Archive for the ‘General Business’ Category.

The Apparent Cash Crisis At Tesla -- Is The $TSLA Thursday Model Y Reveal Really Just a Stealth Emergency Financing Gambit?

I was listening this evening to the excellent Hidden Forces podcast on Tesla and they said something that really resonated with me -- its hard to discuss Tesla because there is so much crazy stuff going on:  A CEO who in many ways channels Donald Trump's worst characteristics; multiple SEC investigations, an ongoing contempt hearing; a story yesterday about thuggish behavior towards a whistle blower; strategic moves that are made, unmade, and then changed again in just a few weeks; astoundingly high turnover in management ranks, including an esteemed general counsel who couldn't hung around for even 60 days and then purged all reference to Tesla from his CV; fantastically passionate bull and bear communities; expansive promises that are seldom kept; outright fraud -- all in a company valued at $60 billion dollars and whose stock price rose 2% today under a barrage of negative news that would melt companies that have 100-year track records.  I have been meaning to do an update on Tesla but where to start?  How can I even bring readers unfamiliar with the story up to date?  I have started and stopped this article about three times, but now I am going to plow through and get something out.  If it is not entirely coherent and far from complete, my apologies.  If you want more, go to @teslacharts on Twitter as a starting point and you will discover a lot of really smart people who are, believe it or not, even more obsessed by the Tesla train wreck than I.

In the past I have limited myself to two issues.  The first is the outright fraud of the Tesla acquisition of SolarCity, another Musk company that was going down the drain until Tesla bailed it out.  The transaction appeared (even at the time) so transparently self-serving to Musk and his family that it just screamed fraud, and time has only made this clearer.  Musk sold the synergy-less acquisition to Tesla shareholders based on a solar shingle technology he portrayed as ready to go, but that still has not seen the light of day 2 years later.  In retrospect, it is crystal clear the solar shingle was a sham that was fraudulently hyped to make the deal go through.  This fire and forget approach to new product announcements has become very familiar at Tesla -- Musk scored extra subsidies from California with a battery swap technology he demonstrated one time and then has never been seen again, and Musk announced a new Semi truck and harvested a number of deposits for the vehicle and then has not even mentioned the product for months.  Since the acquisition, SolarCity new installations have fallen precipitously every quarter, demonstrating that Tesla had no real commitment to the enterprise, and this is only going to get worse as Musk announced that its last remaining sales channel is going to be closed.

The second Tesla issue I have tangled with is the strategic dead end that Tesla has reached, and the bizarre fact that a company in a capital intensive industry that is valued as a growth company has, over the last 12 months, virtually shut down R&D spending and now does less capital spending for its size than does even staid companies like Ford.  I won't cover all this ground again, I refer you to posts here and here-- If you are new to the Tesla story, start with these.   But in short, Musk made the fateful choice to take what was already destined to be an uphill climb for a new company to penetrate an extraordinarily capital intensive industry and made it an order of magnitude more capital intensive by his strategic decisions.  Specifically, Musk chose not only to start up car manufacturing from scratch, but to also build out his own sales and service network AND build out his own fueling network.  Kia was the last brand I can remember that penetrated the US market, and it only had to worry about investing in building cars -- it relied on third parties like Roger Penske and Exxon to build the sales, service, and fueling networks.  But Tesla is committed to building out all three.

This strategic decision really began to drag on the company in 2018.  Tesla's decision to do its own manufacturing -- in freaking California no less -- held back its growth as it spent years relearning auto manufacturing lessons already well-known to other players.  It has fallen behind in Model 3 production vs. its own stated goals and there is no apparent progress adding manufacturing capacity for a raft of announced but still theoretical products (semi, coupe, Model  crossover, pickup truck, revamped S&X).   A better approach might have been to contract for manufacturing like Apple does with the iPhone, especially since there seems to be a lot of excess capacity right now in Chinese auto production.  Even worse, as their fleet grew with the Model 3 ramp, Tesla was not able to invest fast enough to grow its sales, distribution, and service networks in proportion, leading to a lot of disgruntled customers that had bad delivery and servicing experiences.  The same is true for their charger network, where they have again not been able to keep up with investment and are now falling behind technologically as new entrants have faster charging times, times Tesla can't match without a major investment in upgrade of its network.  More manufacturing capacity, a better distribution network, more sales locations, more servicing capacity, more body shop capacity, more parts production capacity, more chargers and massive charger upgrades -- Tesla fell behind on ALL of these in 2018.

And then the really weird thing happened.  Sometimes growth companies fall behind when they grow to fast, but Tesla seemed to have stopped even trying to keep up with capital needs in the second half of 2018.  Their R&D fell, despite many promised new products that were a long way from delivery.  Their Capex levels fell to barely maintenance levels (what might be expected to just keep current plant running) and were reduced to levels as a percentage of sales that were lower than staid, traditional, non-growth auto makers.  Right when they really needed to make a capex push to make their strategy a reality, they stopped spending.

Tesla claimed, and claims to this day, that any slowdown is just the result of efficiency and responsible management.  But this is crazy.  Growth companies slow down and focus on profitability when the market is saturated and the growth phase is over.  Uber has not slowed down.  Even Amazon 20+ years in has not slowed down.  Slowing down is death for the stock price of a growth company, and Musk is -- if anything -- obsessively focused on the stock price.  Tesla is currently valued north of $60 billion. Without enormous growth expectations, a $20 billion valuation might be too high.  Added to this is the fact that after having the luxury EV market to itself for years, competition is finally coming from nearly every luxury care maker.  Tesla's 10-year moat is down to maybe 6 months.  It needs to be updating the S & X and rushing new products out ahead of competitors.  But they have almost given up on the S & X and Audi has beaten them to the market by at least a year and maybe two with a crossover model (the e-tron), a very popular format in the US right now.

And at first there does not appear to be any reason for this slowdown in spending.  Tesla has a stock that a dedicated group of fans gorge themselves on.  With a $60 billion valuation and a passionate fan base that thinks the company is still undervalued by at least a third, this company should be able to raise billions of capital easily.  They could theoretically raise $5 billion with less than 10% dilution -- Tesla almost dilutes itself that much every few years just from employee stock-based compensation.  Add its lofty valuation to what was reportedly $3.5 billion or so of cash on their balance sheet at the end of last year and consumer demand that the CEO describes as near-infinite, and this does not look like a company that should be slowing down.

How do we reconcile these facts  -- a near halt in growth investments despite lots of cash and a sky-high stock valuation?  Here are a few things going on under the surface:

  • While Tesla had over $3 billion in cash, they also had over $2 billion in payables.  The company has a reputation of stretching payables to the absolute limit.  It may well be that the end of year cash number was the result of a lot of window dressing.  In fact, Tesla skeptics have looked at the interest they earned on their free cash in the fourth quarter and have argued that for this number to be as low as it was, Tesla's average cash balance must have been much lower than their end of year reported number.
  • Savvy observers (of which I am not one) who know Wall Street argue that Tesla may well have either regulatory (e.g. SEC investigations) or practical (e.g. information they do not want to disclose in a prospectus) barriers to raising capital, and that the lack of a capital raise for many months can only mean that for some reason Tesla can't raise.
  • Tesla just had to pay off nearly a billion dollars in convertible bonds when the stock price was not high enough to trigger the conversion
  • Demand for Tesla cars in the US has fallen substantially in the first 2 months of this quarter.  Musk liked to portray the huge Model 3 sales ramp in 3Q18 and 4Q18 as the start of an S-curve, but now those quarters look more like a one-time bulge as Tesla blew through over 2 years in orders in just a few months.  Aggressive pull-forwards of demand by Tesla in the fourth quarter as well as the reduction in US and Dutch EV subsidies have also hurt.  [I have to add one note here just for color.  The Tesla fan boys have argued to me on Twitter that Musk has already explained this to their satisfaction -- that Tesla is diverting cars away from the US for their European Model 3 introduction.  This makes ZERO strategic sense.  What company ever enters a new market by giving up hard-won market share in their core market?  There is plenty of evidence that everyone who wants to buy a Tesla in the US is getting one with a very short lead time, implying this is a real demand drop and not Musk's typical supply-constraint story.]

A month or so ago I thought it very possible given these headwinds that Tesla may soon be facing a cash crunch if it cannot do an equity raise.  However, new events that have occurred over the last week convince me that this cash crush is almost a certainty.  There is no way I can explain Tesla's most recent actions as anything but a company desperately trying to stave off a near-term bankruptcy.  These actions include:

