Sunday, 25 June 2017

Tesla (NASDAQ:TSLA) - Read Between The Lines

Tesla has become every short sellers nightmare. Mine included. It is the stock that just won't die despite its hideous 'cash burn rate' evocative of the Dot Com bubble. Much has been written by minds much smarter than mine (See Mark Spiegel's analysis) on the subject of Tesla's financials, the upcoming competition in the market, the build quality issues and the dangers of the autopilot.

I wanted to look at something a little different and that is the motivations and truth revealed by actions as opposed to words. As investors we always look for insider buying and selling as a yardstick for what management do with their own cash - this tells us much more than words. 

A guy like Elon Musk of course knows this - so he borrows some more against his stock to buy into his equity raises - giving the idea of firm commitment. Insider buying is a great yardstick unless the business in question is a 'confidence' business which means either a bank or another business that requires constant Tesla.

But I digress....
"As I grow older, I pay less attention to what men say. I just watch what they do."
           -Andrew Carnegie 
"And so when Cora Tull would tell me I was not a true mother, I would think how words go straight up in a thin, line, quick and harmless, and how terribly doing goes along the earth, clinging to it, so that after a while the two lines are too far apart for the same person to straddle from one to the other and that sin and love and fear are-just sounds that people who never sinned nor loved nor feared have for what they never had and cannot have until they forget the words. Like Cora, who could never even cook."
          -William Faulkner As I Lay Dying

So in that spirit let us make a few simple observations in relation to Elon Musk and Tesla. I have my own theory that 'everyobody tells you everything you need to know' if you read between the lines - it is like a form of dupers delight. Here is an example:

I read these Tweets as admissions of failure. He is saying that starting Tesla has nothing to do with making money. Think about this for a minute. The guy has a company with a $60bn market cap with which he never intended to make money.

Now the second tweet. I think he knows Tesla is failing - why would you be mulling over the origins of your business on Twitter, the great gamble of it all...if it weren't for the fact that you think it is failing? Maybe he is preparing the runway...

Or just chilling to get away from the stress....

This excellent article from the Buffalo News tells you a lot - they report that the $750m former Solarcity (now Tesla) factory still remains effectively mothballed with a skeleton staff. Here are the things they are saying in this article:

Tesla has promised to hire 500 people to work in the factory within two years of its completion and create a total of 1,460 jobs in Buffalo within five years. But the clock does not start ticking on those deadlines until all of the manufacturing equipment has been acquired and delivered to the factory – a condition that has not yet been met.

Action undertaken: Funnily enough they have not been racing to complete the factory. The state government still think its on:

"It has all of the ingredients for great success," Zemsky said. "When that cake comes out of the oven – whether it's in the second quarter or the fourth quarter or mid-2018, I don't know – all of the ingredients are there for tremendous success. That's what I believe."

Hope is not an investment strategy. And the State government is hardly going admit its financing a huge white elephant...a white elephant with very little realisable value:

"By shifting more of the state funding toward the building, the contract amendments have reduced the amount of state money being used to purchase equipment and increased Tesla's obligation to purchase machinery. Tesla – not the state – will own any of the equipment purchased with the electric vehicle maker's funds."

If you never plan to actually open the factory, and your having to ramp it up is conditional on having all the equipment delivered why not just deliver some equipment (that you retain the rights of ownership on) and then sit on it. Do not install it - do not given tours of the factory.... 

Think about what a bad deal the state is giving themselves. Tesla can sell the equipment and leave the state with a huge white elephant of a an empty factory. 

What is the realisable value of an empty purpose built factory in Buffalo? 

Oh and if I were Tesla I would probably look to find a buyer pretty sharpish for that equipment...

Tesla now says the panels produced at the Buffalo plant will be a hybrid product that combines elements of the high-efficiency technology from both Silevo and Panasonic. As part of that deal, Panasonic is investing $256 million in the Buffalo factory, further easing Tesla's financing demands as it gears up for production to begin.

Hybrid product means the Silevo technology is technically rubbish and Panasonic have a better one. The Panasonic deal means another sucker (following the state government) is invested in this project and getting it built. Panasonic has workable technology evidently. What Tesla is doing here is setting up a deal where Panasonic has to buy them out because they will waste enough of Panasonic's money that the sunk costs become unbearable.

Oh and then you can be super clever and paint the deal as a factor slowing the progress on the project.

Smith said he believes SolarCity’s purchase by Tesla and the Panasonic manufacturing arrangement has contributed to delays in opening the factory.

The bottom line is Tesla are not remotely rushing to finish the factory. Otherwise they would be finishing it! 

The reason is making solar panels and selling them is no longer profitable. Tesla know that opening the factory will increase their cash flow drain more than keeping it closed. In the meantime they are hoping to suck Panasonic in to take it off their hands....

You could say this is all conjecture. You would be right. But it is obvious.

Read between the lines. You cannot trust any investment with Tesla written on it. 

Disclaimer: I have a modest short position in(NASDAQ:TLSA) Tesla. These are opinions only, not investment advice. If in doubt read my disclaimer. 

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