By on June 23, 2016

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It was a little terrifying watching the question-and-answer session near the end of Tesla’s livestreamed annual shareholder’s meeting, and it wasn’t just the lady asking about goji berries.

All of the speakers — well, the majority of them — seemed to possess a stratospheric level of admiration for Tesla CEO Elon Musk. Like religious (or political) disciples, the trust they placed in the man’s brilliance and decision-making abilities seemed limitless.

Well, after this week’s announcement that Tesla is offering to buy SolarCity — a solar energy provider co-founded and chaired by Musk — cracks are forming in his circle of supporters, especially in the financial realm.

The proposed share-for-share deal would be worth somewhere in the area of $2.8 billion. Each company is embarking on its largest project to date: Tesla is readying its California assembly plant and battery-making Gigafactory for next year’s Model 3, while SolarCity is trying to get its massive Buffalo, New York solar panel factory off the ground.

The potential for a financial cushion lifted SolarCity’s stock yesterday, but Tesla’s share prices made like Gerald Ford exiting an airplane.

When trading opened yesterday, Tesla shares were suddenly twenty bucks lower than they were at 4 p.m. the day before ($199.31, down from $219.61). At last read, values had eroded further, to $194.32. Not a Volkswagen-level drop, but a negative reaction to the SolarCity proposal nonetheless.

Today, Morgan Stanley’s Adam Jonas, normally an enthusiastic believer in Tesla’s business abilities, lowered his recommendation of the stock, as well as his 12-month target price. No longer predicting a $333 per share value, Jonas now sees the number $243.

Writing to clients, he said, “we believe many of the benefits could have been achieved through arm’s length/strategic partnership and without the risks inherent in exposing Tesla shareholders to the financial and capital markets risks faced by (SolarCity).”

Over at MarketWatch, investing columnist Philip Van Doorn warned investors not to expect to make much money in the near term. In his column, he quoted David Bechtel, a principal at Barrow Funds, who called a possible merger between the two companies “downright frightening.”

Financier Jim Chanos called it a “shameful example of corporate governance at its worst,” adding that neither company is financially strong enough to handle a merger.

Some critics worry that a deal would cause Tesla to take its eye off the ball (meaning the Model 3), risking the company’s fortunes and future. Musk claims the merger makes sense, as both companies are pursuing different ends of the same market. He’s also said a merger wouldn’t affect Tesla’s cash flow.

Despite some investor panic over Musk’s actions, not all Tesla shareholders are getting cold feet. Reuters quoted Joe Dennison, portfolio manager at Zevenbergen Capital Investments (a holder of 600,000 shares), who called the plan “a natural evolution of (Tesla’s) mission to transform transportation into a sustainable business.”

[Sources: Bloomberg, MarketWatch, Reuters, BBC]

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53 Comments on “Is Musk Biting Off More Than He Can Chew With SolarCity Proposal?...”


  • avatar
    FormerFF

    Hero worship rarely ends well.

  • avatar

    They are an energy storage company- that happens to make cars- subsidized and propelled by the US GOVERNMENT- which has been hijacked by environmentaliberals.

    Whether it works or not- they’ll legislate it into working

    • 0 avatar
      pragmatic

      How is Teslas energy storage better than lead acid for stationary applications?

      • 0 avatar
        orenwolf

        Size and weight, for one. Virtually every datacenter I know has recently begun to explore alternatives to lead-acid because storage density is a real problem where floor space is a premium. Modern datacenters need every square foot of space possible, and more than a few non-ground-level facilities have dead-weight limits on floors that prohibit heavy lead-acid batteries from being installed there.

        for home use, though, their powercells are very compact and stylish, they don’t take up a lot of room and are simple to install.

      • 0 avatar
        JimZ

        lead-acid batteries have one (well, two) key advantage: they can supply enormous amounts of current, at least for a short time. Oh, and they’re relatively cheap.

        downsides are they’re big and heavy, use toxic lead, and if you’re not careful they can gas out the electrolyte and be a fire or explosion hazard if they emit too much hydrogen. Lithium rechargeables have much higher density and don’t incorporate such toxic materials. the main downside with them is they’re rather temperamental over how you treat them, but some newer chemistries like LiFePO4 are safer.