  • In early March, Tesla's February sales numbers in the US were announced, and they were a disaster.  Within mere hours of this reveal, Musk teased an announcement (on Twitter, where else).  This event turned out to be a quasi-secret invite-only conference call involving what appeared to be hand-selected media members who had historically been generous to Tesla (only a later uproar by bulls and bears alike forced Musk to release a transcript. On the call Musk announced two things --
    1. Tesla would begin taking deposits for the long-awaited $35,000 Model 3 (though delivery dates were hard to pin down).  Musk had said not too long ago that Tesla was not able to make this car yet profitably, and he refused to discuss margins on the vehicle.  Skeptics like myself suspected that the car can't be made right now for a positive gross margin, and instead this was a back-door attempt to gain new financing via customer deposits.  A couple hundred thousand (theoretically) deposits of $2000 each could yield some real money for a cash-strapped company.  The only thing Musk would say about controlling costs on this product was #2:
    2. In a totally unexpected (even to most of Tesla employees and management) announcement, Musk said Tesla was closing its stores and going to an online-only sales model.  This would supposedly save 6% of the cost of the new cheaper Model 3's, ignoring of course that SG&A reductions do nothing to fix a zero or negative gross margin.  Everyone, including most especially Tesla store employees and maybe even the Tesla BOD, was stunned.  Here is a company whose US sales are going over a demand cliff and they respond by ... eliminating their stores and sales force?
  • Simultaneously, Tesla has been announcing a series of price cuts on, worryingly, many of their highest margin products including the S and X and high-margin upgrades like paint and autopilot on the Model 3.  Almost no one can see how the company makes any sort of viable gross margin at these prices, and they have the look of desperation.  All these cuts did was aggravate buyers who had just paid the higher prices and who faced a suddenly lowered resale value for their car.
  • Within days of the store closing announcement, the WSJ and others published stories about how Tesla was unlikely to see much savings from these closures as their leases all had expensive cancellation clauses that Tesla could still be on the hook for as much as $1.5+ billion.  Incredibly, this seemed to come as a surprise to Musk and helped reveal just how slapdash these announcements were.  Since then Tesla has announced that maybe some stores would stay open and maybe some sales people would not be fired but just have their bonus eliminated.  As I write this, no one really knows what Tesla is going to do, but to many observers this move looks more like what one does in a bankruptcy than in the normal course of growing a business (in fact, bankruptcy is the one time lease cancellation costs can sometimes be evaded).
  • Tesla, furthering their management Abbot and Costello act, partially reversed their price cuts saying that prices would now rise a few percent, barely days after they were cut.  The net of the two announcements still result in vehicle prices substantially lower than in 4Q2018.
  • In an incredibly bizarre move (and there is a pretty high, or low, bar with Tesla for saying something is truly bizarre), it was recently revealed that Tesla last November bought a trucking company, or really they bought a bunch of trucks, with stock.  Essentially, this is a $60 billion company with supposedly $3+ billion in cash and they are paying their suppliers in stock.  Oh, and by the way, remember when I said above that Tesla had already vertically integrated too much and could not afford their capital needs already?  Well, this is yet another silly vertical integration.  Tesla has no business being in the trucking business, a highly competitive business with a lot of incentives to offer good deals and great service for an incremental bit of demand from a growing company like Tesla.  My sense was always that there is plenty of 3rd party trucking capacity out there, but that truckers just did not like serving Tesla because Tesla pays its bills so slowly and acts so unpredictably and imperiously.
  • Tesla continues to produce Model 3's near full volume (around 5500 a week, despite what the nutty Bloomberg model says) even given a fall in demand.  Tesla seems to be building inventory, and certainly the recent price cuts are not a sign they are supply constrained (as Musk continues to insist).  Tesla skeptics believe that Musk has signed a number of supplier deals where Tesla got rebates and price cuts in exchange for volume guarantees, and that Tesla is stuck over-producing cars or it will have to return a lot of money.  [update: @Paul91701736 who goes by Machine Planet on Twitter spends a lot of time observing and researching Model 3 production and says "there's one thing in this piece I can't agree with, a 5500/wk Model 3 production rate. I think ~4700 is the absolute max sustainable rate and it's been well below that most of the quarter"]
  • Tesla is asking customers in Europe, as they did late in 4Q18 in the US, to pay Tesla the full price of the car even before they see it or schedule a delivery.  Frankly, I am staggered anyone would buy a car this way, especially with the fit and finish problems Tesla model 3 customers have found on delivery.
  • Tesla added about $500 millon to its asset-back bank line of credit and continues to roll over some SolarCity debt.
  • When it was obvious that the Model 3 announcement had not created enough deposit activity, Musk then announced they would introduce the long-awaited Model Y crossover, in a reveal set for Thursday afternoon March 14.

Tesla has admitted that it still has not even decided where to build the Model Y, much less started building the plant and tooling up for it.  Given that, the car HAS to be 18-24 months away.  So why reveal now?  Remember that Musk and Tesla have a history of using new product reveals as fund raising tools.  The fake solar shingle product got Tesla to buy SolarCity.  The fake battery change demonstration got Tesla millions in added subsidies from California.  The complete vaporware Tesla semi reveal gained Tesla millions in deposits from corporations that probably didn't expect to ever get the truck but wanted to virtue signal their green credentials (Tesla seldom mentions this product and has announced no plans for actually building it).  The announcement in April, 2016 of early reservations for a $35,000 Model 3 which turned out to be over 2 years ahead of it ever being available in volume occurred just ahead of a funding round.  I am sure experienced Tesla observers could list many more examples, but the point is that there is very good reason to believe that the Model Y reveal (and maybe a pickup reveal in the same way the coupe was thrown in on the semi reveal) is a cynical, desperate attempt by Tesla to raise some cash from consumer deposits.  My guess is that it will not work so well -- the recent $35,000 Model 3 announcement garnered few deposits and Tesla had disappointing deposit activity when they opened up Europe.  Surely folks have observed that putting down a deposit does not get one a car any faster, and just makes one an unsecured creditor of the company (and may even, as was the case recently, sign one up to pay a higher price than folks who come in only a few weeks later).

As an aside, you folks know that as a libertarian I do not advocate for a lot of extra regulation so take the following as a prediction rather than necessarily a recommendation.  Tesla has pioneered the deposit-taking, go-fund-me model for new car introductions, and I think that when this all blows up and the dust clears, one of the results will be tighter regulation of how companies handle deposits on their books.  I would expect the SEC to require better transparency on deposit numbers and that customer deposits be escrowed in some way and not co-mingled with general operating funds.  And while we are at it, I will recommend one regulatory / accounting change -- the ability of car companies to leave ZEV credits off their balance sheet entirely and use them like magic pixie dust out of the blue to spice up random quarters needs to end.  These are real assets and need to be disclosed on the books like real assets.

Disclosure:  I am short Tesla via long-dated puts.  Shorting Tesla seems to make a lot of sense but it can be dangerous and harrowing.  Yesterday we were looking at news of Elon Musk acting like a Mafia thug with whistleblowers and still dealing with the fallout of Tesla's rapidly changing and contradictory strategic announcements, and the stock was up 2%.  Be careful.

Forget Net Neutrality, If the @FCC Wants to Improve My Life, Focus on Fixing the Telephone Caller ID System

I have written before that the caller ID system in the US is totally broken.  It is bad enough at home, but there are legal protections against spamming home numbers that mitigate some of the issues.  I will tell those of you who complain about spam on your cell phone or home phone that you have not seen anything until you have a business line.  The calls are endless, and caller ID is totally useless because every telemarketer seems to spoof the caller ID.  I have almost stopped answering by business number (more on that in a minute).

I did answer one call the other day that said it was from something like Loretta Smith.  I picked up and answered (thinking it might be a customer) and the person, obviously a male, said "I am calling from Such and Such capital company".  I get these all the time - banks won't make cash flow loans to any small business, even one with over $10 million in sales, but everybody and his dog wants to do equipment leasing.  So I began calling the person Loretta.  After a few times of this he got mad and asked why I kept calling him Loretta.  I said the caller ID system said he was Loretta, and that if that is incorrect it likely means his company is spoofing the system and that I was super unlikely to make a major financial transaction with a company whose very first contact with me was based on fraud.

As I said, I have mostly stopped taking calls.  I have a voice mail message that tells folks my email and that they are welcome to email me and I will get back to them promptly, which I do.  I still encourage front line employees and customers to contact me personally if they are having an issue my local managers can't fix.  I used to get these calls by telephone but I just can't answer my phone any more, it wastes too much time dealing with spam.

I have written about my personal frustrations before but what really got me to write this post was a contact with a sales rep for a product I was buying.  This person's entire income comes from phone calls from customers wanting to buy this company's product (for which they are the exclusive local distributor).  This is a one-time product sale and so typically she does not know her customers, they are all new.  When I first called, I got her voice mail.  In the middle of leaving a message, the person picked up and said she was sorry but she hesitated to answer her phone due to all the spam.  Can you imagine?  A salesperson who depends on people calling to buy product that doesn't want to pick up the phone.  That is a broken system.

The Crappy State of Service Businesses

Perhaps it was always this way, but I am just at the end of my rope dealing with service businesses.  Whether it be my roofing contractor or my bank or my background check provider -- really almost everyone -- absolutely no one seems to be able to follow through on service promises.  Increasingly I have to keep a long tickler list of things that my service providers should just reliably do as promised, but that I have to repeatedly follow up on with reminders and such to make happen.  It is exhausting.

Not Quite A One-Star Review, But Worth Sharing

In the spirit of something John Scalzi has done in the past -- he posts some of his 1-star Amazon book reviews online as a sort of therapy -- I like to share some of my favorites.  This one is not quite a one-star review but it made me laugh this morning:

Lol, we are closed for the winter (the TVA, who owns this campground, requires that the campgrounds near its dams be closed in winter).

By the way, this is from my daily report at  They work well for me managing reviews over multiple locations.

Update on Tesla from The Conference Call Today

Today after the market closed was Tesla's analyst conference call to review  fourth quarter earnings.  TL:DR It was as weird as ever, maybe weirder.  Even before the call, Elon Musk said that the numbers released today would be un-audited, and the call ended by saying -- in a sort of "oh by the way" over the shoulder parting shot -- that their CFO was leaving and being replaced by a 36-year-old with only Tesla experience and no prior CFO role (not unlike the random young dude that the Arizona Cardinals just hired as their coach, but that is another story).  Neither Musk statement was a big confidence boost given the myriad questions swirling around the legitimacy of Tesla's reported financials.  But the REALLY weird stuff was in between.

The LA Times, which really has had some of the best Tesla coverage, has the best summary I have found so far of the call.  Before I get into some things we learned that helped support my article I wrote the other day, I want to share some of the priceless other highlights of the call.  All from the LAT article:

Tesla faces questions about whether enough new Model 3 sedans can be sold to generate substantial profits.

“The demand for the Model 3 is insanely high. The inhibitor is that people don’t have the money to buy one,” Tesla Chief Executive Elon Musk told analysts on the call.

This is really hilarious.  The same could be said of Ferrari's, Manhattan Penthouses, and bone-in rib-eyes at most top steakhouses.  Once you get past the absurdity of the statement, you realize that Musk essentially admitted the demand cliff many have suspected for the Model 3, as Tesla has burned through its entire multi-year order book for the Model 3 in just 6 months.

Yet, Musk said, the new [China] factory [which is currently a bare patch of dirt] will be building cars at an annual rate of 300,000 vehicles by the end of the year, at an expenditure of $500 million — much less than a typical auto plant normally costs.

And much faster, by the way, than any automotive company in history has ever started up a new production plant.

It turns out, by the way, the Tesla still seems to be running itself like a free-wheeling largely-unplanned software startup rather than like a capital-intensive automobile manufacturer.  Imagine this from Daimler or Volkswagen or GM:

Musk said Tesla might build the Model Y at its Nevada battery factory but indicated no one should count on it. ”It’s not a for-sure thing, but it’s quite likely, and it’s our default plan,” he said.

