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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.

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We're long Tesla.

Updated Aug 10, 2018 4:13 am

1 comment:

  1. We will all find out if it is true that: "funding secured", when the SEC completes their investigation. If Musk lied, he should not get any special breaks as a "bilk-ionaire", but treated by the SEC like any other CEO who lied and tired to manipulate market prices.
    It "funding secured" is proven to be true, Musk should proceed with his $420 buyout. But that does limit the unside for shareholders counting on higher priced shares tradeable DAILY in the public markets.

    ReplyDelete

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