A Can’t Lose Deal… “Public” Venture Capital

After the debacle that was Solyndra, we hoped that “public” venture capital would die a much deserved death. Alas, we once again underestimated the arrogance and self-professed intellectual superiority of the bureaucrats!

Well we, cynics of “public” venture capital (aka government sponsored business), should hide in shame. We obviously didn’t give enough credit to the great and powerful “Obama!” and his exceptional business knowledge (not to mention staying power), garnered of course from his vast experience in private industry.

Case in point – Tesla Motors

Call me old fashioned but I’m finding it hard to get enamoured with a car I can only run for about 200 miles before I have to “reset it”…yeah, plug it into a coal-fired power station. This is what “they” call “green” today. Way to go boys!

Yet, Tesla is the darling of Wall Street!

“But Chris, you don’t get it! Elon Musk is a genius, and this is the future.” Hmmmm, OK, go on… “Remember, you have to pay for growth, and Tesla is a growth company.”

Gee, thanks for explaining that, I feel much better now. And here I was, thinking that I’d seen this before…somewhere. Nope, it’s definitely different this time! You’re right Mr. Tesla cheerleader, there’s nothing eerily familiar, or scary, about what’s happening with this company. It is different.

Different how?

“Well, for starters we’re in a ‘new’ economy stupid.” Really? You mean an economy dependent on the FED’s insane QE continuing into eternity? An economy dependent on carbon credits, ZIRP, government bailouts, banking bail-ins, government loan guarantees, money flows, and hubris…lots of hubris.

Anyone trading the markets today must realise that valuations don’t matter. Revenues don’t matter. Pfft, get with the program already! Housewives and hair dressers of the world rejoice, fire up your E*Trade accounts and retake your seat at the day-trading merry-go-round. Buy some Tesla!

You see, the ingredients for success are much different today. Tesla has certainly nailed it in that regard. Between their US Department of Energy loans, which have reportedly been paid back, money Musk “borrowed” from the US tax payer ($465 Million), they then went BACK to the trough for another “undisclosed” amount. WTF?

The lesson here: Marketing works, especially when you have the right friends! Tesla obviously has phenomenal marketing prowess. I commend them for this…well done.

The reason for their success, outside of cheap loans from the public, has been their targeting of the high-end luxury market. This has worked because rich guys can and will pay for “cool”. Throw in a little bit of “it’s good for the planet” and you have a winning model, especially amongst Hollywood types!

Let’s face it, if you’re rolling in dough the price tag matters not. The trendier the better. After all, a new Tesla sports car for a guy like Charlie Sheen amounts to a week’s worth of his cocaine habit. And, after all, celebs need something to cart their adopted, ethnically-contrasting babies around just like the rest of us.

So, for you home bakers, here’s the recipe: A heaping teaspoon of government welfare checks, one good looking and well-spoken CEO, a few carbon credits, a gallon of QE-led credit boom, a couple of cute CNBC hostesses stirring the mixture and voila…success!

But let’s talk reality for those of us who still care.

Consider that Tesla sports a market cap of only US $13.6 Billion. Yes, that’s billion with a “B”. But don’t worry, it’s only trading at a forward P/E of 100. It’s still cheap as chips!

For comparisons sake, GM’s trailing P/E is 11.9, and Ford’s is 10.7. Mind you these are merely Johnny-come-lately wannabes, unlike Tesla, which by the way boasts an enviable EBITDA of NEGATIVE US $269 million!

“Come on Chris, you buzz kill! Lighten up, they’ll grow into that PE. Look at their revenues!”

Yeah, try again. US $945 million in revenues amounts to a rounding error on the balance sheet of GM. Unbelievably, Tesla’s market cap is fully 25% of GM’s market cap! Insanity reigns supreme.