But let's get to my thesis I have been arguing for a while.  Tesla has a lot of problems, but the one I have been most focused on is that Tesla is a growth company that has stopped managing itself for growth.  Both R&D and capital spending have dried up, especially in relation to revenues -- a particularly vexing problem because Tesla has chosen a strategy of owning the sales, service, and fueling networks  (not just manufacturing) so growth is even more capital intensive for Tesla than it is for other automobile manufacturers (see the earlier article for details).  Tesla's stock price is close to $300, but its current auto business is likely not worth more than $50 share -- the other $250 is hopes and dreams of growth, valuation that goes away if Tesla is no longer perceived as a growth story.

Beyond the fact listed above that Musk essentially admitted the demand problem in the US for Model 3, here is what else we heard:

Tesla owed much of its cash-flow improvement to a drastic reduction in capital expenses — which can signal either a reduced need to buy, say, factory robots or a slowdown of investment in future growth. In the last three quarters, capital spending has shrunk from $786 million to $510 million to $324 million.

This number is insanely low.  As @teslacharts showed today, this is equal to 4.5% capex as a percent of revenues!

The mature non-growing auto companies typically spend 5-5.5% or revenues on capex just to maintain their position.   4.5%  is NOT a growth number.

In a conference call with analysts, Musk said he still plans to build a factory in China this year and begin building a Model Y subcompact next year. Asked where the money would come from, CFO Ahuja said cutting costs and careful spending would do the trick.

Musk was unusually subdued but his usual speculative self. The China factory site remains a bare patch of ground, and no news was offered on loans from Chinese banks that Tesla is hunting for.

Beyond the fact that Musk is almost criminally full of sh*t on his projections for his China factory production, why the hell is Tesla digging around in the couch cushions to fund their Asian expansion?  Their valuation is at freaking 60-80x earnings.  Why aren't they raising capital for this and a thousand other things they need to be doing?

But in fact, Tesla is actually planning to contract its capital base, announcing in the call they will likely pay the upcoming ~$1 billion bond redemption in cash.

At the same time, past announced growth projects are falling by the wayside.  The semi truck, which was announced to great fanfare and helped pump up the stock price at a critical time, has essentially been dropped from the product plan (Musk did something very similar with the solar shingle at SolarCity, touting the technology and leveraging it to sell the company to Tesla, and then essentially dropping the product).

In the Model S & X, Tesla has already acknowledged that no effort has been started to update these aging products, and in fact production is being cut and much of the manufacturing workforce for these products has been laid off.  These two products have always been the main source of Tesla's gross margins and its unclear how they will make up the lost margin and sales from these core products that Tesla seems to be essentially abandoning rather than investing in and refreshing.  We also learned that prices are being cut on these vehicles:

On Tuesday, Tesla offered an $8,000 discount on S and X cars for customers who let Tesla limit the range of the car’s battery pack using custom software. The range for the software-limited Model S, for example, would be cut by 20 miles, to 310. That car cost $96,000 at the end of 2018. Tesla cut that price by $2,000 this month. Tuesday’s deal puts the price down to $85,000 — a reduction of $11,000 for 20 miles less range.

Note the software limitation does ZERO to cut Tesla's costs, so these are 100% hits to Tesla's margins.

Because the batteries themselves wouldn’t differ, production costs would stay the same as in the higher-range car. The gross profit margin falls by $11,000 per car. (A Tesla spokesman told The Times that improved efficiencies on the assembly line would help address that problem.)

The next milestone for Tesla will be release of fully audited 2018 numbers.  I have no idea when these will appear and would not be surprised if they are delayed.  There are still some real financial question marks in the numbers we have seen to date, and only the 10-K will begin to answer some of them.

In the past I have been careful to say that Tesla is a dangerous short and that you should not take my non-expert advice investing, and I repeat all that now.  I understand business strategy and I am more sure than ever that Tesla's strategy is falling apart and the wheels are very likely to come completely off in the first quarter.  However, I do not understand the stock market's ins and outs and whether Tesla's failings get translated now or later to the stock price  is not something I can predict well.  Trump could bail them out, some sucker could buy them, they could fudge their numbers for years, etc.  So be careful.

One More:  I forgot to mention that Tesla has reduced its SG&A expenses over the previous two quarters in absolute terms, and thus substantially on a percent of revenue basis.  For a mature company this is good news.  For a growth company, this is a sign that growth may not be the goal any longer.  SG&A staffing represents a company's capacity to do new things and take on new projects and enter new markets and add new services.   No way companies like Google or Facebook would have been trimming SG&A in the height of their growth years.  Cutting SG&A is what you do when growth is over or when there is a cash crunch or both.

Postscript:  Not to be too much of a pedant on myself, but I said "parting shot" which I think is OK but I believe the original term was actually "Parthian Shot" named for that army's technique of riding full on towards the enemy, then turning tail and riding away but firing backwards with a bow and arrow off their horse as they rode away.  Really used to piss off the Romans.

An Update on Tesla in Advance of 4Q Earnings

Yes, I am like an addict on Tesla but I find the company absolutely fascinating.  Books and HBS case studies will be written on this saga some day (a couple are being written right now but seem to be headed for Musk hagiography rather than a real accounting ala business classics like Barbarians at the Gate or Bad Blood).

I still stand by my past thoughts here, where I predicted in advance of results that 3Q2018 was probably going to be Tesla's high water mark, and explained the reasons why.  I won't go into them all.  There are more than one.  But I do want to give an update on one of them, which is the growth and investment story.

First, I want to explain that I have nothing against electric vehicles.  I actually have solar panels on my roof and a deposit down on an EV, though it is months away from being available.  What Tesla bulls don't really understand about the short position on Tesla is that most of us don't hate on the concept -- I respect them for really bootstrapping the mass EV market into existence.  If they were valued in the market at five or even ten billion dollars, you would not hear a peep out of me.  But they are valued (depending on the day, it is a volatile stock) between $55 to $65 billion.

The difference in valuation is entirely due to the charisma and relentless promotion by the 21st century's PT Barnum -- Elon Musk.  I used to get super excited by Musk as well, until two things happened.  One, he committed what I consider outright fraud in bailing out friends and family by getting Tesla to buy out SolarCity when SolarCity was days or weeks from falling apart.  And two, he started talking about things I know about and I realized he was totally full of sh*t.  That is a common reaction from people I read about Musk -- "I found him totally spellbinding until he was discussing something I am an expert in, and I then realized he was a fraud."

Elon Musk spins great technology visions.  Like Popular Mechanics magazine covers from the sixties and seventies (e.g. a flying RV! a mile long blimp will change logging!) he spins exciting visions that geeky males in particular resonate with.  Long time readers will know I identify as one of this tribe -- my most lamented two lost products in the marketplace are Omni Magazine and the Firefly TV series.  So I see his appeal, but I have also seen his BS -- something I think a lot more people have caught on to after his embarrassing Boring Company tunnel reveal.

Anyway, after a couple thousand words of introduction, here is the update:  In my last post linked above, I argued that Tesla is a growth company that is not investing in growth.  Sure, it is seeing growth in current quarters due to investments made over the last decade, but there is little evidence it is actually spending money to do anything new.  It stopped managing itself like a growth company trying to maintain its first-mover advantage.

Tesla has explicitly chosen to pursue a strategy that needs a TON of capital.  Everyone understands, I think, that building a new major automobile franchise takes a ton of investment -- that's why they are not popping up all the time.  But Tesla actually has made choices that increase the capital needed even beyond these huge numbers.  Specifically, they chose not just to manufacture cars, but to also own the sales and service network and to own the fueling network.  Kia was the last major new brand in the US that I can remember, but when it started it relied on 3rd parties to build and operate the dealer/service network and relied on Exxon and Shell to build out and operate the fueling network.  So Tesla has pursued a strategy that they need all the capital of Kia and of the Penske auto group and of Exxon.  Eek.

And for years, they were valiantly trying to pull it off.  They created showrooms in malls and created a new online selling process.  They built some service locations but as has been proven of late, not enough.  They built a supercharger network.  It was a gutsy call that seemed to be paying off.

And then something weird happened.  Somewhere in late 2017 or early 2018 they stopped raising capital and greatly slowed down both R&D and capital investment.

  • They slowed expanding the service network at the very time that their installed base of cars was going up exponentially and they were getting bad press for slow service.  Elon Musk promised that Tesla would create its own body shops but nothing has been done on this promise.
  • They slowed the Supercharger network expansion at the same time their installed base has dramatically increased and at the same time new competitive networks were begun by major players like Volkswagen.
  • They stopped expanding the Model 3 production line at the same time it was clear the current factory could produce only about 5,000 cars per day (with some quality tradeoffs at that) and Musk continued to promise 10,000 a day
  • They promised production in China by the end of this year but so far the only investment has been a groundbreaking ceremony in a still muddy field
  • They promised huge European sales but only just now got European regulatory approval for sales, dragging their feet for some reason on this approval despite lots of new EV competition starting to hit the European market.
  • They pumped up excitement with new product concepts like the semi and the coupe and the pickup truck but there is no evidence they have a place to build them or even have started to tool up.
  • Everyone thinks of Tesla as having leadership in battery technology but that is the one area they have actually outsourced, to Panasonic.
  • Through all of this, through all these huge needs for capital and despite Tesla's souring stock price and fanboy shareholders begging to throw money at the company, they have not raised any capital for a year.

Since my initial post, we have seen a few new pieces of news

  1. Tesla still has not raised capital and in fact faces a $1 billion bond repayment in just over 30 days
  2. Tesla admitted that it has not even started working on a refreshed design for the aging Model S and X, despite increasing EV competition coming at this high end from Audi, Porche, and others.  These refreshes should have been started years ago.
  3. In fact, Tesla announced it was cutting back on production of the S and X.  Ostensibly this was to focus on the Model 3.  Most skeptics think this is BS, and the real reason is falling demand.  But it doesn't matter -- growth companies with great access to the capital markets don't make these kinds of tradeoffs.  This is further proof that Tesla is no longer managing itself like a growth company.  These cuts are particularly troubling because the S and X are where Tesla gets most of its gross margins -- the Model 3 margins are much worse.
  4. Tesla laid off 7% of its work force.  Again, this is not the act of a company that is behind in implementing its growth initiatives, growth initiatives that perhaps 80% of its stock market valuation depends on.