  • avatar
    JimZ

    This is where Tesla shareholders are starting to ask when Musk plans on making any money. To them, he should be working on getting Tesla to profitability and not spending on other companies.

    they are shipping their second mass-produced vehicle, and getting close to launching their third. Investors aren’t going to treat them as a “start up” and let them burn cash for much longer.

    • 0 avatar
      tonycd

      Jim, Musk doesn’t appear to be doing his Tesla shareholders any favors, but from a selfish standpoint he may be crazy like a fox.

      Jeff Bezos kept reporting massive paper losses on Amazon for several years, plowing all the money back into the business and essentially cheating shareholders. He kept Wall Street off his back by continually tamping down profit expectations, and he’s been rewarded for his perfidy with astronomical growth that wouldn’t have been otherwise possible.

      • 0 avatar
        JimZ

        Amazon is a retailer.

      • 0 avatar
        Pch101

        Aside from the fact that Tesla and Amazon both have vowels and consonants in their names, these two have virtually nothing in common.

        Tesla loses money because it can’t charge prices that are high enough to cover its expenses. It’s selling $6 hamburgers for $4. That business model is bound to fail unless the cost of producing the $6 burger can be reduced while not alienating the customers who became accustomed to getting more burger than they were paying for and who were unwilling to pay a price that reflected the cost of giving them that burger.

        • 0 avatar
          orenwolf

          You do realize this is exactly what Amazon was (and still is) doing, right? For many years they were losing money on prime memberships due to shipping costs, and they often sold books (and ebooks) at a loss to drum up business.

          For years Amazon ran with zero profit while they poured money into seemingly random acquisitions, and decisions like their AWS cloud hosting system (which also ran at a loss for many years to undercut everyone), phones and other hardware, purchasing IMDB, the list goes on. Some were successful, some were not, but they all lead to no profit for years and years – something many of the B&B would have said should doom them.

          • 0 avatar
            Pch101

            If you can’t figure out the differences between high-volume retailing and low-volume manufacturing (that doesn’t scale well), then I can’t help you.

          • 0 avatar
            orenwolf

            If you can’t accept that some business principles (around the idea of reinvesting in diversification and synergistic expansion) may be relevant in *many* different business types, then I fear you are being overly closed-minded to justify your own bias.

            You’re welcome to your opinion that Tesla’s business plan is destined to fail, but just because they happen to be in a different market than others who have tried isn’t a valid reason IMHO.

            As I always say, the great part is, we’ll see who’s right in the end anyway :)

          • 0 avatar
            Pch101

            For Tesla to make money, battery prices are going to have to fall a lot. This is a race against the technology clock, not a brilliant reinvestment strategy.

            This has nothing to do with Amazon, at all.

          • 0 avatar
            orenwolf

            So, you don’t think the plan of Tesla vertically integrating the largest battery production in the world into their pipeline is an attempt to reduce battery costs and turn a profit?

          • 0 avatar
            Pch101

            The cost of batteries is largely a function of technology, i.e. the inefficiency of its capacity.

            Making more of them doesn’t help. Selling them to yourself at cost or at a loss doesn’t help.

            This is a technology problem, not a manufacturing problem. Selling more volume does not fix it. Getting fanboys on the internet who know nothing about the issue to crow on ones behalf does not fix it.

            The only thing that fixes it is a better power storage unit, with “better” defined as cheap and light with high storage capacity.

            This is nothing like Amazon. The insistence on using it as an example only serves to highlight the ignorance of those who think that it is a good example. Amazon is a market share play, while Tesla will never be a market share play.

          • 0 avatar
            SatelliteView

            I like it when a tractorist (psy 101) is pretending to posess the “common sense”. “Economies of Scale” is an important component of bringing a price down. This is true for manufacturing of batteries, this is true for manufacturing cars.

            As I understand it, Gigafactory eliminates third party’s profit from the equation. To boot, it’s a lot more efficient to make current world’s supply of batteries in one modern factory vs serval separate factories that may not employ latest tech. Model s, x, and 3 leverage more or less same platform.

            The above is clear/understood even to a mediocre, but educated mind.

    • 0 avatar
      heavy handle

      Tesla shareholders should know that they are in for a wild ride. It’s hard to argue that they thought they were buying a safe stock. This kind of move is part of the fun that they implicitly agreed to. If not, they can sell.

