Who Stands To Benefit From Tesla’s Stock Price?

As I read this Bloomberg story this morning about Elon Musk closing in on the goals required to get 5.27 million stock options granted to him in 2012, a thought occurred to me. We all know the financial system is absolutely rigged. That much is no secret. 
At the current share price of Tesla stock those options are worth about $1.4 billion. Despite many on Wall St acknowledging that the value of the company has nothing to do with its current business fundamentals, they keep pushing the price up based on “future potential.”
What rarely gets talked about is that every time Tesla goes back to the markets to sell shares in order to keep the lights on, Elon himself buys up a big chunk of those shares. There’s absolutely nothing wrong with that and demonstrates Musk’s own confidence in his company while also ensuring that his own substantial stake in the company (currently at more than 22 percent of outstanding shares) isn’t diluted. Again nothing wrong with any of this.
However, keep in mind that relatively little  Musk’s net worth which is well over $10 billion is in cash. Like most billionaires that don’t want to give up their stakes in companies he borrows money against those investments. When he wants to buy more Tesla shares, he goes to his bankers, including Morgan Stanley for a loan. As of March 2017, Elon owes more than $624 million
The banks that are owed money by Elon Musk have a financial incentive to maximize the value of the company and help it reach the lofty goals set by the board of directors when they granted those options in 2012. If Tesla fails to reach those goals, especially the market capitalization, Musk won’t get those shares and may not be able to pay back those loans. On top of that, many of the same banks also own a lot of Tesla shares directly, including Morgan Stanley with 3.7 million shares.
To the best of my knowledge (I’m neither a lawyer or financial expert) none of this is illegal. But it’s worth having some context when listening to any arguments pro or against the value of a company, including my own. For the record, I don’t own any stocks in any company directly aside from funds in my retirement accounts.

2015 Tesla Model S P85D – Excellent But Not Perfect

2015 Tesla Model S P85D - 4 of 36-02.jpeg
Nine years ago, I was beginning my career as a professional writer just as a little Silicon Valley startup was emerging from stealth mode to introduce its first product. Taking its name from one of the greatest engineers and inventors of all time, Nicola Tesla, that company reignited the pursuit of battery electric vehicles with a heavily modified Lotus Elise chassis packed with 1,000-pounds of lithium ion cells. It would take another two years before paying customers would finally take delivery of the first Roadsters and another four after that before Tesla would finally deliver its first completely in-house developed product, the Model S. During a recent trip to California I finally got my chance to drive the insanely fast Tesla Model S P85D.


Tesla Goes to the Stock Market to Replenish Cash

Tesla-Motors-symbolThe car business is an enormously expensive place to play. Building factories can cost anywhere from hundreds of millions to billions of dollars, especially if you want to mass produce anything. In late 2008 and early 2009 at the height of the financial crash, we saw General Motors go from $16 billion in cash reserves to virtually nothing in a matter of months as they raced toward bankruptcy. Tesla Motors is now standing on the precipice of major investments to grow the company and they have been spending their reserves at such a prodigious rate that they too need to raise more cash.

In the recently released Q2 2015 earnings report, a more troubling aspect than the operating losses which have been typical of the company’s finances from day one, was the cash burn rate. Tesla went from having $1.905 billion on December 31, 2014 to just $1.15 billion on June 30. A good chunk of this went to paying for equipment in the Fremont, California factory for production of the Model X crossover and ongoing construction of the “Gigafactory” battery plant near Reno, Nevada.

However, the outflow is just getting started as the company prepares to start equipping that $5 billion battery factory (although a significant chunk is coming from Panasonic and other suppliers) as well as developing and producing the more affordable Model III. Tesla has publicly stated a goal of expanding production from 50,000 units this year to 500,000 by 2020. While selling half a million cars would raise significant revenue, they have to spend a lot of money before they ever get there.

To help keep things going in the near term, Tesla announced plans today to issue $500 million worth of new common shares in the company. CEO Elon Musk has committed to spending $20 million of his own money to buy new shares. Given the enormous investments that will be required for equipment and engineering in the next five years, $500 million seems like a pittance and it likely won’t be the last time we see Tesla going to either the equity or debt markets to raise more money. In this case, Tesla’s stock price has already taken a hit in the last few weeks dropping from a high of $282 on July 20 to close at just over $238 yesterday. Right now they are probably balancing the need for cash with not overly diluting the stock and sending the price down even faster.