Tesla has always had an execution problem, or more rightly an over-promising problem.  But it was still actually investing and doing stuff, even if it was disorganized and behind in doing so.  Now, however, it is a company valued as an exponential growth company that is no longer managing itself like a growth company.  It has billions of investments that are overdue -- in new products, in product refreshes, in the service network, in a second generation supercharger -- that should have been started 2-3 years ago and for which there isn't any major activity even today.

As a disclosure, Tesla stock is one of the most dangerous in the world to trade, either way.  You really need to understand it before you trade it and no one really understands it.  I have a couple of long-dated put options on Tesla that I consider more of a bar bet than anything else.  I also have a couple of cheap short-dated calls as I usually do in the runup to the quarterly Tesla earnings call.  Musk is great at the last minute stock pump during earnings call week, and the stock often pops only to fall soon afterwards as people dig into the numbers.  But again, these are "investments" that are less than 0.1% of my portfolio.

Postrcript:  When I wrote "Tesla is a growth company that is not investing in growth" I was picturing the Jim Cramer cameo in Ironman -- "That's a weapons company that doesn't make any weapons!"  Of course it took a work of fiction to see Jim Cramer advocate for the short side.  Doubly ironic given Musk sometimes styles himself as the real life Tony Stark.

Why First-Mover Advantage in a New Industry Isn't Always An Advantage

I have written in the context of both the new marijuana stocks (e.g. Tilray or Canopy) and Tesla in EV's that the market is putting a whole lot of value -- in some cases 90+% of their current market value -- on these companies being first movers in potentially large and lucrative new industries.

It is hard to predict early on where in an industry's value chain the profits will be, or if the industry will be profitable at all.  Who will make money in marijuana -- the growers?  the retailers?  the folks that package the raw material into consumer products?  The early marijuana entrants are focusing on cultivation, but in tobacco do the cultivators or the cigarette makers who buy from them make the most money?  And as anyone at Myspace could tell you, being first is not always a guarantee of success, and in some ways can be a disadvantage.  Second movers can avoid all the first-movers costly mistakes.

I though of all this seeing the infographic below on changing leaders in the Internet world.  Almost all the top 20 companies in the first year are largely irrelevant today -- AOL and Yahoo are technically still in business but only because they have been bought up by Verizon in a group of other dogs they seem intent on collecting.


Business Strategy, The Insource / Outsource Decision, And Tesla

I have a confession -- at Harvard Business School (HBS), I loved business strategy cases.   This is a confession because most ex-HBS students have at best a love-hate relationship with cases in the same way that the Band of Brothers, or the 506th PIR, had with Curahee Mountain.  The first 8, 10, 12 cases were fine and you could handle them. But the problem is that they kept coming and coming, two or three a day, like a North Korean human wave attack.

There is a pretty well defined template for B-school cases, at least in my day (I love being old enough to say that).  A typical example begins with the CEO-on-the-Gulfstream-jet trope, e.g.

Jessica Stevens, CEO of Acme Enterprises, leaned back in her seat on Acme's brand new Gulfstream VI corporate jet, thinking about the meeting that lay ahead of her.  She was flying back to her Pittsburgh headquarters for the quarterly board of directors meeting, and the board was expecting real answers and a specific plan for how she intended to deal with Acme's mounting problems.

Over the last 3 years Acme's growth had plateaued at the same time a slew of new companies had entered its industry, putting pressure on Acme's traditionally strong margins.  In addition, Acme had just lost the bidding on two critical government contracts, its largest plant had just burned down, its CFO was under SEC investigation, a strong unionization drive was in the works supported by Antifa protests outside her house, and she had damaged her favorite Chanel purse when she launched it into the face of her lying mancy VP of manufacturing who she had just caught in bed with her husband.

OK, that last sentence is probably an exaggeration (cases were not quite THAT interesting).  But for me, strategy cases were like who-done-its or locked-room Agatha Christie mysteries.  Would the CEO extricate herself, and if so, how?  What would I do?  If someone were to write business strategy mysteries I would eat them up (the closest I can think of is Clavell's Nobel House -- how would the Nobel House extricate itself -- and even despite the absolutely unrealistic Dallas and Dynasty-like portrayals of business, I love that book).  It is telling that the only novel I have written (OK, more accurately, the only novel I have finished) has heavy doses of business strategy in the plot.

A lot of people write me and say, "Coyote, why the fixation on your blog and Twitter with Tesla?"  Unlike what Tesla fanboys guess about me, I actually like electric cars (though I am not thrilled with my having to subsidize them, but that is not a narrow Tesla problem).  I am riveted to the Tesla story because it totally feels like a great HBS case study of the future.

Long-time readers know I think that there is fraud here -- the SolarCity buyout, to my eye, was totally corrupt.  But if I found fraud fascinating, I would write constantly about Enron and Theranos (heck, I worked for Jeff Skilling at McKinsey on the Enron study so I could even be quasi-insider).  But fraud is only fleetingly interesting.  I can think of 5 companies that I am shorting today that I think are engaged in fraud, and I can't remember mentioning one of them on Twitter or this blog.   I find Theranos mildly interesting, but only because my wife is borderline diabetic and really was enthusiastic for Elizabeth Holmes's vision.

But here is the situation a couple of years ago at Tesla.  Think of this as the case study introduction:

  • Tesla has introduced a real, desirable EV in an industry where EV's were basically crap cars no one wanted produced for PR and some regulatory reasons.
  • For the first time ever, Tesla has demonstrated there was a large market for luxury EV's
  • With the model S, Tesla had what has proved to be at least a 7 year lead over competitors (introduced in 2012 and similar products from several companies coming out in 2019)
  • Tesla had the Model 3 ready to be introduced, with projections of topping 10,000 per week shortly, which could be one of the largest selling sedans in the world, EV or no.  Tesla had as many as 400,000 reservations already in hand for this car.
  • Tesla had a founder (sort of, Musk is credited as founder but really isn't) with the Midas touch, sometimes called the real world Tony Stark, with a huge legion of followers who believe that he is the smartest and most ethical (given his green vision) engineer in the world and can do no wrong.
  • Tesla had shareholders almost literally throwing money at the company, giving it a higher total market value than GM or Ford and with valuation metrics orders of magnitude higher than traditional car companies, based in part on visions of world-leading self-driving capabilities and comparisons to Apple.  The closest thing I have ever seen to the Simpson's take my money meme.

I can imagine the case study now -- should Tesla focus on the high-end of the market now and seek an immediate profit and a potentially sustainable long-term niche?  Or should it go all-out to do nothing less than become the major player in the entire worldwide automotive market, taking advantage of its high valuation to raise billions of capital to fund years of cash burn?  These are super interesting questions that I will not address today.  Tesla's apparent choice in this question is ... neither.  It has clearly gone all in, at least in rhetoric, on dominating the automotive market and Elon Musk has announced (at least on Twitter) future new products in nearly every automotive niche.  But at the same time Tesla has refused to leverage its high stock price to raise capital and actually has been cutting back on capital spending and slow-rolling expansion plans. I frankly cannot explain it, and won' try here.

What I want to discuss is the frequent comparison to Apple.   Elon Musk likes to compare himself to Steve Jobs and Tesla to Apple, but I don't think the comparison is very apt.  A big part of this is the differences in their in-source and out-source decisions.

As background, my thinking is shaped by several aspects of my HBS education.  The first is a business strategy curriculum crafted from the very first class to make one skeptical of flashy, sexy businesses.  Our first two cases in first year business strategy were an incredibly sexy electronics company, followed by a dull-as-dirt water meter company.  But it turned out that the water meter company minted money, with little technology change and huge moats against competition, while the electronics company was having to invest billions every few years just to stay in the game and never really earned a return on capital.

Another factor that shapes a lot of my thinking was that in-source / out-source decisions were very much in the spotlight at HBS at the time.  It was a time when the very nature of the industrial conglomerate was in question, and we were constantly made to ask whether a company really had to own function X to be profitable and successful.  Over and over and over, in company after company, we were asked to think about what were the critical success factor for a business, as well as what the most profitable elements of the vertical value-delivery chain were, and to think about structuring companies solely around these key elements, and outsource everything else.

To a large extent, this has been a key to Apple's success.  As I observed in comparing Tesla to Apple:

But as far as the iPhone is concerned, Apple is a design and software house.  It does not build the phones, it has a partner do it for them.  It does not write most of the applications, third parties do that.  And (at least in the early days) it did not [sell] through its own stores, it sold through 3rd parties.  An Apple-like Tesla would NOT be trying to build its own manufacturing, service, and fueling capacity -- it would leverage its designs as its unique value-add and seek others to do these other lower-margin, capital-intensive tasks.

Yes, we have Apple stores now, but this was NOT part of the initial strategy and success.  The initial Apple iPod and iPhone strategy basically had Apple outsourcing everything from manufacturing to sales as non-strategic, and keeping in-house the design and software functions.   As it turned out, they were right, because they certainly made much better margins than anyone else in the vertical value chain.

But for all Tesla compares itself to Apple, it has take a totally different approach.  Like most manufacturers, it designs its products (which it is pretty good at).  It also manufactures them (which it is not so good at).  But unlike other auto makers it also owns its own sales and service network (instead of third party dealers) and it is not very good at this and this activity consumes a lot of capital.  Also unlike other auto makers, it also is building out its own fueling network, something GM and Ford can rely on Exxon for. AND, Elon Musk at various times has said we would in-source building of car carrier trailers, car transportation trucking firms, and body shops.  I have argued for years that one of the things that Tesla fanboys love about Tesla -- that it is so integrated vertically -- is an Achilles heel because it greatly increases the capital it needs to grow, takes it into low-margin business segments, and forces it to do highly-technical functions like auto manufacturing it does not have the skills for.  If Tesla really were like Apple, it would have developed a 3rd party dealer network, it would have partnered with someone else to do the charging stations (as VW has) and it would have farmed out the actual manufacturing to an auto-equivalent of Apple's Foxcon (maybe Kia?)

