Streetwise Professor

August 24, 2016

Ooooh! Look at that Superfast Squirrel!

Filed under: Economics,Energy — The Professor @ 9:33 am

Yesterday Elon Musk announced the introduction of a 100kW battery pack that would create the quickest production car, capable of doing 0-60MPH in 2.5 seconds. But even Musk admits that production volume will be low, due to the cost and complexity of the new pack. Further given that it will add $10k to the price of an already very expensive vehicle, it will do nothing to advance Tesla’s ambitions of becoming a mass production company.

But it gives Elon the opportunity to strut and amaze the technofanboyz. Wow! Even more ludicrous!

But whenever Elon makes a big splash announcement, there is a very high probability that the true intent is to mask some other far less favorable news. And that was the case yesterday. While everybody covered the battery story, and gave it prominence, only a few covered a far more important, but unflattering story, and did so in a perfunctory way. Specifically, in an SEC filing Musk announced that he was buying $65 million of Solar City’s $124 million bond offering. But it gets better! His cousins, the CEO and CTO of Solar City, are each plunking down $17.5 million. Meaning that related insiders are buying more than 80 percent of the bond issue.

In other words, the market won’t touch these bonds with a ten foot pole, but Elon and his cousins must step into the breach. Mind you, this is happening after Tesla has offered to bail out–excuse me, buy out–Solar City. One would think that would be a credit risk positive, right? Apparently one cash bleeder buying another cash bleeder isn’t appetizing to potential bond investors, even in this era of yield famine–the Solar City bonds weren’t drawing any buyers at a yield of 6.5 percent.

Yet again, this illustrates that the Solar City deal is all about propping up a floundering enterprise, all in the name of staving off a reputation damaging failure.

I also wonder where are Elon et al getting the $100 million to pay for the bonds. Is Elon pledging more of his Tesla stock to Goldman, etc., to secure loans to buy the bonds?

There are other indications that Tesla’s financing issues are beginning to bite. Musk noted that

While the P100D Ludicrous is obviously an expensive vehicle, we want to emphasize that every sale helps pay for the smaller and much more affordable Tesla Model 3 that is in development. Without customers willing to buy the expensive Model S and X, we would be unable to fund the smaller, more affordable Model 3 development.

Which means that the company is having difficulty funding Model 3 development and production (and the Gigafactory) through the capital markets. The bond markets are pretty much off-limits now. The company just did a big equity sale, and will issue more shares to buy Solar City. Tesla’s financial infrastructure looks shaky indeed. Further, it’s not as if the Models S and X are flying off the lot: Tesla inventories consist predominately of the more expensive 90kW battery versions.

So don’t get dazzled. Don’t get distracted by the superspeedy squirrel. Elon makes such announcements in order to divert attention from bad news. Indeed, when Musk makes a splash, you should start looking out for what he’s trying to hide.

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  1. Either kick that spellchecker, or kick it out….;))

    ‘Further given that it will at $10k to the price…’

    Comment by Wilhelmus Janus — August 24, 2016 @ 4:46 pm

  2. This is the second time in recent months that Tesla have bought Solar City bonds. If memory serves.

    Comment by tc phillips — August 24, 2016 @ 8:42 pm

  3. @tc-First time SpaceX bought them. I blogged about it at the time. Elon is raiding all his piggy banks to prop up $SCTY.

    The ProfessorComment by The Professor — August 24, 2016 @ 8:54 pm

  4. @Wilhelmus-Speed kills. Just ask Elon.

    The ProfessorComment by The Professor — August 24, 2016 @ 8:56 pm

  5. Is it really named Ludicrous? WTF I know Tesla is a shell game but Ludicrous???

    Comment by Richard — August 26, 2016 @ 2:39 am

  6. @Richard. Yup. The word applies to Musk and the entire company, but they get away with calling the car that.

    The ProfessorComment by The Professor — August 26, 2016 @ 2:49 pm

  7. […] and assume this car actually can do 0-60 in 2.5 seconds and will make it into production (visit Streetwise Professor to see why skepticism over Elon Musk’s pronouncements is warranted).  According to […]

    Pingback by Ludicrous, and not only in name. | White Sun of the Desert — August 29, 2016 @ 1:23 am

  8. @Professor
    Is the Little Red Schoolhouse going off the tracks or what?

    Props to U Chicago.

    Comment by pahoben — August 29, 2016 @ 10:51 am

  9. @pahoben. It’s always been left, but for the most part has been sincere in its commitment to academic freedom.

    When I have a chance I am going to do a compare and contrast between my alma mater (3x) and my current employer. The comparison is not flattering to the latter.

    The ProfessorComment by The Professor — August 29, 2016 @ 7:08 pm

  10. […] Streetwise Professor » Ooooh! Look at that Superfast Squirrel! […]

    Pingback by Uber v/s Tesla Business Models - Both loose money - Page 2 - Hong Kong Forums - GeoExpat.Com — August 30, 2016 @ 2:30 am

  11. I find Musk’s interest in Solar City a bit odd. SpaceX and Tesla (at least from a technical point of view) are breaking amazing new ground in technology and manufacturing. Solar City seems to be to be quite a commoditised business without any particular excitement – they’re just grinding out economies of scale on existing technologies in a developed market. I wonder why he didn’t just do what most start-up gurus do when a business matures: Sell it off and move on to the next big idea? Nobody would think worse of Tesla and SpaceX if Solar City had faltered under new ownership. Now however, as the Prof says, Musk is obliged to keep the entire façade on the road…

    RE: His comment Model S sales funding Model 3 development. I think it is unfair to assume financial difficulties because of this (though I grant you that there is other evidence) because since they first produced the Roadster, this was their stated goal: That each model would pay for the development of the next, and that each should target a bigger market.

    Also, I think we should stop complaining about the cost of the faster Model S… uh… models. There are very few cars with that kind of acceleration that cost less.

    Comment by Hiberno Frog — September 2, 2016 @ 6:07 am

  12. […] links:AN opinion: “But whenever Elon makes a big splash announcement, there is a very high probability that the true in…” – Streetwise ProfInvesting through populism, a cut out and keep guide – FT AlphavilleThe […]

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