Overcoming SolarCity’s Language Barrier

As you know, elections breed a fair amount of cognitive dissonance.

Which brings us, naturally, to the other vote taking place this month: the decision on Tesla Motors Inc.’s acquisition of SolarCity Corp., scheduled for Nov. 17.

The latest ¯\_(ツ)_/¯ episode came on Friday morning. International Shareholder Services Inc. issued a report urging investors to vote for the deal and containing this gem of a line:

Tesla has — within the confines of its suboptimal governance structure — taken the requisite steps to reassure its shareholders…

Taking steps within confines is, of course, a ticklish task. Even Elon Musk seemed surprised at the outcome. Later that day, though, rival proxy-advisory firm Glass, Lewis & Co. took a somewhat different view:

Stripped from the pretense of creating a fully-integrated renewables retailer serving a loosely framed end-market, we believe non-affiliated Tesla investors should be concerned the proposed tie-up of Tesla and SolarCity mostly amounts to thinly veiled bailout plan (sic).

I have tended to hew more to that view (see here and here). The idea that SolarCity is a vital, healthy, must-have target is belied by the fact that it agreed to sell itself for a low-ball, all-stock offer that, as of early Monday afternoon, barely provides a premium to the undisturbed price:

Tesla’s own numbers show Autopilot has higher crash rate than human drivers

A couple of weeks ago, I wrote about Tesla’s claim that its Autopilot driver-assistance software is safer than a human driver.

After a fatal Autopilot crash last May, the company said the death was the first in 130 million miles of Autopilot driving—and noted that, “among all vehicles, in the U.S., there is a fatality every 94 million miles.”

The clear implication: Autopiloted Teslas are safer than human-piloted cars, and lives would be saved if every car had Autopilot.

But Tesla’s statistics are questionable at best. The small sample size—one crash—makes any calculation of Autopilot fatality rate almost meaningless.

Furthermore, Tesla compared its Autopilot crash rate to the overall U.S. traffic fatality rate—which includes bicyclists, pedestrians, buses, and 18-wheelers. This is not just apples-to-oranges. This is apples-to-aardvarks.

One statistician called Tesla’s comparison “ludicrous on the face of it.”

Tesla and SolarCity are dealing with a critical business problem

As Tesla prepares to acquire SolarCity and create an integrated auto-energy-power storage company, SolarCity’s legacy business model is undergoing a change.

SolarCity reported third-quarter earnings on Wednesday, and the company noted a shift from its traditional solar-panel leasing operations to a newer loan program that brings in more cash, Bloomberg reported.

Here’s Bloomberg’s Christopher Martin:

SolarCity is facing shifting consumer sentiment over solar power. Homeowners increasingly prefer to purchase the rooftop systems rather than the decades-long leases that make up most of the company’s business. Rive said in an Oct. 9 interview that 30 percent of September sales came from cash installs, or loans, instead of leases.

Cash and equivalents rose 78 percent to $259.3 million from the end of the second quarter, and Rive said he expects improved cash generation in the current quarter and next year.

This is important for a couple of reasons. First, Tesla and SolarCity, as a combined company, will be rolling out a new solar-roof product that’s designed to be a fully integrated roof, not a group of solar panels attached to an existing roof. That’s something that Tesla will want homeowners to buy, through financing, when it comes time to install a new roof.

Second, leased solar panels might make it easy for customers to get into solar energy, but when it comes time to sell the house, the lease could be an issue. SolarCity can arrange for it to be transferred, but what if the new homeowner doesn’t want to deal with the cost?

SolarCity’s $8 Billion Turns Out To Be Just $1.1 Billion

When Tesla (NASDAQ: TSLA) announced in June it would buy SolarCity (NASDAQ: SCTY), I got really excited. For months, I’d been studying SolarCity’s financials and I had been stunned by the many misrepresentations of its value in the company’s publications.