I wish I had the guys name but the person in this blog said it far better than I have been able to say it to date.  From "Credit Bubble Stocks"

The test of whether you are an electric vehicle “disrupter” is: how many manufacturers are licensing your battery? If you’d actually invented a better electric battery or other EV technology (battery is the only technology that matters though), you could license them and have a 10x book business. Tesla not only did not do a battery licensing model, but they effectively did the opposite. Consider the parts of the vehicle industry that they have decided to in-source versus the ones they have decided to outsource. As we know, they decided to in-source and compete head-to-head on manufacturing. The results have shown that they are worse than their more experienced competition. They decided to in-source the automotive retail, which had not been done before and was not legal in most states. (And still is not legal in eight states). This had been a huge distraction from the manufacturing side and has resulted in abysmal customer service. But of all things to outsource, they outsourced the battery production to a joint venture with Panasonic. What should be the entire premise of an electric vehicle company is not even enough of a competitive advantage to do in house.

I am not totally sure I agree -- I think Tesla would argue the key is in design and software, just like Apple.  But even if that is true, why are they doing all this other stuff that they don't do very well and is a total distraction and sucks up needed capital?

Humans Saved Again By Our Opposable Thumbs

From a fascinating article on Amazon and its automation vision:

After a customer places an order, a robot carrying the desired item scoots over to a worker, who reads on a screen what item to pick and what cubby it’s located in, scans a bar code and places the item in a bright-yellow bin that travels by conveyor belt to a packing station. AI suggests an appropriate box size; a worker places the item in the box, which a robot tapes shut and, after applying a shipping label, sends on its way. Humans are needed mostly for grasping and placing, tasks that robots haven’t mastered yet.

Amazon’s robots signal a sea change in how the things we buy will be aggregated, stored and delivered. The company requires one minute of human labor to get a package onto a truck, but that number is headed to zero. Autonomous warehouses will merge with autonomous manufacturing and delivery to form a fully automated supply chain.

I got some cr*p on twitter a while back about writing this, but I think it is pretty much vindicated by the "one minute" factoid above:

Amazon likely is being pressured by the tightening labor market to raise wages anyway.  But its call for a general $15 minimum wage is strategically brilliant.  The largest employers of labor below $15 are Amazon's retail competitors.  If Amazon is successful in getting a $15 minimum wage passed, all retailers will see their costs rise but Amazon's competition will be hit much harder.


Elon Musk Sued by The SEC -- SEC Seeks to Bar Him From Leadership of Public Companies

Just to save everyone from sending this to me, Elon Musk has been sued by the SEC.  The details are here, I will not go over all this old ground.  Of course this is just an accusation, and has no immediate effect (except to trash the stock price) until it is settled or proven in court.

I have such mixed feelings for Musk. On one level, it is awesome to see an entrepreneur trying to do build real stuff like rockets and cars. He has all the geeky charm of a 1970's edition of Popular Mechanics, breathlessly hyping captivating but sometimes impractical ideas.  I rode with an acquaintance in his $100,000 Tesla the other day and he loved it. Totally drank the Kool Aid.  Despite my extreme skepticism, he was sure that Elon was going to have same-day body shop repairs for Teslas and could make it work because they only had 3 models of cars with lots of shared parts.  It's the same sort of enthusiasm you see from people who still stand in line first day for the new iPhones. I envy being able to create that as a company.

On the other hand, Musk is just so unsuited to running a public company, is awful at operations, and will end up having cheated a lot of people.  He fails to meet commitments and makes public statements that are transparently absurd.  Just as one example, the other day in response to many delivery problems Tesla has (delivery problems that may actually be due more to efforts to shift 4Q sales into 3Q), Musk said there was a shortage of car delivery trucks and Tesla was starting to build them.  Seriously??? There is zero evidence of a delivery truck shortage and it is absurd to think Tesla had the time or the resources or the skills or knowledge to bang out large truck trailers (that require a variety of DOT inspections and approvals).  Honestly, I can't tell if Musk is the pointy-haired boss from Dilbert who promises absurd things because he is utterly clueless, or if Musk is totally corrupt -- it could be both.  I think his body shop insourcing idea was likely clueless but his SolarCity acquisition was corrupt.

New entries from Jaguar, Audi, and others demonstrate both that Tesla faces a lot of new competition but also that Tesla's original Model S and X still have a lead over competitors.  When the book on the electric car industry is written, I think it will be said that Tesla greatly accelerated the transition to electric cars.  But it is a fact of business history that the pioneer and innovator seldom is the ultimate victor (Lycos, Netscape, Altair, Yahoo, etc).  Tesla has not lost yet, but it still has a huge hill to climb.  Unfortunately, Musk's decisions to do so many things in-house -- own the dealer network, own the fueling network, own the manufacturing, own the body shops, etc. -- is going to require too much capital.

It is pretty clear that Musk is often using Apple as one of his models for what he wants to do with Tesla, and he has successfully created the same kind of almost cultish loyalty as has Apple.  But he ignored a lot of what Apple did.  Apple is a research, software, and design house.  It farms out manufacturing to a partner and sold most of its ipods and iphones initially through third party retailers.  If Tesla had done the same: taking advantage of rich third parties who already know how to sell cars as dealers; working with a consortium to create the fueling network; and going to someone like Kia to do private label manufacturing of the cars -- they might have lost something of the customer magic in the process but they also might be in a much better position to survive.

Update:  Apparently Musk was offered a very, very attractive settlement by the SEC which involved Musk stepping down as Chairman but NOT as CEO, adding a couple new directors, and paying a fine.  It is hard to read this as much more than a slap on the wrist, especially in the context of the SEC now seeking a full bar of Musk from any position at any publicly traded company (hell hath no fury like a government agency scorned).  Frankly, I find this nearly as impossible to understand as the fact that Tesla never raised any equity funding this year when its stock and story were so strong.  Tesla skeptics are arguing that both of these hard-to-explain events stem from the same cause -- that Tesla has some deep dark secret that Musk can't afford for either a new executive or a public offering document to disclose, the same secret (the story goes) that has driven away a number of senior accounting and finance officers in the last several months.  I agree that the existence of such a secret would explain the facts, but I can't imagine what could be much worse than the bad balance sheet and operational data that already is publicly known.

Fixing Tesla

I promised I would not post any more Tesla for a while, and to some extent I am keeping that promise -- no updates here on the SEC investigation or the 420 tweet.  But since I have been critical of Tesla in the past, I thought I would acknowledge that there are good things in Tesla that could and should be saved.  The problem is that Tesla is saddled with a bunch of problems that are NOT going to be solved by going private.  In fact, going private could only make things worse -- given that Tesla already has too much debt and its debt is rated barely above junk bonds, piling on more debt just to save Elon Musk from short sellers is not a good plan.  Here is what I would suggest:

  1. Find the right role for Elon Musk.  Musk HAS to be part of the company, without him its stock would go to about zero tomorrow.  But right now he is CEO, effective head of media relations, factory manager, and chief engineer.  Get him out of day to day management (and off Twitter) and hire real operating people who know what they are doing
  2. Get rid of the dealerships.  Tesla tried to do something different, which is own all the dealerships rather than franchise them out.  This is fine if one has some sort of vision for doing sales and service differently, but Tesla really doesn't.  It does the same things as other car dealerships but just slower since it has not been able to build out capacity fast enough.  And this decision has cost them a tons of growth capital they desperately need, because they have had to build out dealerships most car companies get for "free" because the capital for the dealerships is provided by third-party entrepreneurs.  Also, the third-party entrepreneurs bring other things to the table, for example many of them tend to have experience in the car sales business and a high profile in their local markets with government and media.
  3. If possible, find a partner for the charging network.  All traditional car companies get their fueling networks for free because the network is already built out by the oil companies.  Tesla is building its own, and again this is sucking up a lot of capital.  It is also dangerous, because Tesla has chosen to pursue a charging standard that may not become the industry standard (this is already happening in Europe) and Tesla risks being stuck with the betamax network.  Tesla should see if it can shift this to a third party, perhaps even in joint venture with other EV companies.
  4. Do an equity raise.  To my mind, it is absolute madness Tesla did not do this earlier in the year.   Their stock was trading at $350 and at a $50+ billion valuation at the same time they were burning cash cash at a rate of $3 billion or so a year.  Musk says he can skate through without more capital but he has said this before and it was not true.  Given the enthusiasm for his stock, there is just no reason to run cash poor when there are millions of Tesla fanboys just waiting to throw money at the company.  Even a $5 billion raise would have been only 10% dilution.  Musk says he wants to burn the shorts but ask any Tesla short out there what they would most fear, and I think they would all say an equity capital raise.  $3-5 billion would get Tesla at least through 2019 no matter how bad the cash burn remained and give the company space to solve its operational problems.
  5. Get someone who knows how to build cars building the cars.  I have written about this before -- it is always hard when you are trying to be a disruptor of an industry to decide what to disrupt and what industry knowledge to incorporate.  In retrospect, Musk's plan to ignore how cars are built and do it a different way is not working.  Not only are the cost issues and throughput issues, but there are growing reports of real quality issues in model 3's.  This has to be fixed ASAP.
  6. Bring some sanity to the long-term product roadmap.  This may be a bit cynical, but Tesla seems to introduce a new product every time Musk needs to divert the public's attention, his equivalent of yelling "Squirrel!"  There is the semi, a pickup truck, a roadster and probably something else I have forgotten about.  Even the model 3 lineup is confusing, with no one really knowing what Tesla is going to focus on, and whether the promised $35,000 model 3 will ever actually be built.  This confusion doesn't work well with investors at all, but Tesla has been able to make it work with customers, increasing the buzz around the company because no one ever seems to know what it will do next.  But once real competitors start coming out from GM, Volvo, Jaguar, BMW and others, this is not going to work.  Customers that are currently captive to Tesla will have other options.    Let's start with the semi.  The demo was a beautiful product, but frankly there is no way Tesla is going to have the time or the money to actually produce this thing.   Someone like Volvo is going to beat them to the punch.   They need to find a JV partner who can actually build it.

Update:  If I had a #7, it would be: Invent a time machine and go back and undo the corrupt SolarCity buyout, in which Tesla bailed out Musk's friends and family and promptly proceeded to essentially shut down the company.  Tesla shareholders got nothing from the purchase except a lot of debt.


Tesla Predictions Secured

I had dinner last night with my old college roommate Brink Lindsey and he even sort of rolled his eyes about my recent Tesla obsession, so I really really will try to make this the last post for a while.  However, I have to count coup on a few accurate predictions I made last week here and here.