These are perilous times for Tesla Motors.

Tesla AutoPilot Cost and Take-Rates

Model S autopilot

Last October, Tesla Motors CEO Elon Musk stepped onstage in Los Angeles to announce the new P85D edition of the Model S and a new semi-autonomous driving feature called AutoPilot. Surprisingly, Musk told the audience that, starting two weeks prior to the event every Model S coming off the line was already equipped with the package of radar, camera and ultrasonic sensors that would enable AutoPilot. The engineers were still working on the software and it would debut in 2015. It’s now August 2015 and AutoPilot still hasn’t been turned on but the company’s second quarter earnings release did make an interesting mention of the new capability.


The Apple Auto Store Could be More Disruptive Than the Car

retail_store_gallery_istanbulAs the discussion about a possible entry of Apple in the car business continues, yet another wildly premature question arises. How would Apple go about selling these totally speculative vehicles?

Developing and building a modern car from the ground up is a vastly more complex problem than anything that Apple has previously attempted. Elon Musk, Henrik Fisker and countless others before and since can certainly attest to this. However, that is largely an engineering problem with basic technical issues to address and regulations to adhere to. Aside from scale and the nature of the engineering challenges, it’s an area that Apple is somewhat familiar with.

Retailing cars, at least in the United States can be just as problematic, if not more so. Unlike most industries, the system of selling automobiles is very highly regulated and the rules are set at the state level with each of the 50 states having their own nuances. One common feature across the country is the franchise system.

The Franchise System

The network of independently-owned franchised car dealerships was established in the early years of the industry. In those days, it was hugely beneficial to all of the startup automakers by providing them with an inventory buffer and some extra working capital. With a system of franchises, automakers don’t actually sell product to the end consumers that drive around. Vehicles are purchased by independent dealers who maintain the inventory and sell to end consumers. Even when a customer special orders a vehicle with a particular configuration, it is still sold twice, once by the factory to the dealer and then by the dealer to the consumer.

In the early years of the industry, this system benefited manufacturers because they sold franchises to aspiring retailers and them sold them the product shortly after it came off the assembly line. It also benefited the dealers that could charge a healthy markup and also make money selling parts and service. Finally, the system benefited the consumer because with so many independent dealers that could charge whatever they liked, there was an opportunity to shop around for the best price or to find the exact car they wanted.

However, as dealers became more wealthy, they would increasingly wield their influence over state legislators to get laws passed to prevent automakers from competing by selling directly to consumers. Until the import brands started arriving in force in the 1960s, this all worked well with dealers only competing with each other for sales. However, the imports seeing the thousands of dealers selling the cars at a discount had a different idea.

While they didn’t try to go against the franchise laws, they also realized that by selling fewer franchises, their dealers wouldn’t be undercutting each other as much, selling more vehicles per store and earning higher profits. Until GM and Chrysler went through bankruptcy in 2009, all efforts by the Detroit automakers to cull their dealer networks or compete directly had been firmly rebuffed. Even now with 20-25 percent of their dealers shut down during the bankruptcy process, the Detroit three still have several times the number of franchises of their import brand competitors.

Tesla and the company store

Having seen the success that Apple had with its company owned retail outlets since the first opened in 2001, Tesla decided to eschew the franchise model for its fledgling lineup of battery powered vehicles. Starting in California and a few other states with more lenient regulations that allowed carmakers without any existing dealer network to sell direct to consumers, Tesla has opened several dozen stores modelled on the Apple boutique concept.


Unfortunately, Tesla’s attempts to expand beyond that initial retail footprint have been largely rebuffed by the legislatures and courts. In fact laws against automakers selling direct to consumers have been made even more strict in a number of states including Texas and Michigan.

So what might Apple do?

As with everything else about a potential car program, we can only speculate at this point but Apple’s history and some emerging technology provide some clues. Prior to the opening of the first Apple Store in April 2001, Apple’s products had been sold through third-party retailers including CompUSA, Best Buy and a range of independent stores. In the larger stores, Apple products were often relegated to a remote corner and rarely given much support.