Preparing the merger, I thought, would make a lot of 3rd parties take a closer look, so we would finally get a true picture of what the highest paid Bay Area executive under 40 had been achieving so far.

Unfortunately, the 3rd parties brought to the table by Tesla and SolarCity did not offer a lot of joy. They stuck to the numbers given to them by the people who paid them, so the story of deception just continued.

In fact, smooth sailing made executives of Tesla even more courageous, because on October 25, they showed the following graph in a presentation given to Institutional Shareholder Services Inc.

Solarcity Earnings Heading Quietly Into The Sunset

SolarCity’s Wednesday started with a bang and ended with a whisper.

At the end of a day many Americans spent adjusting to the election of Donald Trump as president, SolarCity Corp. reported its third-quarter results. Despite these being potentially the last ever set of numbers as a public company, they were even more downplayed than usual, with no accompanying analyst call.

This might seem strange, given shareholders are due to vote in about a week on whether to approve the company’s merger with Tesla Motors Inc. and that Trump’s elevation is widely seen as a yuge risk to the incentives underpinning the solar leasing business (the stock dropped 4 percent on the day). Bear in mind, though, that last week’s Q&A with the management of the two companies wasn’t the most convincing sales pitch. On that basis, maybe it was best to let the figures speak for themselves.

Not that they were entirely convincing. The first thing to note was the cut to guidance on installations, something SolarCity has now done in all three of this year’s quarterly updates.

Tesla: You’re All Missing The Point

Believe it or not, I actually don’t really care about this quarter. In fact, I don’t care about ANY quarter on its own.

So Tesla pulled some levers and juiced its numbers. Lots of companies do that. But what companies can’t do is alter the core economics of their business, and here’s where Tesla falls down.

Tesla is an industrial company that makes cars and batteries (and now plans to offer ride sharing, which, you know, makes so much money for Uber(Private:UBER)…). My view is that cars and batteries generate roughly the same EBIT margins at around 10-12%.

I’ve already modeled this out, and here’s the key: even with massive growth, immediate free cash flow, and higher-than-guided production of its current models, Tesla’s shares are overvalued.

For this reason, it doesn’t matter if it is profitable. In fact, I expect the company will be (at some point). The key is that as a car company, Tesla will never earn huge returns. Cars are a cyclical, highly capital intensive, and unattractive industry. TSLA continues to face competition from competitors who have more resources, and who know they’re behind, and can easily imitate Tesla’s strategy and whittle away any excess returns it has yet to generate.

For the record, I have never disputed that Tesla makes a great product. They’re slick, fast, sexy vehicles, and people love them. I think Elon Musk is humanity’s best hope to colonize mars, and to advance the human race into a more sustainable way of living. That does not mean, however, that one should fall in love with Musk, with Tesla, or with ANY stock for that matter.

What matters is the present value of free cash flow a business generates over its life, and based on the information we have now, Tesla is a long way from justifying its value on that basis.

Is Tesla’s Elon Musk Throwing A Hail Mary For The SolarCity Deal?

Tesla’s Elon Musk tweeted on Friday that he would pay SolarCity’s debt if it came to that. It was in response to a tweet from David Tayar asking about Tesla assuming SolarCity’s obligations after the presentation on the SolarCity acquisition on November 1. There are major concerns about the merger due to SolarCity’s negative (and increasing) cash flows and therefore its ability to service its debt (and then becoming an obligation to Tesla).

This is compounded by the concern that Tesla may not be legally obligated to pay for the debt (even though Musk says they will be one company) since there is language in at least one of Tesla’s filings with the SEC that “the Company and its Subsidiaries shall not guarantee or otherwise become directly liable for any Indebtedness of SolarCity and (b) the Company and its Subsidiaries shall not permit SolarCity to guarantee or otherwise become directly liable for the Indebtedness of the Company or its Subsidiaries.” This is from an 8-K filing on August 1 and you have to go to the EX-10.1 portion to find it.

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