First, I said, in reference to how Musk can bail himself out of his "funding secured" tweet when it has become clear this is not the case:

So what can Musk do?  Well, the first defense might be to release a statement like "when I said funding secured, I was referring to recent conversations with ______ [fill in blank, maybe with Saudis or the Chinese, call them X] and they told me that if we ever were looking for funds they would have my back."  This is probably the best he could do, and Tesla would try to chalk it up to naivete of Mr. Musk to accept barroom conversation as a firm commitment.  Naivite, but not fraud.   I don't have any experience with the Feds on this kind of thing but my guess is that the SEC would expect that the CEO of a $50 billion public company should know the rules and legally wasn't allowed to be naive, but who knows, the defense worked for Hillary Clinton with her email servers.

Today Musk writes:

Recently, after the Saudi fund bought almost 5% of Tesla stock through the public markets, they reached out to ask for another meeting. That meeting took place on July 31st. During the meeting, the Managing Director of the fund expressed regret that I had not moved forward previously on a going private transaction with them, and he strongly expressed his support for funding a going private transaction for Tesla at this time. I understood from him that no other decision makers were needed and that they were eager to proceed....

I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving. This is why I referred to “funding secured” in the August 7th announcement.

Of course the Feds probably expect "funding secured" to mean a signed term sheet (which does not exist) accompanied by an 8-K (which STILL has not been issued).  I then said in my prediction:

But this defense is MUCH MUCH better if, in the next day or so, Tesla can announce a deal with X on paper with signatures.  Then Musk can use the same defense as above but it has much more weight because he can say, see, they promised funding and I believed them when they said they had my back and here they have delivered.

And today we learn:

But was the funding really secured? Apparently not, because in the very next paragraph Musk writes that "following the August 7th announcement, I have continued to communicate with the Managing Director of the Saudi fund. He has expressed support for proceeding subject to financial and other due diligence and their internal review process for obtaining approvals. He has also asked for additional details on how the company would be taken private, including any required percentages and any regulatory requirements."

Hmmm.  So basically Musk had a chat with the Saudis that did not include any due diligence, any percentages, or anything about the structure of the transaction and nothing has been submitted formally to the Saudis for the required review and approval.  The Feds would never accept this BS from an unpopular CEO like, say, Jeff Skilling.  It remains to be seen whether they will really go after cultural icon Musk.

Finally, I predicted the odd and relatively unprecedented transaction that Musk likely envisioned:

Here is what I think Musk wants -- he wants an LBO without any actual change in ownership. Basically he wants to create Tesla New, which will be private and not trade on the markets. He is hoping that all his current fanboy shareholders will exchange a share of Tesla for a share of Tesla New. Musk has already said he will do this with his 20%. In the extreme case, if every current shareholder wants in on the new private company, then no capital at all is needed for the LBO. Musk might admit that perhaps a billion or two are needed to buy out the few recalcitrants at $420, and then all the Tesla fanboys can enjoy short-seller-free illiquidity

There was no way that Musk could expect to raise $70-$80 billion ($420 times the float) or to run an already cash-starved business with that much debt.  The only way to imagine this is if the buyout was only of a small percentage of owners.  And sure enough, here is Musk this morning:

Therefore, reports that more than $70B would be needed to take Tesla private dramatically overstate the actual capital raise needed. The $420 buyout price would only be used for Tesla shareholders who do not remain with our company if it is private. My best estimate right now is that approximately two-thirds of shares owned by all current investors would roll over into a private Tesla.

I won't comment on whether this is possible because I don't know enough about security laws.  I have been told that the SEC would likely frown on a private company with no public disclosures that has thousands or even millions of individual shareholders, but again, I don't know.

I find it amazing that anyone would want to stay in on this basis, but like Musk, the Tesla fan-boys seem to care more about burning the shorts than the quality of their own long investment in Tesla.  How can moving your small (percentage-wise) investment in Tesla from being exchange-traded to being locked up in a private company possibly be an improvement?  Today your investment has total liquidity (you can sell any time), it has massive 3rd party scrutiny and accountability, and it has real-time price discovery.  You would lose all of that in a private company.  You can only sell when Musk lets you sell and at the price he chooses to give you based on whatever company information he chooses to release.  Choosing the private option as a minority shareholder is like saying that you would rather hold non-refundable airline tickets than fully refundable ones.

Postscript:  I am new to the world of short-selling fights, as I am not really an active investor and just got sucked into watching Tesla because I found it interesting.  But wow, the tribalism of politics sure has leaked into the investment world!  In tribal politics, we see people more motivated by hatred of the other tribe than by making progress on their own tribe's goals.  This same kind of "reasoning" seems to dominate a lot of the Tesla long-short battle.

Update:  Here is a new prediction.  For a while Elon Musk has claimed he will not have to raise capital this year.  Everyone basically looks at his numbers and thinks he is nuts.  What's more, given his $50 billion equity valuation currently, he SHOULD be raising capital now while his stock is high and thus his cost of capital is low.

But one way to look at this is if he raises $20 billion in equity to buy out the 1/3 he thinks will want the cash rather than the new stock, he could easily just make that $22 billion so the company has an extra $2 billion in operating cash and thus raise capital this year without it looking like he violated his promise not to raise capital.


What's Going On At Tesla

Matt Levine of Bloomberg has many of the same guesses I made the other day (here on the transaction Musk likely wants, and here on how might paper over his lie about "funding secured").  Levine writes:

The intermediate possibility is that there is some sort of deep misunderstanding, that when Musk tweeted about “taking Tesla private at $420” and having “funding secured,” he didn’t mean what you and I and the SEC normally interpret those words to mean, which is that he would make a binding offer to buy any Tesla shares not owned by Musk and his financing partners for $420 a share in cash.He meant something more like: He would like to not be subject to the obligations of being a public company anymore, and it would be nice if there was a way to do that. After all Musk immediately followed up by tweeting about letting shareholders continue to own their shares in a “private” Tesla, which is not how going-private transactions normally work. There has been a lot of speculation about how that could be done, and I remain a bit skeptical, but the important point here is that if Musk believes that (1) there is actually a way to “go private” while keeping all of his existing shareholders and (2) most of his existing shareholders love him and would prefer to stay private with him, then he could rationally believe that he doesn’t need much financing. If no one will take the cash, then you don’t need any cash. Both of those things are kind of weird things to believe, but neither of them seems impossible for Musk to believe.

If I were Musk’s lawyer, and if he doesn’t actually have $80 billion of financing locked up, I’d be working on a termsheet for the board that (1) offers Tesla shareholders the choice between (A) $420 in cash or (B) shares in a new special-purpose-vehicle that will hold shares in a private Tesla (or whatever your plan is to let people hold on to their shares); (2) limits the cash consideration to, like, $5 billion, or whatever Musk can actually raise; and (3) has some sort of proration mechanism in case more people choose the cash than he can afford. Does this fit with the spirit of the going-private transaction that Musk tweeted about? No, absolutely not, not even a little bit. But it is … something. And then let the special committee reject it, and then quietly walk away and say “well no we were serious about the buyout proposal but it just didn’t work out.” Which is a much better position to be in than walking away saying “oh yeah sorry we were kidding about that.”

The Weirdness That Is Twitter

So the last couple of days I was bored and I logged into Twitter for the first time in a while and spent a few hours trying to convince myself that if I really wanted to, I could build a presence on Twitter.   Increased my follower count from about 1000 to about 1300 and got some notice and retweets.  And pretty much zero satisfaction, so I think we are going to declare that experiment over for a while.  But, this time, unlike the last effort, I managed to pretty much remain a nice guy and not become a hateful troll, so that is a step forward.

Anyway, weirdly, I managed in the process to create my single most -- by far -- liked and retweeted post, and it is really random.  It was just a toss-off reply to @popehat when he asked rhetorically if dentists all hire awful lawyers.  So I wrote this (which is an entirely true experience)


My Guesses About $TSLA, and Why @TSLA Shareholder May Be Presented with a Bad Deal

@Elonmusk is facing real blowback for his management buyout by tweet the other day, in particular for two words:  "funding secured."  Many, including myself, doubt he really had tens of billions of dollars of funding secured at the time, particularly since all bankers and likely sources of funding as well as most large Tesla shareholders had never heard of any such transaction when contacted by the media.  The SEC is now looking into this and other Musk corporate communication practices.  If he lied in the tweet, perhaps to get revenge on the short-sellers he hates with an irrational passion, he could be in deep, deep legal poop, up to and including jail.

Let's play a game.  Let's assume he did NOT have funding secured at the time he tweeted this, and now is running scared.  What can he do?  One ace he has is that the board is in his pocket and (I hate to be so cynical about this) will likely lie their asses off to cover Musk.  We already saw the dubious letter the other day, from "members of the board" rather than officially from the board, attempting to provide cover for Musk's tweets.  This is not just a crony thing -- it is entirely rational for the company to defend Musk.  He is, in my opinion, a terrible executive but he is the avatar that drives the fan boys and the stock price.  The day that Musk leaves is the day that the company can really get its operational house in order but it is also the day the stock trades under $75.

So what can Musk do?  Well, the first defense might be to release a statement like "when I said funding secured, I was referring to recent conversations with ______ [fill in blank, maybe with Saudis or the Chinese, call them X] and they told me that if we ever were looking for funds they would have my back."  This is probably the best he could do, and Tesla would try to chalk it up to naivete of Mr. Musk to accept barroom conversation as a firm commitment.  Naivite, but not fraud.   I don't have any experience with the Feds on this kind of thing but my guess is that the SEC would expect that the CEO of a $50 billion public company should know the rules and legally wasn't allowed to be naive, but who knows, the defense worked for Hillary Clinton with her email servers.

But this defense is MUCH MUCH better if, in the next day or so, Tesla can announce a deal with X on paper with signatures.  Then Musk can use the same defense as above but it has much more weight because he can say, see, they promised funding and I believed them when they said they had my back and here they have delivered.

The problem with this is it would be really a deal being crafted for tens of billions of dollars on a very short timeframe and with limited negotiating leverage (X will know that Musk NEEDS this deal).  As a result, the deal is not likely to be a very good one.  X will demand all sorts of extraordinary provisions, perhaps, for example, a first lien on all Tesla IP and a high breakup fee.  I picture this more like the negotiation for bankruptcy financing, and in fact the IP lien was part of the financing deal Theranos made when it was going down the drain.  But put yourself in Musk's shoes -- jail or bad deal?

