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.

Musk’s Tweet Fails To Recognize That Tesla Has Crossed The Rubicon With The Inventory Model

While many commentators have expressed disbelief that a CEO is not aware of the Company’s discounting practices, let’s give Mr. Musk the benefit of doubt. It is not that difficult to see that this unfocussed CEO does not know what is going on in his Company. Life is too busy contemplating life on Mars and trying to force the wrongheaded acquisition of SolarCity (NASDAQ:SCTY).

However, if Mr. Musk did not know the sales practices at Tesla, it brings forth a whole different set of questions:

- How can a competent CEO not know the sales practices at his Company? If the argument is that Mr. Musk does not have the time, then we suggest that the Company’s board is once again asleep at the wheel.

- What was Mr. Musk expecting that his sales teams would do when he sent a company-wide email to push hard to get strong Q3 results ahead of capital raise?

- Does Mr. Musk not discuss sales and promotional strategies with his sales and finance teams?

- Is Mr. Musk not aware that Tesla builds spec cars (also called “inventory”) which are not build-to-suit?

More Than Money at Stake in Tesla’s SolarCity Deal

The vote on Tesla Motors’ proposed merger with SolarCity is drawing nearer. That means Tesla shareholders have quite a dilemma to sort out.

Though Elon Musk, Tesla and SolarCity’s chairman and largest shareholder, has termed the proposal a “no-brainer,” the reality, at least for Tesla shareholders, is far more complex.

From a strictly financial perspective, the deal is something Tesla shareholderscan do without. Tesla, of course, has significant ongoing cash needs without the additional burden from SolarCity. Though Tesla showed $3.2 billion in cash on its balance sheet as of June 30, that money is expected to burn quickly as Tesla prepares to bring the Model 3 sedan into production. Capital expenditures alone are expected to total $1.75 billion for the second half of the year.

Adding the struggling solar-panel developer to the mix would make this problem worse. SolarCity spent $766 million on operating expenses last year, nearly twice as much as its total revenue. Through June of this year its expenses hit $265 million, 42% more than its revenue in the first two quarters. Worse still, SolarCity has more than $3 billion in long-term debt on its books. Tesla has said it would need to raise fresh capital before the year is out, despite raising nearly $2 billion in equity financing in May.

Avoiding that burden would give Tesla more financial flexibility to launch the Model 3 on time and on budget. A successful Model 3 launch is essential for Tesla to justify its valuation, and that task becomes more urgent as legacy auto makers roll out new competition for the Model 3.

Tesla-SolarCity Merger Would Make Tesla’s Business Model Worse, Not Better

Tesla shareholders would be better off voting down the company’s merger with SolarCity, in part because combining the two companies would likely cause Tesla’s expenditures to explode.

The merger looks like a loser from a Tesla shareholder’s perspective, mostly because the addition of SolarCity would wear on Tesla’s financial well-being, as the company’s capital expenditures alone are expected to balloon to $1.75 billion by the second half of the year.

Adding the hulking, money-bleeding solar-panel developer to the mix would inevitably compound this problem.

SolarCity spent nearly $800 million on operating expenses in 2015, the Wall Street Journal reported Monday, essentially dwarfing its total revenue by more than half. The solar panel maker is an albatross on shareholders’ necks: It currently has more than $3 billion in long-term debt on its books; and its expenses hit $265 million by June.

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