Automotive retail is a very different environment where the vast majority of stores are dedicated to a single brand. However, because they are independently owned and operated, automakers have very limited control over what the stores look like or how they are configured. Automakers have resorted to a carrot and stick approach to getting dealers to follow certain guidelines, such as providing support payments to remodel or withholding allocations of certain models if dealers don’t tow the line.

In lieu of a franchise system for the computer business, Apple just went into direct competition with their third-party resellers. By providing a halo experience for customers where they could show off their latest products, Apple was able to grow their sales dramatically. While many independent resellers went out of business, most of the larger chains like Wal-Mart, Target and BestBuy saw the increasing attention that Apple brought to its products as a boon. By advertising that they had the same products, they were able to draw in consumers that also needed other products.

There was one significant distinction here from the auto industry. Apple has always sold its products at premium prices and virtually never discounted anything, thus avoiding one of the major concerns from franchised car dealers. They also discouraged third-party retailers from discounting Apple products. In this way, they avoided the appearance of undercutting third-parties and competed on providing a better retail experience.

With its huge cash horde and influence, if Apple chose to take on established car dealers to set up their own retail network, the tech company could potentially lobby and win over state legislators that have so far done the bidding of dealers. Apple already has nearly 300 stores in the U.S. and has shown a record of playing nice with those third-parties which could help if it does go after changes in franchise laws. Apple would likely have a better chance of success with its polite and well-mannered CEO Tim Cook than the outspoken Tesla CEO Elon Musk.

It’s also entirely possible that Apple could go the traditional franchise route. There is probably no shortage of potential dealers willing to put up a multi-million dollar franchise fee to give the brand a shot.

My own personal guess is that we’d actually see a mix of both independent dealers, stand-alone Apple car stores and some support from the existing Apple store network. Given that existing Apple stores largely live in malls and are often overcrowded as it is, Apple could provide a virtual reality introduction to its vehicles from the existing stores.

dk2-productImagine walking into your local Apple store, walking over to the car section across from the new watch counter and slipping on a set of Oculus Rift goggles. You could sit down in a mock driver’s seat and reach out to experience the entire Apple automotive user interface. When you are done, one of the Apple geniuses could set up an appointment for a physical test drive at a nearby Apple car store or third-party store or even pull up the loan application on an iPad and arrange for your new car to delivered right to your driveway.

If anything, Apple taking on the car buying experience may end up being far more disruptive to the industry than any Apple-branded car. As the old curse says, “may you live in interesting times.”


Why an Apple EV Might be the End of Tesla


Over the last couple of days I’ve been having some further discussions with people about what sort of car Apple might create if indeed they are developing one. As I said in my first post on the topic the other day, if Apple is going to build a vehicle, it will almost certainly be a premium EV in direct competition with the Tesla Model S and Model X. For any company getting into building cars for the first time today, this is probably the only rational course.

A major component of the investment in developing a vehicle is the powertrain and for internal combustion engines, that is a huge differentiator with different manufacturers having decidedly different characters. In its existing businesses, Apple contracts with other companies like Foxconn and Samsung to do all the actual production and they likely would for a car which I’ll come back to. For most of the important parts that are actual product differentiators like processors and fingerprint sensors, Apple does the design work in-house and only them manufactured to their specifications. They generally don’t like to licence these components.


Can an Apple User Experience Be Enough to Succeed in Cars?


In recent days, the speculation that Apple, Inc. has embarked on an effort to develop and produce cars has blown up all over the internet. If indeed Apple is doing this, they come at this market segment as the industry may be entering the most transformational period in its near 130 year history. I believe Apple can do some very interesting things in this field in the near term, but it’s not at all clear if the company behind the Mac and iPhone has the traits to succeed in the long run. Even if Apple does succeed in the near-term, Tesla is likely to be the first automaker to feel the pain.

The auto industry is scrambling right now to develop future cars capable of driving themselves, taking the humans completely out of the loop. As I’ve discussed previously, there are still a great many technical issues to resolve before we can turn over full control of our mobility needs to sensors, actuators and algorithms. It may in fact be decades before we have fully autonomous general purpose vehicles that can go anywhere.

The era of personal vehicle ownership may be coming to an end