before this going-private chatter was ever on the table was there ever a question that one of Musk's unique traits was to snap a finger and raise capital? Hasn't that been at the center of getting this loss making, cash burning business to where it is today?

Musk knows how to raise funds, right? That's one of the perks in investing alongside Musk.

So suddenly everybody questions Musk if he says "Funding secured"? Suddenly he lost that special knack to raise tons of capital? Does that make any sense?

And Now With Profits, "Funding secured" Is In Question?

Even worse to that thought process, Musk had no problem raising oodles of cash while burning tons of it, just on his vision and progress.

But now, oh so sweet earnings and cash flow are a quarter away based on the company's guide.

Model S&X may have had gross margins jump from Q1 to Q2 1100 basis points. Did anybody notice? You can back into the math based on the data they gave in the earnings reports.

And Model 3 gross margins are expected to jump from +1%-or-so to 15%-25% over the next two quarters. Tesla said operating expenses don't build that much.

If you do the math you have the company swinging to profit and cash flow in Q3. (Model available for subscribers)

Let's Think Logically

Before I ask you, put aside all the loud media stories and the volatile stock, watching the tick-by-tick on a fancy CNBC chart to get your heart beating.

Let's think logically.

Go with me here and answer honestly.

If Musk could raise oodles of cash while burning money, do you think he has the ability to raise cash when they are about to swing to one of the biggest earnings inflections ever in history in Q3? Answer honestly (We saved you room in comments to answer.)

Risk Arbs' Dream

This should be a risk-arb's dream putting it together.

The CEO who's known to raise cash like water said "Funding secured."

As a risk-arb you also know that this is as heavily shorted and doubted a company that exists. So you know you have a huge spread of disbelief to a CEO who's proven time and time again the ability to raise cash.

This should be a risk-arb's dream come true.

You're A PE Firm, What Valuation Do You Pay?

And you're a big fund or even a PE firm, what do you want to pay? Would you want to help Musk take Tesla private?

Let's ponder, what goes through your mind.

We have Tesla, based on the gross margins jumping in Q2 and Q3 going to $18-20.00 per share for 2019. The Street's at $3.30 up from $2.20. The Street does not believe in the company's guidance. Or they did not do the trajectory of what that Q3 and Q4 guide means for next year. They should cut and paste some formulas in their spreadsheets to see what 2019 should be. Street's way too low.

If 2019 jumps that means 2020 should jump as well. If you have that type of cash to help take Tesla private you probably walked the floor with Musk to see it happening, to beleive.

Let's say that $18-20 for 2019 goes to $25-30 in 2020. Can you envision $35 in earnings at some point.

Really really, our 2019 of $18 GAAP assumes a $24/share swing in earnings from 2018. Can it swing again another $24 in 2020? It could. That's what earnings inflections do.

So would you be willing to pay, as a PE firm, $420 for +$19+$24 = $45/share in 2020? Would you be willing to pay under 10X earnings two-three-years out before the Street jams the valuation higher?

Under 10X?

You don't need to sharpen your pencil to do this math. I think the answer is yes.

I Like Listening To What People Say

There was a small hint on the Q2 earnings call that Musk may have been toying with this private idea in his head. First he apologized to a couple of analysts to get back in their good graces. Now that they are all friends, he can raise capital all over again. "Bonehead, brainless" analyst comments were quickly forgotten.

So when asked, "How do you plan to fund all of this growth without going back to the capital markets to raise funds?"

Musk's answer, "we will not be raising any equity at any point."

Sorry but was he asked about equity or raising funds? Funds include debt and equity. His answer? He will not be raising any equity.

He's done with equity.

Who wants to give away equity when Musk's brain is pondering a 10X PE on earnings two years out.

Equity, he will "not be raising," but debt, he may.

That was hinted by his response to the question.

"Funding Secured"

Investors doubt funding is secured as he said on Twitter? How's Musk's track record with raising funds? Pretty strong, right?

If you thought that "funding secured" tweet was an attempt at market manipulation, we'd disagree. That tweet had far from the same vigor of his many short teases excited to squeeze the shorts.