And likely his conscience would be clear because this deal would be killed quickly by shareholders.  That would be fine, because the purpose of the exercise would be to keep Musk out of jail, not to actually buy the company.  Tesla shareholders will still get hosed, probably having to pay some kind of break-up fee which any sane investor X would insert as the price for participating in this farce.  And we will go back to the starting point of all this, which is Tesla being public and focusing on operational improvement in what may be the most important operational quarter in its history.

Disclosure:  I have in the past been short Tesla but have no position in it now (I did short when trading reopened the other day after Musk's announcement but covered this afternoon).  I am not in any way, shape, or form giving any financial advice you should spend actual money backing.

Recommendation: 99Designs

I am going to a trade show in a month or two.  I bought one of the standard backdrop things and needed some art for it.  I was quickly told that all my attempts looked like bad powerpoint slides transferred to the backdrop.  So I tried a site called 99designs.  They have a whole pool of freelance designers that compete for simple jobs - logos, wordpress templates, backdrop art, etc.  I committed $250 to a design contest for my backdrop (the site takes some cut of that and the rest is a prize for the winner).  That was 2 days ago.  At this moment I have 35 different designs sitting there for me to comment on and choose from.  Almost any one would be acceptable, and many are fabulous.

This strikes me as a classic victory for the division of labor. I am getting what seems like a crazy amount of good work for $250, work I could not duplicate myself for 100x that.  I suspect that some of this stuff is super-derivative and is banged out using simple tools in just a few minutes, but so what?  They can do something fast that I can't do at all and we all benefit.

My End Game Prediction for @Tesla ($TSLA) if They Really Do Go Private at $420

Readers know I am in the campground business.   Years ago there was a trend towards building super-luxury campgrounds for as much as $30,000 a camp site.  I never understood how anyone could get a return from this.  Finally I had a guy from a large campground and RV park REIT tell me, "You know how you make money on a $30,000 a site campground?  You wait for it to go bankrupt and buy it for $5,000 a site."

This is what I think the end game for Tesla may be.  I just don't think there is enough available capital in the world, and enough operational focus in Elon Musk, to see their way through to bootstrapping an entirely new worldwide automotive firm, including new dealerships, manufacturing plants, charging networks, etc.  Remember, Tesla does not just need capital for R&D and manufacturing, they also need it for the whole sales / service / fueling network.  Kia, for example, can grow with less capital because it can get independent business people to invest in the service and dealer networks and rely on existing gas stations for the fueling network.  Tesla must build all of this from scratch because of choices they made early in their development.

Even without an LBO, I think they were going to fail at this (despite having some good products) and others disagree with me.  But given the amount of debt that an LBO at $420 might take, and the subsequent rejection of the largest public capital markets, I don't think there is any way Tesla could head off a failure.  People who want to lionize Elon Musk forget that SolarCity was headed for exactly this same kind of cash crunch, only to be bailed out by a crony insider transaction with Tesla (much to the detriment of Tesla shareholders).

Right now, GM, Ford, Daimler .. pretty much any of the auto majors, would do well by buying Tesla.  It would help them with an instant presence in the BEV market and it would help Tesla by solving some of the sales and service investment and manufacturing operations problems they have.  But Tesla is just too damn expensive.  Right now the company is worth more than either GM or Ford.

I see the future after at $420 LBO as a failure in 24 months followed by a purchase by an auto major thereafter.

Musk's Proposed Tesla LBO Price of 420: Intentionally Hilarious? My Guess Is Musk Wants An LBO Without Any Actual Change in Ownership

Today, following his usual practice of ignoring all the securities laws that other CEO's have legions of lawyers to educate them on, Musk teased a possible Tesla LBO in a series of tweets.  In case you are wondering, it is not generally considered best practice in legal compliance to issue such information in cryptic tweets, and it is definitely not usual to do so while the stock is actively trading.  You can read the whole story here, though it continues to evolve as the market has finally halted trading in Tesla.

Here is the part I found funny watching this in real time:

Mr. Musk’s account tweeted at 12:48 p.m. ET: “Am considering taking Tesla private at $420. Funding secured.” It isn’t clear what prompted the tweet. Mr. Musk has a history of joking on Twitter and sending erratic tweets.

About 30 minutes later, the account tweeted “420” in response to a reporter’s tweet asking what price buyers might pay.

When this came out, I honestly thought "420" was an admission by Musk of a drug-induced mental state when the previous tweet went out, but in fact it appears to be his target price for the LBO.  Some quick thoughts

  • This would fit Musk's personality, as he seems unable to ignore those shorting Tesla stock and would get the twin satisfactions in such a deal of a) burning a lot of current shorts and b) making shorts irrelevant in the future as going private ends the active market for the company.
  • The implied valuation would be insane, something like $75 billion in equity (compared to GM and Ford which are both around $50 billion) plus $9 billion or so of assumed debt.  Tesla is already at the breaking point on debt so it is unclear where the funding would come from -- LBO's generally increase leverage and Tesla needs to decrease it, and needs a lot more capital for operations and growth going forward.  But Musk claims he has the deal funded already.
  • Part of the clue to the capital availability may be the Saudis.  It was revealed today that the Saudi's own just under 5% of Tesla' stock.
  • Here is what I think Musk wants -- he wants an LBO without any actual change in ownership.  Basically he wants to create Tesla New, which will be private and not trade on the markets.  He is hoping that all his current fanboy shareholders will exchange a share of Tesla for a share of Tesla New.  Musk has already said he will do this with his 20%.  In the extreme case, if every current shareholder wants in on the new private company, then no capital at all is needed for the LBO.  Musk might admit that perhaps a billion or two are needed to buy out the few recalcitrants at $420, and then all the Tesla fanboys can enjoy short-seller-free illiquidity.

This is great for those who want out, but for those who are in for the long haul, it seems like a lot of capital just to remove short sellers from the picture.  This is a company that does not have anywhere near enough capital to do the things it has already promised to do (China plant, model 3 ramp, $35,000 model 3 car, semi, pickup truck, two-seater, battery storage projects, revive SolarCity, etc.).  For those who think that the capital will always be there for Musk, just remember SolarCity, which was close to bankruptcy and in steep decline when Musk engineered the insider deal with Tesla.

Update:  This statement from a Morningstar analyst makes no sense to me:

Taking it private would allow the billionaire “to not constantly worry about going to the public markets for more money,” Mr. Whiston said. “He can do what he needs to do behind closed doors and keep growing the company without all that extra scrutiny.”

I get the second part -- Musk would love to avoid the extra scrutiny -- Theranos probably survived years longer as a private company than it ever would have as a public company.  But I don't understand how it stops the need to go to the public markets for more money.  Cash needs are driven by Tesla growth plans and they still need a LOT more.  Going private does not make this easier, it makes it harder by cutting off one huge source of capital (public markets) and potentially loading up the company with extra debt from the privatization transaction.

Tesla New Math

I was reading the Tesla shareholder letter and I found this funny.  Tesla began by celebrating that it produced 5,000 Model 3 cars  in the last week of Q2.  And also

Highlights from the company’s letter to shareholders included the promise to produce 6,000 Model 3 sedans a week by late August, and to produce 50,000 to 55,000 of the sedans in the third quarter.

So we began the quarter at 5,000 per week and will hit 6,000 a week about two thirds of the way in so that we will on average produce around 4,000 a week for the quarter.  Right.


Open Letter To Walmart: I Have a Business For You

The last few days I have written of my frustration at trying to get local business bank accounts, the sole purpose of which is to accept deposits of cash from my local campgrounds and then transfer that money to my main account.  This is a major hassle as opening a bank account as a corporation is not a simple task and, as I have found out, some banks won't even accept this sort of business.

Here is what I need:  I need a national network of offices, many in rural locations, that will take my cash and ACH (a cheap form of wire transfer) the money to my bank account.  So naturally, I think of Walmart.  Walmart already is used to handling a lot of cash and Walmart is already starting to offer a number of consumer banking services.  One reader told me about the Bluebird service, a joint effort between Amex and Walmart to create a sort of virtual consumer bank.  I love the idea, but it has rules limiting it to consumer accounts.

So here is my business for you Walmart

  • I bring my cash to you at any store.  You zip it through a counter.  We agree on the amount.
  • You wire my main account with the money.  I will give you three days so you can use the cheapest transfer and have time to get the cash into your own account.
  • I will pay you 100 bp (1%) of the cash value for the service

Currently I pay merchant processors 270-300bp for those transactions and I have to wait 3-5 days for the money to hit my accounts.  So 100bp on cash would be fair for me, and I would guess fair for Walmart.

Why Tesla ZEV Credits Don't Appear on the Balance Sheet

I asked this question to an accountant friend you runs a web site on accounting technical issues:

Tesla gets Zero Emission Vehicle (ZEV) credits from about 10 states for selling EV's.  These have a LOT of value and can be sold to other car makers who need them to compete in these states.  In the past Tesla has sold batches of them for upwards of a billion dollars, so they are material.  Tesla tends to horde them for several quarters and then sell them in a big batch to juice a particular quarter.  However, they do not appear on the balance sheet.  Anywhere.  It is a public company but no one in the outside world knows how many of the ZEV credits Tesla has until they show up on the income statement as having been sold and having generated a huge profit.

How is it possible that Tesla is gaining these valuable assets with each sale of a car in certain states but they are not getting put on the balance sheet in any way?
He answered, and for now I am going to leave his name off -- he says he may post on it soon and I will link him then.

I  learned of this a few weeks ago, and was actually thinking about writing a blog post on it because it is so ridiculous.  I’ll try to explain quickly.

One’s first reaction could be that this is a “tax asset,” like tax loss carryforwards.  BUT, GAAP only addresses tax assets that arise from determination of income taxes; hence, the literature on “deferred tax assets” is not directly in the scope of this issue.

The second thought is that this is a contribution from a government that has value.  BUT, GAAP is silent on how to account for donations to a company from the government (ironically, this is addressed by International Financial Reporting Standards, but not GAAP).

In a nutshell, that leaves Tesla with a lot of wiggle room on accounting for this.  The FASB’s definition of an asset in its conceptual framework would pretty clearly include this, but not perfectly.  So, with the permission of its auditors, Tesla gets to treat this as sort of a rainy-day reserve.  It’s utterly ridiculous – classic definition of a loophole.

