How Elon Musk Used A Broken Marketplace To Play Us All

Overview

Elon Musk has controlling stakes in 3 companies: Tesla, SolarCity, and SpaceX. Tesla and SolarCity are publicly traded. SpaceX is not publicly traded. This document’s focus will be soley on the financial interdependencies of the companies. There are also incestuous business practices, and nepotism within the leadership of each company Musk controls.

We hope to illustrate simply and clearly the immense risk the US government has taken with your money by giving it to a man who is essentially telling them what they want to hear while picking their pockets doing it.

Background

Tesla borrowed Venture Capital (VC) money from Elon Musk at VC rates. It borrowed VC money from taxpayers at non-VC rates

Tesla needed $500MM to get started in 2008. The US Government lent $465MM to Tesla at 3% interest under its push for Green Energy. Elon Musk lent the company $38MM at10% interest plus stock options. Here are the profits on those loans:

Elon Musk’s $38MM generates profit of $1.4BB, or 3,600% ROR- a VC payout
Taxpayers’ $465MM- generates profits of $12MM or 2.6%ROR- not a VC Payout

Taxpayers took VC risk without VC returns. The table is set for Elon to arbitrage the Government’s largesse much more. All in, the US Government committed about $4.9BB to finance Tesla’s operations

Musk Gets More Government Money

Using Government loans, Elon Musk creates 2 more companies; SolarCity and SpaceX. He now controls three government sponsored clean energy companies financed by taxpayer money.

The Companies

Tesla- makes electrical cars, develops technology for same. Loses money hoping for future profits

Loans money to SolarCity via its own stock
Borrowed $465MM from Gov’t at 3% and $38MM from Elon Musk at 10% plus stock options
Does not make money

SolarCity- makes and leases solar panels to homeowners. Loses money hoping for a back-end profit

Borrows money from Tesla
Borrows Money from SpaceX
Does not make money

SpaceX- will provide future service related to satellite launches. It makes money via prepaying customers

Loans money to SolarCity at approx. 10%
Borrows Money from Government at approx. 4%
Makes money

Elon Musk now has 2 companies that do not make money. He has 1 that makes money from prepayments for services yet to be given. All are financed by the US taxpayer at ridiculously below market rates. The table is now set for financing using inflated currency (sound familiar?) in the form of Tesla stock to get real cash in Mr. Musk’s pockets.

The SolarCity Problem

Despite gov’t subsidies SolarCity still needs money to operate. SpaceX, while not profitable, has cash on hand form prepayments and Gov’t subsidies. Tesla, also not profitable, has no cash, but has highly (over)valued stock it can use as currency or loans for cash. Elon Musk owns major stakes in all 3 companies.

SolarCity borrows $165MM from SpaceX at market rates of about 4.4%
SpaceX uses govt loans (2.0%?) to lend $165MM SolarCity
SolarCity borrows another $90MM from SpaceX to avoid defaulting on first SpaceX loan

Yet SolarCity is still in trouble. It needs cash. Government subsidies are on hold. Its stock price is sinking and it is in danger of defaulting on existing loans. Enter Tesla and Elon Musk

Tesla and Musk Bail Out SolarCity

Elon Musk and Tesla loan stock to SolarCity. SolarCity margins that stock for cash so they can make their loan payments to SpaceX.

Elon Musk used money loaned to him at 2.6% to generate 3,600% from Tesla stock sales
SolarCity was failing. If It failed, it likely would take SpaceX with it.
Elon Musk and Tesla used his govt sponsored inflated currency (Tesla stock) to prop up a failing SolarCity.

Not Enough

But that was not enough money. Tesla then makes a bid outright to buy all of SolarCity at above market valuations using Tesla stock. This essentially ensures a payout to himself and his partners at SolarCity while eliminating the SpaceX debt. Now it all depends on the price of Tesla stock. And Tesla has been punished by the market since the announcement.

Finally there is the loaned stock by Elon Musk to SolarCity. If Tesla drops enough for amargin call, it is all over in our opinion. what we have not covered includes the valuation offerred to buy SolarCity. Public shareholders of Tesla should be incensed atthe price being paid for SolarCity. Meanwhile, much of SolarCity’s stock is still in the hands of Musk and family members.