That was a tired tweet that we're looking to get out of media's bearish spotlight and run a business. That was a tweet I'm tired and I want to just run this company now that it's about to throw off oodles of cash. That was a tweet saying, why do I need to expose myself to all this beating when I have something so special that's about to take over autos and throw off a high return. I don't have to deal with this anymore now that I don't need the funds.

And so those sleepless tired fingers eked out that tweet so he could get the ball rolling and put an end to the media grilling and start raking in the cash.

Conclusion

I believe "Funding" has been "secured" because I believe what Musk said and I believe he has the track record to back it up. I believe he has the desire to take this company back after bulging-eyes are staring down one of the biggest earnings inflection stories in history.

Blame it on the shorts, but I think he's thinking with his wallet.

Risk-arbs, I think you have an amazing opportunity.

Good luck Musk and everybody.

You can vote if funding's secured here.

Looking For Earnings Home Runs

We spoke to the top tech companies over the last few months to identify what tech stocks have home run earnings potential. Earnings are what drives stocks, especially tech stocks. Finding those few tech stocks that have realistic earnings trajectories way above the Street can give you conviction to see a stock through to big upside. Dip your toe in the water with a free trial.

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We're long Tesla.

Updated Aug 10, 2018 4:13 am

Wednesday, August 8, 2018

Tesla: Should Have Been Private, Now Should Be Public

When doing the work on Tesla (NASDAQ:TSLA) we always thought the company should be private. Burning through all that cash and constantly needing new funding rounds sounds awfully like a private company, not a public one.

Shouldn't Have Been Public

The loss making, fund raising model is normal for private companies. Private equity and venture funds that are used to it are of course searching for it.

But public shareholders are used to stead-eddy. Public shareholders are typically served earnings progressions and quarterly metrics that don't question a company's sustainability.

So when public shareholders were forced to acclimate to Tesla hands needed wringing. The sustainability before Q2 had been based on the hope that CEO Elon Musk could muster up some fresh capital. The sustainability of the business model was not based on straight-lining trends or having a few years of cash burn before you run out.

Many of those public-type shareholders then turned bearish and even shorted because this Tesla model was more like an Uber model that burned a ton of cash, but Uber wasn't public. Nobody needed to care about Uber's cash burn except its private investors.

But Tesla's cash burn model on any other company that couldn't snap their fingers for new capital was of course quickly going to zero. Musk was of course a different story and could raise capital until he didn't need to.

Should Be Public, Now

But behind the curtains Musk started seeing the gross margin ramp from S&X and Model 3. He realized he didn't need to conjure up more investors to stay afloat. He could do it from his own cash flow.

From there he quickly calculated, our guess, is "if I don't need them now, then why do I need them."

Simultaneously the story quickly turned to a potential earnings inflection story, the types most investors only dream of.

The funny thing is so many good analysts used to normal public companies dug themselves into being bearish on the cash burn, raise money model that when the company said we're going profitable in Q3 and Q4, they couldn't swivel their heads to appreciate.

The story flipped and quick.

But now with flipping fast to profits on booming S&X margins (we think 37% in Q2) and jumping Model 3 margins, growing deliveries and relatively flattish operating expenses, this company's story just flipped.

It went from a cash burn to cash flow story.

This is the type of story that would be a great public company. If it stays public it probably won't be until about a $500-600 share price before the bears on the sell-side will finally come around and say this thing could be worth $1,500 in 5 years.

No more bull case-bear case from the same analyst who couldn't see the ramp. They all will be piling in bullish, "must own."

But before they turn bullish they have to wipe out all those 40-page cash burn reports from their memory that dug themselves bearish.

Keep It Simple Earnings, KISS

Well maybe KISS stands for something else but we use any excuse to promote an earnings focus.

We don't hate companies, we don't love companies. We love earnings stories. That's the bottom line.

The market's a market to decide where you're going to get your returns. I don't need to hate one vendor that I don't think I'll get the right return and I don't need to love another.

When I go into a Wal-Mart or shop on Amazon I don't need to love 'em or hate 'em. Either they have what I need or they don't.

So in this market, the Stock Market, I also don't need to love or hate the companies that are offering me a return to invest with them. I just need to figure out what that return is and next.

So all this bearish, negative, short reports that turns into a battleground, love 'em or hate 'em, clouds objectivity to see that this earnings progression was about to be huge.