      Stepping back a bit, the move makes sense. Tesla will make the batteries, build the cars, retail them, and then sell you the electricity to run it. They get a cut each time. Compare to the Big 3 that made record losses at the same time as oil companies were making record profits.

      • 0 avatar
        Old Bird

        OK, so GM should merge with Exxon? Perfect sense.

        • 0 avatar
          heavy handle

          No opinion on GM and Exxon.

          Think of it as the Apple business model: they sell you the hardware, and the OS, and the apps, and they take a huge cut from most of the content.
          At that point, it doesn’t really matter if one of the businesses isn’t profitable (Apple Play, Apple Pay), the business model is to keep you in their ecosystem.

        • 0 avatar
          kurkosdr

          GM should have bought parts of Standard Oil when Roosevelt broke them up. And probably buy some overseas oil companies. That way they would have the ability to “dump” oil during the oil crisis of the 70s and cushion the impact of OPEC being douches, or at least make a huge profit and cover the losses of the car business. They didn’t. On a second thought that’s good, because we would be worse of that way, as we ‘d probably still be driving V8 pushrods cranking out a grand total of 180 bhp.

  • avatar
    285exp

    He’s buying a money losing business with stock from another money losing business? Sounds like a great plan.

  • avatar
    readallover

    Corporate Governance was supposed to have taken great steps forward post-2008. B.S. deals like this, companies like Sears Holdings, I heart radio, clear channel show all the same signs as the GM, Worldcom, and AIG disasters. The SEC has done nothing to end rubber-stamp boards of directors. I hope the Tesla board members check to make sure Elon is keeping up on the payments for their liability insurance.

  • avatar
    FreedMike

    Off topic…but if you are tempted to lease solar panels and expect to refinance the house with a conventional loan, don’t do it. Buy the panels instead. Otherwise it actually gets into stuff like verifying the equipment can be removed without damage, verifying the solar company’s insurance (not yours – the solar company’s), and who pays to take the panels off if there’s a foreclosure. The level of minutiae is insane, even for the mortgage biz.

    The amount of paperwork needed to get these approved is so ridiculous I’ve never actually seen a refi with one of these damn lease deals done. Every single deal I’ve seen with these ends in the borrower telling us to to do something anatomically impossible with our genitals and walking away.

  • avatar
    CarnotCycle

    Ever since certain legislation in Nevada went into effect, Solar City has ever-so-slowly been creeping into the classic toilet-bowl orbit of a company built for political markets suddenly not having enough of them. The problem with such entities and their intrinsic negative gross margins is there is no way out; can’t cut one’s way to profitability, or make it up on volume, or expand to new markets. One needs the political crutch externality as part of the business plan; there is no other way.

    Tesla, by contrast, makes a product with real markets and is quite trendy and supported by many political ones. Will be interesting to see if Tesla is connected enough that way to haul Solar City’s water as well. Smart move by Musk – in the context of his Solar City interest, not Tesla’s – doing this now before Solar City starts having liquidity problems etc.

  • avatar
    orenwolf

    This is why I chortle at the “stock scheme” comments here from time to time. Musk, I think, cares very little about stock price. He keeps SpaceX private so that investors can’t force them to focus on short-term profit vs long-term goals (in the SpaceX case, getting to Mars).

    Insure he wishes he could do that for Tesla right about now. Amazon is a great example of a company that eschewed a decade of profit to accomplish amazing things.

    Contrary to many comments here, I don’t personally believe that it’s all about turning a profit as quickly as possible.

    • 0 avatar
      JimZ

      “Contrary to many comments here, I don’t personally believe that it’s all about turning a profit as quickly as possible.”

      not for Elon at least; he’s *made* his fortune already. I think he’s doing this all for the notability.

      but as the shareholders of most companies repeatedly demonstrate, they have other motives.

  • avatar
    accord1999

    But without regular equity financing, Tesla at best would be a much smaller company building a lot fewer cars, or at worse bankrupt years ago.

  • avatar
    jacob_coulter

    Elon Musk is a con man, but the fawning media will never give him the scrutiny he deserves.