Now, I can hear the Tesla cheerleaders…it’s deafening. “What about their first quarter profits of US $11 million? Well, as I read it there is roughly US $100 million in unsustainable line items in there, including US $68 million in carbon credits. Wipe out the Obama-mandated “loan” from the taxpayer and we’re staring at a giant, smoking hole in the balance sheet.

Tesla shareholders can also be comforted by the following: The Company guarantees that the residual value of their cars will be higher than any other luxury car on the market after 3 years. How do they know this? Well they don’t of course, but therein lies the difference between marketing and implementation. Mr. Musk will just go back to the taxpayer-funded trough, and his good pal Obama for more dosh if things don’t pan out…at least that’s been the precedent.

I haven’t even mentioned the obvious yet… Every other car maker in the world, to date, has been unsuccessful with their electric car initiatives. From the Chevy Volt to the Nissan Leaf…not to mention the Fisker, which was actually a pretty cool ride. They’ve all flopped.

Bottom line. Musk is a genius, he’s good looking, has a reassuring demeanor and in the end the economics don’t matter (nor do sales). After all, the money is free when you move in the right circles.

Tesla Chart
Parabolic? We know how this story usually ends…

Just look at this beautiful chart. What could possibly go wrong? Next stop the moon Alice!

I am however reminded that things can remain insane for longer than you can stay in the game. If you’re short that is. That’s likely the case here. I don’t see anything on the horizon…yet… that indicates a tipping point for Tesla. It’s one to keep a close eye on because it bleeds cash, has “unique” accounting, is led by a man with a questionable history of telling the truth, and though I’m not a car guy, from what I can tell has nothing of proprietary value. It is therefore a marketing company that just so happens to make cars funded by the tax payer. And that will go on until…well….until it doesn’t.

– Chris

The electric car, a “new” idea… “Yes, my grandfather worked with Thomas Edison on the electric car, and he sold electric cars at the 1900 World’s Fair in Paris.” – Al Jardine


This Post Has 7 Comments

  1. Weapon

    What does Tesla Motors have to do with Obama other then the fact that they paid back the loan at that time?

    1) The Tesla Model S is rated 265 miles range under the 5 cycle test.

    2) Being green never meant 0 pollution, it means going towards the goal of reducing pollution over the norm. So even buying a higher MPG gasoline car is technically going green. Think of it like a scale of speed, your never going to be moving at the speed of light but going towards that goal.

    3) Even if you power an EV with 100% coal, it will still be more efficient(at least here in the US) then a gasoline car. That said no state use 100% coal, only about 4 states use over 90% coal. My state for example uses only 5% coal. Country average for 2012 is 37% coal.

    4) It has nothing to do with it being a new economy, Tesla is being evaluated as both an automotive company and as a technology company. Though it is true that valuations don’t matter and it has always been the case. That is because valuations are based on belief in something’s value. Would you sell your product for a dollar bill if it had no value? A person has a perceived value of something and that perceived value is backed up by others. This is how a luxury car can lose its value just by driving off the lot while some really old car gains value with time. Tesla is trading on the fundamentals that EVs will be the future and that they have no competition in the market for at least until the Gen III comes out. One of the advantages that Tesla has as a technology company is if you have a gasoline engine, it is going to cost you the same price to build that same engine. In Tesla’s case is different, every quarter that passes, Tesla’s margins grow as the technology becomes cheaper and cheaper to produce! And with no competition, Tesla does not need to bring down the price to be competitive.

    5) Tesla got a DOE loan from the government and payed it back with interest. They did not go back to the government for an undisclosed amount. They sold off stocks with a 2nd offering. They made a total of around 1.1 billion(your going to have to check exact numbers in the SEC filing) and paid off the loan with interest.

    6) While Tesla earned a bit from carbon credits, the amount was not that big. Most of the extra earnings have been from ZEV credits. ZEV credits are not carbon credits.