After a loss of $4+ in Q2 we have Tesla going to a gain in the following quarters. Our quarterly EPS model ramps like this from Q3 onward (Full model for subscribers):

0.37

1.64

4.14

4.59

4.62

4.64

But if some bear hated the cash burn, raise money business model that public companies are not typically known for, while it's understandable, they could never objectively switch gears to catch this incredible earnings ramp.

Love 'em, hate 'em works for sports teams unless you're a sports better.

But love 'em and hate 'em for companies tarnishes objectivity.

We offer a fix. Love or hate the earnings progression, not the company. Then you can be objective when things change up or down.

We're 60's-style, peace and love all the companies, but the earnings are what are in question.

Conclusion

Personally, I hope this company stays public. Ok, if that gets announced maybe the stock takes a hit but the upside is much higher than $420.

The hate, I guess was built because public investors and the media weren't used to such a business model. I remember that business model in the 90s. Not many of those companies lasted. But Musk and Tesla survived.

It's funny too. Usually sell-side analysts' and all analysts' favorite word is "inflection." You listen on conference calls and they all salivate to hear a company say "inflection."

Inflection.... AAAH.

With Tesla, they have earnings inflection right before their eyes but because of the hate of the business model as a public company they missed it.

And now this turns into one of the greatest earnings inflection stories in history.

We're ok either way. Staying public or going private we wish Tesla and Musk much continued success, profits, and love.

Looking For Earnings Home Runs

We spoke to the top tech companies over the last few months to identify what tech stocks have home run earnings potential. Earnings are what drives stocks, especially tech stocks. Finding those few tech stocks that have realistic earnings trajectories way above the Street can give you conviction to see a stock through to big upside. Dip your toe in the water with a free trial.

Tuesday, August 7, 2018

Tesla: $420's Way Too Cheap

If you read our Tesla (NASDAQ:TSLA) report on Thursday you'd agree that Elon Musk's $420 bid is way too low.

He knows it's way too low that's why he blames the short sellers to take his business private so suddenly. It's really that the business is way too cheap.

If you back into the S&X gross margins you get 37% for Q2. When you start to do the math for 2019 EPS you can see the Street's too low by maybe $16/share. The secret sauce to the earnings model is the gross margins. They are ramping too fast. They are blowing other auto companies away.

No wonder he suddenly wants to take this private. We have a $900-1000 target on it based on what the company said about gross margin targets for Q3, Q4 and 2019.

Bears Way Too Bearish

Too bad there were so so many bears and shorts. All that crazy negative media. First the CEO buys stock himself, now he says nope I'll take the whole thing private.

How wrong were all those negative reports? It's nuts.

As soon as they said they were targeting a profit in Q3 we said, "No idea how the shorts stay short." That was in early June. We took heat for that comment.

If you want to see the model feel free to subscribe and you'll see you don't have much problem getting to $18-20 for 2019 based on everything they said over the last two quarters. The Street's at about $3.00.

Proof is in the pudding. That's why he's trying to take this thing suddenly on the cheap.

But what about the shorts?

The shorts may not let this stock stay below $420 and may not let it stay down to $420. How do they get out? This could be a wreck higher.

Conclusion

$420's way too low.

Looking For Earnings Home Runs

We spoke to the top tech companies over the last few months to identify what tech stocks have home run earnings potential. Earnings are what drives stocks, especially tech stocks. Finding those few tech stocks that have realistic earnings trajectories way above the Street can give you conviction to see a stock through to big upside. Dip your toe in the water with a free trial.

Monday, August 6, 2018

S&P 500 All Time Highs?

Link

The S&P 500 ETF (NYSEARCA:SPY) matched the second highest close in its history. The "SPY" is less a percent away from it's highest close. That next highest close looks like the next stop.

After the market passes its all-time high it probably has running room for a while.

The market has eaten up trade war news. According to some reports the next package of harsh trade news may not come until late Fall. That's when the current set of $200B in tariffs may not be able to take effect until.

So we have high growth, GDP at 4+%, low inflation, the latest PCE price was .1% and a market inches from new highs.

Low rates, low inflation and high growth approaching on new highs is a reason for the market to break those highs and keep going.