If Tesla stock drops enough, it could take out potentially all 3 companies. Essentialy Musk is at the center of an American Keiretsu.

Conclusion

The interdependent relationships between the 3 government subsidized companies Elon Musk owns or has a controlling stake in are an abuse ofgovernment largesse towards Green Energy. Taxpayer money is being used at market risk without market returns to prop up 3 unprofitable companies. While we do not debate the technology Tesla has developed, we question the leverage with which these companies are able to operate under. If something were to go wrong, we feel an eventual Solyndra Greenmail situation would occur. Tesla would be TBTF to the Government and have to pay. We feel Elon Musk knows this and is will play that card if need be.

Luxury automakers to Tesla: We’re coming for you

The message from Dieter Zetsche was clear.

Shortly after the Daimler chairman unveiled Mercedes-Benz’s concept electric SUV at the Paris Motor Show Thursday, CNBC asked if the German automaker was fighting back against Tesla and its growing hold on the luxury electric car market.

“If you want to interpret it that way it’s fine,” Zetsche told CNBC. “Tesla is a successful electric automotive company…[but] we want to be No. 1 by latest 2025 in the electric premium segment.”

Make no mistake: Mercedes, BMW, Audi and practically every other luxury automaker is gunning for Tesla with a slew of high-end electric vehicles scheduled to come out over the next several years.

Mercedes, for instance, plans to release 10 new electric models. BMW says it will introduce an electric version of every model it sells. And Audi plans for 25 percent of its sales by 2025 to come from electric vehicles.

“Tesla is highly likely to lose its dominant position,” UBS told investors last week, describing the coming wave of electric cars from established luxury brands as a “tsunami.”

Stephanie Brinley, senior auto analyst for IHS Markit, agrees Tesla will feel some pressure.

“The mainstream luxury brands can really reach beyond the early adopters in a way Tesla cannot,” he said. “They have the dealer network, strong brand recognition and strong customer loyalty.”

Has Elon Musk Finally Run Out Of Rope?

Summary

The public’s willingness to take everything Elon Musk says at face value appears to be wearing thin.

Elon’s long-established pattern of following bad news with grandiose announcements and, frankly, truckloads of baloney, has lost its appeal and is having an ever more minor and temporary effect on Tesla shares.

Even Tesla’s biggest institutional supporters appear to be losing patience and casting a skeptical eye toward his plans, and this does not bode well for TSLA investors.

And this is not even a comprehensive list of all the signs of eroding confidence in Elon.

Conference calls have transitioned from seemingly scripted softball sessions to something approaching real conference calls with poignant and skeptical questions coming from those in attendance.

The financial community is no longer taking everything Elon tells them at face value. I don’t know of a single analyst that believes Tesla will sell 500,000 vehicles in 2018, as Elon promised during the Q2 earnings call.

All in all, the rose-colored glasses are coming off and there are signs that reality is beginning to carry the day.

Musk’s Wall Street cheerleaders drop their pom-poms over Tesla

Elon Musk is losing some of his Wall Street cheerleaders just when he needs them the most. Goldman Sachs Group Inc., one of Musk’s top bankers, has reversed course and cut its recommendation on the entrepreneur’s flagship Tesla Motors Inc., following a similar move by another big booster, Morgan Stanley.

Goldman’s decision, announced Thursday, comes as Musk is under growing pressure to rally investors for a new fundraising round. While the banks are subject to strict rules designed to separate their research and underwriting, the downgrade underscores how Musk’s Wall Street enablers have played multiple, even conflicting roles as he’s chased ambitions — from electric cars to solar power — where profits are hard to come by.

“I am sensing that some Tesla cult members think he’s not as brilliant as they thought he was,” said Barclays Plc analyst Brian Johnson, who has advised selling the shares for the past year. “He will be able to raise money but maybe they have to do it at a discount.”

Both Goldman and Morgan Stanley have been big owners of the stock. Their analysts have, on occasion, recommended the shares right around the time that the firm’s underwriters were lead managers on a new round of funding.

In addition to underwriting Tesla stock offerings, Goldman and Morgan Stanley have loaned Musk $275 million, and $200 million respectively, according to regulatory filings. Some of the loans were used to buy Tesla stock, the filings said.