    He basically sold a crap load of Tesla stock, then used Tesla to bail out his investment in SolarCity. He knew that this move would badly damage the value of Tesla.

    So now you have two combined companies bleeding red ink as far as the eye can see.

    Tesla stock is VASTLY over valued by at least 50%. That’s if it doesn’t formally go bankrupt in the next few years.

    • 0 avatar
      JimZ

      ALL tech stocks are overvalued. The thing about Tesla is that they at least have a way to get to profitability. Tesla makes *things* that people *want* and *will pay for.* Profitability simply means getting volume up and/or getting operating costs down (I said “simple,” I didn’t say “easy.”)

      Tesla is going to have to start acting more like a car company. Pushing out gee-whiz features that might not be fully baked is tolerable for software where you can push out updates quickly. It’s not what you want to do with hardware, where updates and fixes to flawed designs can take weeks to months. I know a few people (who should know) who say Tesla is the worst about this; they have people who don’t understand you can’t make daily changes to production tooling and fixtures.

      • 0 avatar
        MBella

        I have to agree Jim. I think it depends on the model 3. If Musk can keep his promises and produce it at with a positive cashould flow, he will likely do quite well in his end game. I had my doubts for a while, but having recently driven a model x, I was impressed. The interior quality was lacking compared to comparable luxury makes, but this can be overcome with the help of his tier 1 suppliers. The range and performance of the vehicle is truly amazing. Overcoming that major engineering challenge, fixing the interior will be easy. I wouldn’t bet against them.

      • 0 avatar
        accord1999

        Many Tesla supporters point to those frequent changes as a strength; Tesla is awesome because they make 20 improvements a week.

        http://electrek.co/2014/11/10/20-model-s-improvements-every-week/

        But I suspect this is a major reason why their early production have such terrible fit/finish and other issues, why it seems Tesla have problems scaling up production and also causes issues with parts availability.

        • 0 avatar
          JimZ

          “Many Tesla supporters point to those frequent changes as a strength; ”

          which is why I’m most dismissive towards those Tesla supporters. They have no idea how a car is built, but think they do because they picked their favorite company. They’re idiots.

      • 0 avatar
        Big Al from Oz

        JimZ,
        I really do think if Tesla wants to become competitive, it must produce cars that are affordable to a larger swath of the market. Not just much cheaper pricing is needed for Tesla either. Tesla needs to build cars that are comparable to ICE vehicle ownership.

        Tesla is nowhere’s near this. Tesla is a huge risk and is appealing to a very few. People don’t want to fnck around when “filling up” the car. And this sh!t from the EV fans, ie, “just plug it in overnight”, or, “battery technology will improve”, just doesn’t cut it for the majority or reality of vehicle ownership.

        The Giga Factory is going to have many problems. There are several articles stating that Elon’s Battery Factory and others will have issue supplying the factories with reliable material, ie, the minerals required for battery production.

        Currently most of the minerals used are either “secondary waste” from primary minerals, ie, copper and nickel mining, etc.

        Also, the current users of the “secondary waste” can afford to pay a higher price for the minerals with less impact on the pricing of what they produce. The problem with battery production these “secondary minerals” and the lithium represent 70% of the total cost of battery production.

        Even lithium prices are based on potash demand and prices to a degree.

        So, even if lithium demand rises the price of mining for lithium stil will cost, because the price of potash will drop.

        I can only see significant price rises for batteries. Will they double, triple or quadruple in price?

        This will blow a hole in all battery storage devices from solar, wind, EVs, even cordless drills.

        It quite naive for the EV fans to think EVs are the saviour. They can only ever exist as a toy/hobbie, along with extensive battery storage for solar and other green energy forms.

        Where is the money going to come from for Elon? Will the Giga Factory become subsidised like, Space X and Tesla.

        The guy is good at schemes to screw the taxpayer out of their money. I suppose the auto industry in general fits into this category as well.

        This isn’t directed at you Jim, but to all interested. Just research where most of the minerals come from for batteries, they are not the primary mineral sought. They are a “bonus” for the mining of nickel, copper, lead, etc.

        How long will it take to find new economical minerals to build these “super” batteries required? This sh!t would be used right now in consumer products like Smart Phones, Tablets, Laptops, etc. People want these things charged yesterday, it can be frustrating waiting for a phone to charge, let alone a car.

