The big surprise here isn't that Tesla was doing an offering - it was Goldman did a huge research note 24 hours before the offering while actually participating in said offering.
Super bad form and just goes to show the community- don't trust investment bankers. Such bad form.
Prominently displayed in large font on page 1 of the Goldman research report on Tesla:
"Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision."
(I put this in the reply to a child, but I felt it was relevant enough to reply directly to the parent.)
The equity research department is firewalled off from the deal teams doing the offering. It would be unethical if the people who published the research note even knew anything about the offering.
Or both departments within Goldman both reached the same conclusion independently: the stock is currently very undervalued.
If Tesla sells (heh, and builds) every one of their pre-ordered model 3's, that's over $14b in revenue.
The only question is, are they going to be able to do it. If both departments at Goldman think the answer is "YES", then what they have done is absolutely reasonable.
Secondary offerings don't significantly affect the stock price and research notes don't make the bank much money, so the outrage is a bit misplaced. If a bank wanted to make money by breaking the rules, they'd have M&A talk with their prop trading desk.
Isn't this exactly what's supposed to happen at big banks? I thought we wanted the equity research department to be separate and not conflicted with capital markets?
I'm unclear why that's bad form. Pumping a stock while you are selling it is bad form. Say it's great and that you intend to offer to buy some seems kind reasonable to me.
Why is it bad form to research a company and then decide based on your findings to invest in it? (I am an outsider to the world of finance and clearly I am failing to understand something)
I'm not too familiar with the Research / IB relationship or ethics of it but I'm curious about how this would affect the general market if they did know about it. Do people blindly follow Goldman's research advice and thereby increase the share price and give Goldman a higher commission or something?
I think its likely that "everyone" following Tesla knew an offering was coming. I'd go as far as thinking its likely Bob Lutz knew the offering was coming soon. GS research could easily have known without illegal backroom whispers.
Well, $1.4 billion for Tesla, $0.6 billion for Musk personally, and an option for Goldman Sachs to get $0.21 billion.[1] Tesla stock is down in after-hours trading, but that doesn't mean much. If the stock is down significantly at the close tomorrow, the market didn't like this.
It's a legit offering. The company intends to build a big factory and make stuff. Real capital assets will be bought with that money. It's not to sell stuff at a loss to gain market share in hopes of raising prices later. (Looking at you, Uber.)
Tesla just hired Audi's head of manufacturing, Peter Hochholdinger. About a week ago, the previous two top people in manufacturing quit, right after Musk announced he wanted the production line running two years sooner. Maybe Hochholdinger can do it.
> Tesla stock is down in after-hours trading, but that doesn't mean much. If the stock is down significantly at the close tomorrow, the market didn't like this.
Well... there's all kinds of information asymmetry in investing. Musk generally has a clearer picture of the company's future than investors, such that signalling theory postulates that when he decides to issue equity, this may be interpreted as him viewing the equity is overvalued. i.e. selling an overvalued stock makes sense. Particularly, selling an overvalued stock prior to bad news coming out that would negatively affect the valuation, such as a growing rate of cancelled orders. Just making something up here.
As such, knowing nothing about the firm, and only the timing of the equity issue, most investors are usually inclined to interpret an equity issue as the stock being overvalued somewhat, and adjust accordingly.
So the market not liking this may just be a function of general principles of finance, and have little to do with the specifics of the company itself.
Goldman Sachs and Elon Musk are likely the largest buyers of this offering. So the stock doesn't have to go down much from this dilution as they are absorbing it.
Why do people keep spouting this nonsense that Tesla is losing money on EVERY car? They make money on every car otherwise they wouldn't be selling any cars. The lose money due to their high R&D.
Possibly because other auto manufacturers do include R&D in their COGS? Tesla, instead, treats it as an OpEx which to be fair, most non-automotive companies do as well. Still, it's not standard for the industry the are in.
tldr: Because if Tesla did their accounting the way Toyota does, they have a negative gross margin.
So it's not all just R&D. Their revenue and cost of revenue includes their resale value guarantee and lease programs. I'm not enough of an accountant to know which way these tilt the numbers. Their resale value guarantee probably will help them maintain a high sticker price.
Selling at a loss is a real thing that lots of companies do and is entirely possible in Tesla's case. By this I explicitly mean the marginal cost ... that is the sale price may well be lower than the cost to make one more vehicle.
They would do this strategically to build their brand, market share, to work on inefficiencies in their pipelines expecting to make it up further down the road.
They lose more money per quarter than they spend in R&D per quarter, so your statement is wrong. They have insane cash burn. You also have to consider they are subsidized, without those subsidies they run an even deeper loss.
It's harder to value fast growing companies than stable companies. Still, it would be good if Bloomberg would have an adviser who is able to value companies at least a little bit better than an average person.
This is not a surprise; there's an old saw that I think I first read in a Buffet annual report. It says that financing tends to alternate forms for companies in terms of what makes sense: debt -> equity -> debt -> equity.
Equity offering seems likely to be much cheaper than debt right now; Tesla has great mindshare among consumers, and lots of doubters on the professional investor side.
echo "Tesla to offer $1.4 billion shares, remaining to be sold by Elon Musk.
Musk is exercising options to buy 5.5m shares and will boost overall holdings
on net basis. Developing... " | wc
1 30 176
News articles and tweets are converging at an alarming rate.
Eh, that's just fintech. They push stuff like that out as fast as possible, then update it continuously as the story develops. The difference in a few millisecond of publishing is directly correlated to profit.
It's pretty obvious at this point that Tesla's number one product is their stock. Which makes it no different from a number of other high fliers.