Looking For Earnings Home Runs

We spoke to the top tech companies over the last few months to identify what tech stocks have home run earnings potential. Earnings are what drives stocks, especially tech stocks. Finding those few tech stocks that have realistic earnings trajectories way above the Street can give you conviction to see a stock through to big upside. Dip your toe in the water with a free trial.

Friday, August 3, 2018

Apple Suppliers Not Out Of The Woods

Apple's (NASDAQ:AAPL) earnings reported this week. The report and conference call said two things about their inventories which have implications to the food chain of their suppliers.

On the one hand they said channel inventory was at the low end of their 4-6 week target. That was lower than the previous quarter. If there is demand Apple will have to meet that demand and as a bonus drive sales by replenishing the under-inventoried channel.

That's bullish for Apple.

On the other hand Apple's in-house inventories jumped once again.

	Jun	Sept	Dec	Mar	Jun
	Q3	Q4A	Q1	Q2A	Q3E
Inventory	3146	4855	4421	7662	5936
Year-over-yr	71.8%	127.7%	63.0%	163.3%	88.7%

Inventories are up huge year-over-year. Some of that may be Apple charging to build components in-house, but that's also a negative story for suppliers.

Apple has also said they bought inventory ahead at good prices so they have stock at lower prices.

Either way you look at it if their inventory growth is far outpacing the revenue growth you have to dig a little deeper before you fall in love with an Apple supplier.

Looking For Earnings Home Runs

We spoke to the top tech companies over the last few months to identify what tech stocks have home run earnings potential. Earnings are what drives stocks, especially tech stocks. Finding those few tech stocks that have realistic earnings trajectories way above the Street can give you conviction to see a stock through to big upside. Dip your toe in the water with a free trial.

Thursday, August 2, 2018

Tesla: Largest Earnings Inflection Story I Remember

Tesla reported earnings. That's just it. They will actually start to report positive earnings in Q3 and Q4. But they told us they would already. I guess investors finally get it that it's approaching reality.

In June we said,

"If you're short, how in your right mind do you say 'la di da, no biggie'" that they are going to turn a profit.

Not only that, our earnings numbers go up huge.

Backing into this reported quarter S&X are deep into the 30s% gross margins. So if Model 3 hits their 15% gross margins in Q3 and 20% in Q4 the auto gross margins are going to start being huge. (I have no problem using the same word, huge, in an article countless times. Hope that's ok.)

Also in Q1's call CEO Elon Musk said 25% Model 3 gross margins was a possibility by Q4, so there could be upside.

The Street's at like $2.00+ for 2019. Give me a break. Our EPS for 2019 go to $18 GAAP and $20-21 non-GAAP*. What PE would you like to use. You decide. Whatever it is you're going to get a big price target on our numbers.

Shorts need to get out and institutions need to get in.

This is going to be the biggest earnings inflection story I think I can remember. Going from uh-oh losses and media-concerned bankruptcy, to see-ya later no monkey-business GAAP profit.

Stock's going higher.

*Subscribe to see full model here.

Looking For Earnings Home Runs

We spoke to the top tech companies over the last few months to identify what tech stocks have home run earnings potential. Earnings are what drives stocks, especially tech stocks. Finding those few tech stocks that have realistic earnings trajectories way above the Street can give you conviction to see a stock through to big upside. Dip your toe in the water with a free trial.

Wednesday, August 1, 2018

Fed Today: What To Watch

The Federal Reserve comes out with their decision at 2 EDT today. No change is expected but wording will be watched carefully. There is no press conference which also implies nothing major should change.

The stock market is down into the Fed meeting which is a little usual. Usually investors wait for the Fed decision to buy stocks. The Fed day is known to be one of the most bullish days on the calendar over time.

But with the trade news that President Trump is eyeing more tariffs and the tech rout the market's trying to find some direction.

Another issue is the 10 year touched 3% yields today which may be a hint for the Fed decision. ADP came out with a strong jobs report today implying the economy's on fire. The Fed sees that and they feel emboldened to keep their message to continue to raise rates this year.

The flip side though is that PCE price was only up .1% ex-food and energy. That has to spook the Fed because if they raise too much they risk a deflationary spiral. So while that may not come out today, the Fed, because of inflation, may not be able to raise much more.

High GDP and low inflation is a bullish stock market combination. But with the market trading down ahead of the decision it may be looking at the other data points like tariffs and yields to decide.

