Tesla (TSLA): So What’s the Angle Here?

Tesla - TSLA

Yesterday on Twitter Elon Musk floated the possibility of taking Tesla (NASDAQ: TSLA) private.  Perhaps coincidentally, it was revealed that the Saudis have accumulated a stake in Tesla worth a couple of billion.  Adding two and two, many have leaped to the conclusion that the Saudis will be in essence the private equity firm behind the deal, perhaps as part of some futuristic hedge against the end of oil.

As with all things Elon, look for the con.  Case in point.  He hyped the Tesla takeover of Solar City as the creation of a visionary vertically integrated clean energy company.  I saw it as a way of preventing an embarrassing bankruptcy of Solar City, and of bailing out Musk relatives using Tesla shareholder money.  The wind-down of Solar City’s business pretty much has proven me correct.  And  all talk of the visionary vertical integration strategy has ceased.  Indeed, the lack of discussion of the solar business reminds me of the old expression “don’t speak ill of the dead.”

So what’s the angle here?  I conjecture as follows.  Tesla is still losing money hand over fist.  It is burning less cash–but only because it has slashed expenses and capex–which puts a crimp in its growth plans.  And “burning less” is a relative statement–it is still a world class incendiary.

In the past Elon has fed the cash machine with stock and bond sales.  But he has publicly stated repeatedly that no future capital raises will be necessary.  It is clear, however, that such promises are not credible.  He has also promised that profits are just around the corner.  But that promise is also hardly credible, especially after serial failures to deliver on past promises.

This puts Elon in a bind.  He needs money, but a capital raise would (a) hammer is already tottering reputation, and (b) more seriously, create a huge risk of shareholder lawsuits and an SEC securities fraud case.

Further, it is clear that Elon finds many aspects of running a public company distasteful.  He particularly hates analysts (stock analysts, not psychiatrists, though maybe he hates them too!) who question his judgment, his statements, and sometimes his sanity.

He also hates short sellers.

So how to escape these problems? East–go private! Especially if the world’s deepest pockets are behind it.  No need for a public capital raise.  No more pesky outsiders questioning his competence, strategy, or behavior.  No more short selling a-holes.

The trifecta.

Of course, maybe Elon is just attempting to goose the stock price and inflict some pain on the shorts.  But if this is the case, he is digging his securities fraud hole deeper.

As for the Saudi angle.  A big bet on Tesla would be a rather foolhardy way to hedge against the end of oil.  It is a hedge rife with idiosyncratic risks–Tesla’s mercurial CEO being just one of them.  A more diversified strategy–investing in battery technology, and cobalt mines, and the like–would make more sense.

It will be entertaining to watch this spectacle unfold.  The one thing I can be sure of is that the story that Elon tells will not be the true story.  So look for the angle, and watch for the con.  My conjecture is plausible, but it is not the only possible scenario.  But whatever scenario plays out, it is likely to be as crooked as a dog’s leg.

About Craig Pirrong 232 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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