It's probably a marker of our expanding corporate state that GAAP needs to address more carefully "donations to a company from the government."

Your In-Office Entertainment This Week

UPDATE:  I had the wrong link.  The call is Wednesday but at 2:30 Pacific after the market closes, which makes more sense.  Like many companies, Tesla likes to dump the quarterly financials, dozens of pages in 8 point font, just seconds before the conference call.

If you are sitting in your office this week and need to be entertained in a way that looks like you are working, consider the Tesla investor conference call Wednesday at 2:30 PDT.  I can't guarantee anything but past conference calls have been a circus.  Normally I would expect the Tesla Board or the corporate counsel (who is Musk's divorce lawyer, lol) to bring adult supervision to the party, but so far that has not happened in any Tesla communications to date.  Expect potential discussion around:

  • Tesla's immediate external capital needs, given that they are burning cash faster than you could actually physically burn it (Musk claims zero is needed but everyone else in the free world thinks its >$2 billion, with a huge part of Tesla's existing debt also expiring and needing to be rolled over soon)
  • Model 3 order blacklog (this was the question in the last call that caused Musk to tell the experienced Wall Street analyst to shut up and then he switched to taking questions from a Youtube fanboy
  • Model 3 production rates and quality issues
  • Gross margins.  They HAVE to get higher for survival.  Particularly since Telsa has chosen to eschew traditional dealer networks so corporate bears all the cost of service and support.  This demands Tesla not only get its gross margins as high as other auto makers, they need to be higher.
  • Expiration of tax subsidies -- the $6500 government tax credit for Tesla customers slowly disappears once their 200,000th EV has been sold in the US, which has happened.
  • The disappearance of the $35,000 Model 3 from the web site (this is the promised car that generated a lot of the Telsa hype in the first place)
  • Disappearance of all those other teased products (coupe, semi) that were released to great fanfare and have not ever been mentioned again
  • ZEV credits (these are credits it gets from states like CA that other car makers have to buy to do business in those states with gasoline vehicles).  These are odd ducks as they have a lot of value but for some reasons do not show up anywhere on the balance sheet, so one doesn't know they even exist until Tesla chooses to sell them for a LOT of money.   They can flip a single quarter positive by saving these and exercising them at the same time.  Most folks see this happening in a bid to make Q3 profitable.  (By the way, anyone out there that understands by what accounting rules these valuable assets don't get put on the balance sheet are encouraged to email me the answer).
  • Introduction of competitive products (Jaguar, Volvo, and pretty much everyone else soon)
  • Pending lawsuits from both shareholders and whistle-blowing employees
  • Implosion of SolarCity (now part of Telsa) such that new installations are on a trend line towards zero
  • (unlikely but someone should really ask) Musk's silencing of critics
  • (unlikely but someone should really ask) Musk's social media demeanor, including calling the Thai rescue hero a pedophile because he did not use Musk's goofy submarine

Tesla is a train wreck I cannot take my eyes off.  Unlike Theranos, which combined a product that didn't work with a screwed up management, and which operated in the dark, Tesla combines what has been a really good product with a screwed-up management, and operates in an absolute blaze of publicity.  I have never seen any stock where sentiment was so polarized between bears and fan-boy bulls (Herbalife, maybe?)

I have a personal metric of sentiment and volatility I invented but I am pretty sure has been used since before I was born.  Anyway, I look at the sum of the price of an at-the-market put and at-the-market call for the stock about 6 months out.  I then divide this combined price by the share price.  For Tesla January options, this comes to 31%.    This is really a huge number.  Take ExxonMobil, which has a lot of split sentiment right now (a historically fabulous company that keeps screwing up its quarters recently) this metric sits at 9%.

Disclosure:  I am in and out of short positions on TSLA, typically selling around 350+ (usually after Musk has honeytrapped the fan boys) and covering in the 290-300 range (usually after real news or a Musk meltdown).  This strategy has been profitable for 2 years but I think that is coming to an end.  TSLA is either going to fall more or stay high based on what it does in the 3rd quarter.

Elon Musk Combines the Social Media Maturity of Donald Trump With the Business Ethics of Elizabeth Holmes

Frequent readers will know that I have expressed both admiration and skepticism for Elon Musk's various business ventures.   SpaceX is cool.  I am extremely skeptical of the hyperloop, which looks like the technological equivalent of the emperor's new clothes.  I thought Tesla's acquisition of nearly-bankrupt SolarCity was corrupt insider self-dealing.  I think the initial Tesla cars were terrific products but that Musk's management is likely to kill the company.

Lately, I have tried to avoid discussing Tesla and Musk much because I don't want to turn this into a dedicated blog on those two subjects.  Also, with all the press (positive and negative) that it gets, another article on Tesla is about as necessary as another article on Stormy Daniels.  I even resisted the urge to comment on Musk's childish need to insert himself into the Thai cave rescue story and his subsequent rant on Twitter petulantly calling one member of the rescue team a pedophile because he did not use Musk's submarine.  Lol, a submarine for a rescue where one passage was so narrow a diver wearing tanks could not even squeeze through.

My will to avoid Musk and Tesla on this blog collapsed the other day when Musk personally called the employer of one of Tesla's harshest (and I would add most intelligent) critics pseudonymed Montana Skeptic, and threatened to sue the critic and get him fired unless he shut down his criticism.  He succeeded, as Montana Skeptic was forced to shut down and issue this statement:

Yesterday, July 23, I decided to cease writing about Tesla (TSLA) here at Seeking Alpha web site. I also deactivated my Twitter account, where I was @MontanaSkeptic1. Here is what prompted those decisions.

Yesterday afternoon, the principal of the family office in which I am employed received a communication from someone purporting to be Elon Musk. Doubtful that Elon Musk could actually be attempting to contact him, my employer asked one of my colleagues to investigate and respond.

My colleague then spoke by phone with Elon Musk (it was indeed him). Mr. Musk complained to my colleague about my writing at Seeking Alpha and on Twitter. Mr. Musk said if I continued to write, he would engage counsel and sue me.

My colleague then spoke with me about the phone call. We both agreed that Mr. Musk’s phone call and threatened lawsuit were actions that would tend to involve our employer in matters in which he has had no part. To avoid such a consequence, I offered to immediately cease writing at Seeking Alpha and to deactivate my Twitter account.

How did Mr. Musk learn my identity, and that of my employer? It appears to me his information came thanks to the doxing efforts of some of his followers on Twitter.

Neither Mr. Musk nor Tesla has ever attempted, at any time, to contact me. Instead, Mr. Musk determined to go directly to my employer.

I do not know what Mr. Musk’s precise complaints are about me. I do not believe he has any valid legal claim, and I would have no trepidation in defending myself vigorously were he to bring such a claim. My response to his threats were simply to protect my employer and preserve my employment.

And so, you might say, Elon Musk has won this round. He has silenced a critic. But he has many, many critics, and he cannot silence them all, and the truth will out.

Folks who have read the book "Bad Blood" about Theranos will recognize this behavior immediately.  Musk took advantage of the work of some of his fanboys who bravely doxxed Montana Skeptic and allowed Musk to determine his true identity.   Musk is certainly a child (emphasis on "child") of his age, preferring to force critics to shut up rather than respond to them in a reasoned manner.  And by the way, where the hell is his board of directors?  Just like at Uber, it is time for the grown-ups to come in and take over the visionary but flawed company started by their founder.

If you have a chance, you really should look at at least some of Montana Skeptic's work.  He was fact-based and analytical -- this is not some wild crazy social media guy going off on biased rants.  I would take Musk's action as a ringing endorsement of Montana Skeptic's analysis, most of which you can find here but require a Seeking Alpha membership.  However, if you have time to listen, the Quoth the Raven podcast has two good episodes with Montana Skeptic on Telsa (#23 and #28).

By the way, Elon.  If you wish, you may contact my employer here.

The Days I Love My Job

I write on this blog a lot on those days in my job that get me down.  That only makes sense because I write about government regulatory policy vis a vis business and it is government interventions that often cause me the most heartache.

But there are good days too.  I have been putting together a new division and really need someone with b2b sales and marketing experience to run it and get it going.  I was just trying to figure out how I wanted to do a search when a resume came to me unsolicited from a current employee who has done a great job for us.  Basically they were applying for our manager training program (all our campground managers start in front-line service jobs).   Well, it turns out this guy who is currently cleaning bathrooms and doing landscaping for us in a campground is recently retired from over 10 years running a sales force for a $80 million industrial company and more recently running the whole division for that company for 2 years.  Talk about just finding a $100 bill lying on the sidewalk!

The Value of Branding

This is yet another in a series of posts on the value of branding (previous iterations include here and here).  Socialists and anti-capitalists often deride branding as, at best, a complete waste of resources and at worst a huge value destruction in that the marketing associated with branding tricks consumers into buying products they don't want or need.  This argument that consumers effectively lack agency in the face of corporate marketing is characteristic of a broader class of capitalist critiques that assume the powerlessness of individuals to make good choices.

I don't buy into these critiques because I think individuals are hugely powerful in a capitalist system, far more powerful in fact than they are in any more authoritarian system  (just ask Toys R Us and Pontiac).  Brands are obviously useful to producers as they help create barriers to entry and a potential basis for obtaining a price premium.  But they also have benefits to consumers.  I ran into one this morning.

My 21-year-old daughter is in another city and called to say that she thought she had a bad tire on her car and was not sure what to do.  Every dad worries about his daughter when she is on her own (I know, patriarchy, but I am not apologizing) and this is particularly true in car repair because women have historically been taken advantage of in many car repair situations.  But I sent her without hesitation to the local Discount Tire store.  That's because I knew from past experience with several of the stores in this chain that the stores were clean and safe and the people who worked there were fair -- they have never tried to charge us for something we don't need.  My wife goes there all the time because she is kind of panicky about her tires and most of the time they tell her the tires are fine and fill them with a bit of air and send her on her way with no charge.  They easily could have sold her a crapload of tires she didn't need but have never done so.  So it was with relief that I saw Discount Tire had a store near her.  Sure enough, she just needed air (is this sort of tire-related behavior genetic?) and they were very nice to her and filled up the tire and told her she was fine.

This is the power of branding.  From a distance, without any chance to inspect or check out the establishment, I knew exactly what the store would look like and was pretty confident how their employees would treat my daughter.  That has real value.