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.”

Musk’s SolarCity Sued for Intellectual Property Theft

Elon Musk’s SolarCity has been accused of intellectual property theft by Cogenra Solar and Khosla Ventures.

In a lawsuit filed in San Francisco on Monday, the parties accused SolarCity of gaining undue advantage of Cogenra’s Shingling technology that helps in manufacturing high-efficiency commercially viable solar panels.

SolarCity and its subsidiary Silevo misappropriated Cogenra’s trade secrets, manufacturing processes, and other intellectual property to give themselves a competitive advantage and head start in developing shingled-cell solar modules, Cogenra said in the lawsuit.

SolarCity accused of misappropriating solar company Cogenra’s trade secrets

Solar company Cogenra is suing Elon Musk’s SolarCity over the use of shingling technology the company alleges SolarCity took from Cogenra and used to create a world-record breaking solar panel.

Cogenra says it shared its “most precious and confidential trade secrets, manufacturing processes, and other intellectual property with Silevo and SolarCity” between 2010 and 2014.

Silevo is a subsidiary of SolarCity and the complaint alleges these trade secrets gave SolarCity a leg up in manufacturing its own solar cells.

“It was only by misappropriating Cogenra’s proprietary technology, including its trade secrets and other intellectual property, that SolarCity and Silevo were later able to announce a claim that they set a new world record for solar panel energy efficiency,” Cogenra said in the suit.

The complaint also says Cogenra began shopping itself around to bigger solar companies in 2014 and, according to sources who spoke to Bloomberg, one of those companies considered a potential buyer was SolarCity. The possible acquisition allegedly gave SolarCity access to classified information.

However, SolarCity calls the lawsuit “meritless” and says the whole thing began after it alerted SunPower to an ex-SolarCity employee who had unlawfully downloaded confidential information from the company and recently joined SunPower, Cogenra’s parent company, as a senior sales manager.

“Instead of taking responsibility and ensuring the return of our misappropriated trade secrets, SunPower subsidiary Cogenra raced to court to divert attention from its conduct by filing a meritless lawsuit,” SolarCity told TechCrunch. “Cogenra’s complaint fails to identify any actual trade secret that Cogenra owns, much less that SolarCity supposedly misappropriated. We are confident the court ultimately will reject Cogenra’s claims, which are factually and legally baseless.”

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.

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