Looking For Earnings Home Runs

We spoke to the top tech companies over the last few months to identify what tech stocks have home run earnings potential. Earnings are what drives stocks, especially tech stocks. Finding those few tech stocks that have realistic earnings trajectories way above the Street can give you conviction to see a stock through to big upside. Dip your toe in the water with a free trial.

Tuesday, July 31, 2018

Apple Earnings: What We're Watching

Apple (NASDAQ:AAPL) reports tonight. We expect a strong earnings report but the key metric may be iPhone units.

iPhone units accelerated on a one-year basis last quarter but actually slowed on a two-year basis.

iPhone being the most important driver to the overall business forces analysts to watch this key metric.

Here's the last few quarters iPhone unit data.

Fiscal	2017	2017	2017	2018	2018
Calendar	2017	2017	2017	2017	2018
	Mar	Jun	Sept	Dec	Mar
	Q2	Q3	Q4	Q1	Q2A
iPhone Units	50763	41026	46677	77316	52217
Growth	-0.8%	1.6%	2.6%	-1.2%	2.9%
2-year gr	-17.2%	-13.5%	-2.7%	3.5%	2.0%

You see last quarter's pick up to 2.9% but adding up the last two year's growth rate the trend slowed from Q1. We look at the two year because you can catch an underlying trend that cancels out one-timers from a year ago.

Comparisons get tougher now also. June last year was up 1.6% versus March -.8%. So this year's June growth number gets a little tougher to come by when lapping higher year-ago numbers.

We'd expect a good guide because iPhone was late last year and hopefully won't be this year.

Net net we'd expect a good report but the key to watch is the iPhone unit trajectory.

Looking For Earnings Home Runs

We spoke to the top tech companies over the last few months to identify what tech stocks have home run earnings potential. Earnings are what drives stocks, especially tech stocks. Finding those few tech stocks that have realistic earnings trajectories way above the Street can give you conviction to see a stock through to big upside. Dip your toe in the water with a free trial.

Monday, July 30, 2018

Stock Market: Lots Of Outflows. Need A Washout.

Money's flowing out of the stock market (NYSEARCA:SPY).

Almost $50B exited equity markets in the last few weeks according to Lipper.

Tech's been a leader. So when you have negative announcements and negative reactions this could feed on itself.

Tech's been the support for markets helping it move higher, leading it higher. When that turns investors need to turn somewhere.

What's interesting is the outflows predicted the negative reactions. Or, because of the outflows the market didn't have the buying support to scoop up down stocks. We think it's the latter.

While the market acted like a champ through all the tweets and tariff calls, outflows could be signaling a lack of support.

We'd like a washout, frankly to make it a little easier to pick up great stories on the cheap.

Looking For Earnings Home Runs

We spoke to the top tech companies over the last few months to identify what tech stocks have home run earnings potential. Earnings are what drives stocks, especially tech stocks. Finding those few tech stocks that have realistic earnings trajectories way above the Street can give you conviction to see a stock through to big upside. Dip your toe in the water with a free trial.

Friday, July 27, 2018

FANG Stocks: Where Do We Go From Here?

FANG stocks have had a huge move until this week. Facebook was down huge after guidance on the conference call. Netflix was down when subscriber growth expectations slowed. Google and Amazon put up good results.

The stock market looked to FANG stocks for leadership which can always give added confidence in trading in general. It can give a needed support to stocks in general when your go-to names are making you money.

The chinks found in Facebook and Netflix armor can decay some of that confidence.

While Google's quarter was strong this time last quarter was mired in question when leverage didn't come through. Google will also have to face GDPR issues just like Facebook.

It's not clear if these will be the leaders.

Amazon is hitting stride on the profit side and probably is the cleanest story of the FANG stocks.

So the stock market's tech dependence could turn to Apple that reports earnings next week as probably the most important driver to the stock market and tech stocks.

Looking For Earnings Home Runs

We spoke to the top tech companies over the last few months to identify what tech stocks have home run earnings potential. Earnings are what drives stocks, especially tech stocks. Finding those few tech stocks that have realistic earnings trajectories way above the Street can give you conviction to see a stock through to big upside. Dip your toe in the water with a free trial.

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