    7) Tesla’s valuation and GM’s valuation depends on potentials. If you bought out GM today your not going to double it by next year. In Tesla’s case, doubling to next year is cake. And then comes the margins. Even if you bought GM, your margins are going to be tiny. In Tesla’s case as I explained above the margin potential is huge. Then there is the CCC to consider. Tesla’s price is high because of hype and a short squeeze, but it is not coming down because of the fundamentals.

    8) As far as the resale value guarantee, it is not very hard to guarantee really. First of all, looking at the roadster the resale value is pretty high 5 years later. 2nd of all, part of what brings down the value of luxury cars is the manufacturer releases a new model every year. Who wants a 2010 car when 2011 is out? Tesla does not plan to release a new Model S for 4-5 years. So yeah, their resale value will obviously be higher then any other luxury car in its class. Also, the guarantee is insured by the banks with Musk’s personally liable. The government is not going to bail out a person.

    9) Well technically, the chevy volt and the fisker are hybrids, not pure electrics. I mean what would you classify as an electric car? The prius is an electric hybrid and it is doing pretty well. Most modern cars while do not drive on electricity use electric to pretty much operate everything else. That said,the biggest reason why nissan leaf, chevy volt and fisker are doing so badly is simple, and it is for 2 reasons. First reason is most of them are crappy compliance cars rather then actual entries. Second reason is they are using dealers to sell their cars.(Dealers make most of their money on service & parts, not on sales. Last thing a dealer wants to sell is an electric car). For the record, Henry Ford’s first car company flopped.

    1. Chris MacIntosh


      1) Musk has an army of lobbyists working for him and has cashed in on the “green energy” government bonanza. Tesla, SpaceX and Solar city all government funded. SolarCity spent $535,000 lobbying congress and DOE. Low and behold they then received an initial $344M and an additional $66M. SpaceX has recieved over $1B in tax payer funding. Yep BILLION.

      The fact is that in a true free market economy Tesla Motors would not exist period. Obama has used the “success” of Tesla as his poster child for his “green energy” program.

      2) Not sure we agree.

      3) It is more efficient ONLY due to tax payer theft. It is not economically efficient without the myriad of “incentives”. The same gimmick is being applied as is applied to the CPI calculations. It’s bollocks.

      4) I’m not sure why you think “valuations don’t matter”. I’ve been investing all my adult life and valuations ALWAYS matter.

      5) The IPO was in place while essentially the government backstopped it with the loans. Hardly like a normal IPO. Musk pocketed nearly $1B in the deal and went out and bought himself a $17M Bel Air mansion…thanks to the entire govt/public structure. Again, not possible for the “average Joe” running a business, and not free market!

      6) Carbon credits, ZEV credits…it’s semantics really.

      7) They need to grow by 600% annually to get to the same valuation as GM for example. Eliminate their ZEV credits, which were $68M last year, and you’re staring at a big hole in the balance sheet. Just do the math.

      8) This conflicts with the point you made in #4. As far as who will be on the line…it will be the shareholders.

      – Chris

  2. Weapon

    1) I do not know what Solar City and SpaceX has to do with the range of the car. But for the sake of accuracy, SpaceX 1 billion was made up of 200 million in private equity, 100 million from Musk, 100 million from investors and then in 2012 they got 400-500 million from NASA as a down payment for their contracts. The funding looks legit to me, mostly considering that you can’t even launch anything into space without approval from NASA for obvious reasons.

    As for what will exists in a true free market, probably not one company today would exist in a true free market. Why? Because a true free market like all ideals is impossible in reality. It is like finding a person who has never done anything wrong in their life. Which is why concessions are made to accommodate ideals in the real world.

    And as for Obama using Tesla as a success is not shocking, a politician taking credit for things he had 0 contribution on is nothing new.

    2) Which part do you not agree with? I mean there are extremists who think we should all go back to living in caves and have no emissions at all. But that is why they are extremists and unfortunately it is the extremists who get the most media time because the mass media likes extremist polar arguments.