Tesla representatives didn’t respond to requests for comment.

In August of last year, the company hired Morgan Stanley as one of the managers of a $783 million offering, priced at $242 a share. Three days after the announcement, Morgan Stanley analyst Adam Jonas raised his estimated future price for the stock to $465 from $280.

Avoid Tesla due to aggressive discounting: Analyst

Pacific Crest told investors to be wary of Tesla shares, citing the profit margin risk from increased price discounting.

“Checks indicate Model X orders have improved, but we detected aggressive Model S discounting at U.S. sales centers intended to maximize Q3 deliveries,” analyst Brad Erickson wrote in a note to clients Tuesday.

“So while a strong Q3 delivery number could provide some reprieve for the bulls, our view of declining quality for incremental Model S demand poses ASP and margin risk while calling longer-term demand into question.”

Tesla Shares Fall After Goldman Downgrade (TSLA, SCTY)

Electric carmaker Tesla Motors Corp.’s (TSLA) shares declined by 3.6% to $201 after analysts at investment bank Goldman Sachs Group Inc. (GS) downgraded the stock from Buy to Neutral and cut their price target for the stock to $185 from $240. The downgrade comes after Tesla reported record-breaking car deliveries for the third quarter. (See also: Tesla Reports Biggest Quarterly Sales)

The “incremental risk” associated with capital deployment in the merger between Tesla and SolarCity Corp. (SCTY) is one of the reasons for Goldman Sachs’ downgrade. The firm projects increased free cash flow and leverage for the combined entity. For example, they estimate a free cash flow of between $2.4 billion to $2.5 billion for next year and leverage figures that are 6.6 times greater than that for this year. The other reason for the downgrade is related to possible delays that the company might incur while launching the Model 3, its electric car for the masses. (See also: Behind Tesla’s 1,173% Rise In 10 Years)

Despite the downgrade, the investment firm has a relatively positive take on Tesla’s near-term prospects. It is forecasting a loss of 59 cents per share for the car maker, when the consensus is for the company to report 93 cents in losses this year.

Goldman’s estimates for the long-term, however, are an opposite of the consensus estimate.

Given its bearish stance on Model 3 deliveries, Goldman Sachs has a 48 percent lower than consensus on average for the 2017 to 2019 period. This is because the investment firm expects Tesla to increase expenses related to sales and marketing and research. Other analysts expect the car company to turn profitable next year.

To be sure, the firm’s downgrades for Tesla should be taken with a grain of salt. The investment bank upgraded Tesla a day before underwriting its secondary offering this May. An analyst from Devonshire Research said the downgrade had become “an after-hours laughing matter.”

Tesla Is Grossly Overvaluing SolarCity

More than three months after Tesla (NASDAQ: TSLA) announced its intention to acquire SolarCity (NASDAQ: SCTY), CEO Elon Musk hasn’t answered the single most important question for investors yet, which is what return they should expect from such an investment.

When analyst Colin Rusch from Oppenheimer & Co. asked for “some sort of scope of return on capital” on the conference call after the acquisition announcement, Mr. Musk acknowledged the relevance of the question, saying “we will certainly have all that done for you, but the reason it’s not just all in a neat package is because this is a sort of an odd case where we have to tell you at the start of the process, before we have all the answers.”

Three months later Mr. Musk is running behind on his promise. The S-4 that has since been published, hasn’t been helpful either. It heavily relies on the dubious metrics that SolarCity has been using for years without presenting a new and serious look at what the business is actually worth.

Analysts and media seem a bit shy too to delve into the numbers. Those who are in favor of the deal generally stick to explanations like “If you don’t believe in Elon, why are you buying these stocks in the first place?” - an insight presented by equity analyst David Whiston (link).

As some of the Tesla bulls repeatedly say, it is easy to criticize Mr. Musk from the sidelines, while he is working hard to build his business empire. So let’s take a positive attitude here and offer some help. While Mr. Musk is engineering the first rocket which performance bar is larger than the vehicle itself - you can’t make this stuff up, can you - we’ll delve into SolarCity’s numbers to work out an actual fair value for the company.

Stop Elon From Failing Again

THE ONE STOP DATABASE ON STOPPING ELON MUSK

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