At first they were an innovative car company. Then the stock price shot well above the level sustainable by an electric car company. Elon realized this, and then builds the Giga factory. We're not just a car company, we're a power company!
Now they are raising more equity off of an inflated stock price. I'd stay away from this one.
Not a total hater, Tesla cars are great, but one of these day's Elon's moon shots and obsession with the stock price will catch up with him (he'll still be rich) and his investors (they may be significantly less rich).
From the press release, it appears that the capital raise is "only" $1.4 billion -- the remainder is Elon Musk selling shares to cover his tax liability for simultaneously exercising options from 2009. Hopefully 1.4 billion is enough.
Tesla has a really great business. They're not just cars, they're batteries. Their home battery for storing solar energy is a huge deal at least in terms of future cash flows. Also, they're a white label supplier of batteries to companies like Toyota and Mercedes. Anyway--new long term TSLA shareholder here. Bought in at $205.
[+] [-] jboydyhacker|9 years ago|reply
Super bad form and just goes to show the community- don't trust investment bankers. Such bad form.
[+] [-] philrapo|9 years ago|reply
"Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision."
(I put this in the reply to a child, but I felt it was relevant enough to reply directly to the parent.)
[+] [-] xadhominemx|9 years ago|reply
[+] [-] repler|9 years ago|reply
If Tesla sells (heh, and builds) every one of their pre-ordered model 3's, that's over $14b in revenue.
The only question is, are they going to be able to do it. If both departments at Goldman think the answer is "YES", then what they have done is absolutely reasonable.
[+] [-] bjacokes|9 years ago|reply
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[+] [-] Aelinsaar|9 years ago|reply
[+] [-] SilasX|9 years ago|reply
[+] [-] fosco|9 years ago|reply
[+] [-] Animats|9 years ago|reply
It's a legit offering. The company intends to build a big factory and make stuff. Real capital assets will be bought with that money. It's not to sell stuff at a loss to gain market share in hopes of raising prices later. (Looking at you, Uber.)
Tesla just hired Audi's head of manufacturing, Peter Hochholdinger. About a week ago, the previous two top people in manufacturing quit, right after Musk announced he wanted the production line running two years sooner. Maybe Hochholdinger can do it.
[1] https://www.sec.gov/Archives/edgar/data/1318605/000119312516...
[+] [-] IkmoIkmo|9 years ago|reply
Well... there's all kinds of information asymmetry in investing. Musk generally has a clearer picture of the company's future than investors, such that signalling theory postulates that when he decides to issue equity, this may be interpreted as him viewing the equity is overvalued. i.e. selling an overvalued stock makes sense. Particularly, selling an overvalued stock prior to bad news coming out that would negatively affect the valuation, such as a growing rate of cancelled orders. Just making something up here.
As such, knowing nothing about the firm, and only the timing of the equity issue, most investors are usually inclined to interpret an equity issue as the stock being overvalued somewhat, and adjust accordingly.
So the market not liking this may just be a function of general principles of finance, and have little to do with the specifics of the company itself.
[+] [-] cloudjacker|9 years ago|reply
[+] [-] jernfrost|9 years ago|reply
[+] [-] encoderer|9 years ago|reply
tldr: Because if Tesla did their accounting the way Toyota does, they have a negative gross margin.
[+] [-] Splines|9 years ago|reply
Total Revenue: 4,046,024 Cost of Revenue: 3,122,521 Gross Profit: 923,503
R&D: 717,900 Selling, General, & Administrative: 922,232 Total OpEx: 1,640,132
Loss from Operations: (716,629) /* snip some other line items */
Net Loss: 888,663
http://secfilings.nasdaq.com/filingFrameset.asp?FilingID=111...
So it's not all just R&D. Their revenue and cost of revenue includes their resale value guarantee and lease programs. I'm not enough of an accountant to know which way these tilt the numbers. Their resale value guarantee probably will help them maintain a high sticker price.
[+] [-] colechristensen|9 years ago|reply
They would do this strategically to build their brand, market share, to work on inefficiencies in their pipelines expecting to make it up further down the road.
[+] [-] partiallypro|9 years ago|reply
[+] [-] xiphias|9 years ago|reply
[+] [-] chrisper|9 years ago|reply
[+] [-] forgetsusername|9 years ago|reply
[+] [-] johnward|9 years ago|reply
[+] [-] adventured|9 years ago|reply
Fiscal 2015 -
Research & Development: $717 million
Net loss: $888 million
First quarter 2016 -
R&D: $182 million
Net loss: $282 million
If their R&D was $0, they'd still be losing lots of money.
[+] [-] kgwgk|9 years ago|reply
Actually they would be losing money even if the R&D line was zero.
[+] [-] GreenPlastic|9 years ago|reply
[+] [-] vessenes|9 years ago|reply
Equity offering seems likely to be much cheaper than debt right now; Tesla has great mindshare among consumers, and lots of doubters on the professional investor side.
[+] [-] crabasa|9 years ago|reply
[+] [-] nathancahill|9 years ago|reply
[+] [-] Diamons|9 years ago|reply
[+] [-] agumonkey|9 years ago|reply
[+] [-] jgalt212|9 years ago|reply
At first they were an innovative car company. Then the stock price shot well above the level sustainable by an electric car company. Elon realized this, and then builds the Giga factory. We're not just a car company, we're a power company!
Now they are raising more equity off of an inflated stock price. I'd stay away from this one.
Not a total hater, Tesla cars are great, but one of these day's Elon's moon shots and obsession with the stock price will catch up with him (he'll still be rich) and his investors (they may be significantly less rich).
[+] [-] 11thEarlOfMar|9 years ago|reply
https://youtu.be/6eZaVdFbo6A?t=145
[+] [-] marvin|9 years ago|reply
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