    3) It is more efficient due to higher regulations on coal and other fossil fuels. And looking at the unregulated coal and gas mix going on in china with smog all over cities where children have to be kept in doors, people walking around with masks and don’t get me started on the high cancer rates.

    While I agree that like the CPI index, things can be manipulated. Just like the CPI index, we have 3rd party sources validating the results. Fact of the matter is, the results still stand that an EV 100% powered by coal in the US is still cleaner then a gasoline car with the exception of sulfur levels but considering coal plants are away from civilization generally, the impact is not as grand. Luckily though we as a country are moving away from coal as usage drops every year.(in terms of percent)

    4) The reason why I don’t think valuations matter is simple, valuations are like art, you have a bunch of experts come in and tell you how that line with a circle is worth millions and give you a unique perspective of how grand it is and the deeper meaning. But it is still a line and a circle at end of the day. Same thing with company evaluations. When you evaluate a company, you evaluate it based on your own metrics of what you think it is worth. When you have a lot of people believe in the same metrics, then it makes things gain value based on those defined metrics. And if those metrics were right 100% of the time and everyone believed in the same thing, then you will not have a market. Things have value as long as people believe they have a value. The game of stock is all about psychology, this is why 80% of trades are done by automated machines with complex algorithms that monitor social networks and the internet.

    5) To be fair, I don’t think an average joe is capable of starting a car company. There is a reason why we had no successful new American car company for over 50 years until Tesla came along. Musk had to literally spend his last penny keeping Tesla alive. He pretty much sold everything he had to keep it going. As far as Musk making a billion dollars on the IPO is not the case. When the IPO came out, he sold 1 million shares which would only give him a few million in cash. the IPO also made Tesla only 210 million at the time. For the record, Musk right now has more shares then prior to the IPO. He has a personal debt of around 250 million to Goldman Sachs.

    6) Not semantics, big difference. Carbon credits cover CO2 emissions. ZEV credits cover local pollution only like NOX. You can argue global warming one way or the other, but I am pretty sure you appreciate clean drinking water and air that does not clog up your lungs.

    7) First of all, no one said Tesla is going to be evaluated as big as GM over night? There is a reason why today GM still has a higher valuation. That said 600% growth for Tesla is not impossible since right now they are production capped, not demand capped. With the introduction of Model X, Gen III sedan and suv, roadster 2, a pickup truck and 500 mile Model s they will position themselves on that path. I would estimate that Tesla might reach GM valuation levels in 2017/2018. But it won’t be until 2020+ till Tesla reaches the size of GM. At that point though, the EV market is going to be much more competitive so whether or not Tesla will reach GM’s size depends on Tesla and the competition. Part of what is fueling Tesla’s growth in valuation is 0 competitors.

    As far as ZEV credits go, the ZEV credits will deplete by end of this year. Tesla should be able to report 25% gross margins in Q4 without ZEV credits.

    8) It doesn’t conflict with #4, Luxury cars lose a lot of value once used. The reason is simple, the luxury cost includes prestige and new features. There is no prestige in owning an old luxury car and all the new features are not new anymore. Since Tesla does not plan to release a new luxury car Model S for 4-5 years it will hold better value.

    If there is anything to be worried about in the guarantee it would be #5. Which is the fact that I don’t think Musk has that much money left to his name considering the debt he is in. But generally again it is a safe bet because as I mentioned above, considering the other luxury cars value it is not hard to beat.

    1. Chris MacIntosh

      Well its in.

      From the company themselves:
      “Since consensus estimates reflect non-GAAP results with lease accounting, our comparable Q2 non-GAAP net income was $7 million or $0.05 per share.”

      Unbelievable. A company that reports non-GAAP revenue…lol
      Take a look at “net income” lines and “free cash flow”
      A fiction novelist couldn’t make this shit up.

      Remind me to call my accountant. Apparently non GAAP financials are now being accepted. Awesome!

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