        • 0 avatar
          orenwolf

          The thing is, they will literally sell every car they can manage to produce.

          Every single one. Not to fleets or volume dealers, either.

          • 0 avatar
            JimZ

            Yes, and?

            they’re still not doing so profitably, even with the lack of fleet/volume sales.

          • 0 avatar
            mcs

            >> they’re still not doing so profitably, even with the lack of fleet/volume sales.

            They do make a profit on each vehicle sold. They’re taking the profit and putting it back into the company to grow it.

          • 0 avatar
            JimZ

            *facepalm*

            this stupid line again. The “R&D” they’re spending their money on is something EVERY automaker does. IT’S NOT OPTIONAL. it includes the costs of developing and launching the Model 3. it is the. cost. of. doing. business. If it consumes all of their revenue, then they are *not profitable.*

            PERIOD.

            Jesus, it’s like saying “Old GM was profitable, they were just investing all of those profits on taking care of its retirees.”

          • 0 avatar
            Pch101

            It would be easier to teach a pig to sing every opera that Mozart composed than it would be to teach basic finance to this MCS guy.

          • 0 avatar
            JD23

            “They do make a profit on each vehicle sold. They’re taking the profit and putting it back into the company to grow it.”

            Please spend some time learning how to decipher earnings and cash flow statements. You cannot call a company profitable solely because it has positive gross profits. If that were the case, nearly every company would be profitable.

          • 0 avatar
            WheelMcCoy

            @JimZ – “*facepalm* this stupid line again. The “R&D” they’re spending their money on is something EVERY automaker does.”

            I’m going to give @mcs a little slack here, as there is a bit of nuance to decipher here. My accountant steered my small company toward 0 profits. That is

            revenues – expenses = 0

            because it would mean no tax liability. If I had a healthy revenue, then I should invest some of it in new equipment, training, business trips, advertising, R&D. Do anything legally to get the profit to 0.

            Hollywood studios took this to a slimy level. They avoided paying some actors by promising profit sharing, only to cheat them by having no profit to share. For example, according to Wikipedia, Return of the Jedi, despite having earned $475 million at the box office against a budget of $32.5 million, “has never gone into profit.”

            When companies have huge revenue streams, they start to move the money overseas (Apple, Google, Microsoft), but that’s not Tesla’s problem right now. Tesla is in the early stages, and needs to channel its money and energy into making cars, building infrastructure, making deals, and building good PR. They aren’t an R&D company as in making a better battery, but they probably do optimizations research (in the manufacturing sense), and do research for better design, function, and ergonomics in the cars and charging stations.

        • 0 avatar
          orenwolf

          Calling SpaceX subsidized is to ignore the cost-plus contracts that the existing players operate under.

          *all* the oldschool players receive contracts for the flights, and *in addition* they receive R&D funds as well. SpaceX, and the other new entrants, only receive costs-per flight. Costs that are drastically lower than the oldschool players.

          SpaceX is many things, but every single flight on a Falcon 9 versus an Atlas or Delta saves the US taxpayer an enormous amount of money.

        • 0 avatar
          TriumphDriver

          I think Big Al has correctly described the big problem with batteries that the enthusiasts seem to gloss over. There’s some numbers at http://investorintel.com/technology-metals-intel/lithium-ion-batteries-three-critical-mineral-constraints/

          It would be wonderful if it were otherwise, but reality can be sometimes inconvenient.

          Cue comments on some anticipated tech breakthrough in battery technology that will save the day.

    • 0 avatar
      WheelMcCoy

      “He basically sold a crap load of Tesla stock, then used Tesla to bail out his investment in SolarCity”

      The deal hasn’t happened yet. A vote is required from shareholders under stock exchange rules. Based on the uproar, my guess is the majority will vote no.

  • avatar

    Well, to put it mildly, it is a massive gamble, from all involved incl. the financial markets, to put everything on electric drive. Why? Oil prices have been falling. Governments are reassessing fiscal treatment of the models Tesla is producing. Electricity storage through batteries is not what should be expected from what Musk envisages.

  • avatar

    Preston Tucker.

  • avatar
    jdmcomp

    Sadly, when you cannot cover your debts, confuse the issue with even more debts.

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