Comment by dave1619 | Hacker News Reader

Comment by dave1619 | Hacker News Reader

This is a quadruple whammy for Tesla.

1. Tesla pays off the $452 million Dept of Energy Loan, and this improves their political image and in the long-run will help sales.

Tesla's had difficulty in some states selling direct to consumer, and paying of the DOE loan can help them convince conservative lawmakers to vote on Tesla's side in states like Texas and North Carolina (both have bills on the table).

Also, paying off the DOE loan removes ammunition from a lot of critics who have said that Tesla is just leaching off the U.S. gov't.

2. Tesla puts more than $400 million additional cash into their bank account (they already had over $200m), so now it's well over $600m and close to $700m in cash they hold.

This allow them to speed up a lot of the intiatives they have to roll out infrastructure. First, they can open more stores (especially in Asia and Europe). Second, they can roll out more service centers (all around the world). Third, they can roll out more Superchargers stations (around the world).

Finally, Tesla has an upcoming 5th announcement in a 5-part trilogy and I think Tesla might announce battery swapping stations (for long distance travel). Tesla can now more aggressively roll these out as well.

3. Tesla stock gets a boost of confidence from Elon Musk spending $100m to buy common stock.

Elon Musk is putting his money where his mouth is and is basically saying that at the offering price of $92.24 that TSLA stock is not overpriced but is a fair value to himself buying more stock and to investors.

4. Involving Goldman Sachs and Morgan Stanley in brokering convertible notes and stock increases the credibility and perception of Tesla. Big funds are now starting to invest in Tesla after their blowout 1st quarter earnings report (WSJ reported in another article that European funds and large-cap funds are starting to invest). Recently Morgan Stanley sent a client note saying that after the 1st quarter earning report saying that viability was no a problem for Tesla. This opens up TSLA stock to a whole new crowd of investors because Tesla's risk has been dramatically reduced.

Overall, I think this is a great move by Tesla.

I hate the whole "leeching off the fed" argument. Every large-scale business venture in this country leeches off the government, often in multiple ways:

* Free use of state-subsidized infrastructure.

* Free use of state-funded research and development. (This is huge.)

* Government contracts.

* For the finance industry, they are backstopped by the government if they are "too big to fail."

* Government limits on liability for many risky industrial processes.

... and so on.

Tesla is threatening the status quo in a stale, moribund industry. That is what people don't like.

The US government takes 5.62 trillion in local, state, and federal taxes from people each year, and when it unilaterally increases those prices people must pay up, renounce citizenship, or be thrown in jail at gunpoint.

Where's the cost/benefit analysis to show that those services you tout (infrastructure, etc.) are actually provided efficiently? For those cases where private examples exist alongside (FedEx/UPS/email vs. Postal Office; SpaceShipOne/SpaceX vs. NASA; Google self-driving cars vs. California train-to-nowhere; Coursera/Udacity/Khan vs. Dept. of Ed) the comparison is not flattering.

I'm aware of the large libertarian chunk of HN and have nothing against libertarians.

But api made no references or comments about the efficiency of government services; he merely stated that companies use government services.

Not to be rude, but it seems like you are looking to start a political debate where there isn't one (and a conversation that has been had over and over again in HN threads).

I see this mistake in economic thinking over and over again when it comes to public vs private and it's getting to be rather dull. You need to do a much deeper dive into economics or step back from making these types of statements. Much of the most "efficient" government spending is spending that the private sector would not take on because it is "inefficient" in the narrower definition of a corporation. FedEX/UPS would be much smaller companies if they'd had to rely on private corporations to builds roads and highways. The Internet would never have reached the same critical mass as private telephone companies (dial up) would never have bothered wiring huge swaths of this country where houses or farms are miles apart. UPS and FedEx (sensibly) cherry pick the richest segments of delivery as the Postal Service has to cover the non profitable segments. SpaceX would not be able to launch if it wasn't for government funded space infrastructure initiatives.

IF a market is such that it can be serviced by the private sector efficently that's always the better choice. In many cases here the government, if it was in it already, will remove itself over time (USPS is going through this now on a massive scale) But there are multiple examples over the course of time where only something like a national government can rationalize the investment in infrastructure that results in dramatic improvements down the road (Eisenhower's Federal Highways, Massive Power projects, Telecommunications)

Your factual claim that infrastructure would not exist without the government is actually not true; look at the history of private roads/turnpikes and rail in the US and Britain:

http://eh.net/encyclopedia/article/klein.majewski.turnpikes

> Private road building came and went in waves throughout the nineteenth century and across the country, with between 2,500 and 3,200 companies successfully financing, building, and operating their toll road.

"Your factual claim that infrastructure would not exist without the government". Your desire to reduce this to black and white statements tells me you're only interested in convincing yourself you're right. "private telephone companies (dial up) would never have bothered wiring huge swaths of this country where houses or farms are miles apart." It's not too hard to deduce from my statement that private telephone companies would have wired parts of the country where homes were very close together and they could therefore reasonably price their services and capture a profit. And roads would be built to the most populous towns and cities where there would be enough traffic to create tolls low enough that people would adopt the roads.

Again, government investment in infrastructure makes a lot of sense, and happens, when the economics do not make sense for a private company.

  spending that the private sector would not take on... 
  The Internet would never...private telephone companies 
  (dial up) would never...SpaceX would not...only something 
  like a national government

Note your continual use of "only" and "never". You made this a black and white question. I'll freely admit that the government can build infrastructure; you should admit that history shows that independent individuals can as well. Then the question returns to the relative cost-efficiency of each provider, which was my original point. And that's an empirical question: could these services be rendered for less than $5.62 trillion in taxes per year?

The relevant question is not “could” they be rendered for less than $5.62 trillion, but “would” they be. From what I have observed, privatization of infrastructure does not typically result in cost savings; corporate profits soak up whatever was previously “government waste”.

1. A lot of people don't care about the DOE loan. But those who don't like the government investing in private enterprise probably aren't going to run out and buy a new Tesla just because the loan is being paid off. Net-net: perceptions of Tesla are not likely to change based on the loan repayment.

As for Tesla leaching off the government, it is important to note that $85m of Tesla's revenue in the last quarter came from regulatory credits. The vast majority, ~$67m, came from California's zero-emission program. All told, 15% of Tesla's revenue came from state and federal credits. Forget politics and perception: the impact of regulatory and tax credits on the company's finances and sales prospects over time is something any long-term Tesla investor should thoroughly understand.

2. Tesla is smart to raise capital now while money is still so cheap thanks to an almost unprecedented compression of risk premiums. The odds that capital will become more expensive in the next several years is certainly higher than the odds that it will become much cheaper.

But raising capital doesn't guarantee that capital will be deployed effectively. Celebrating the capital raise without acknowledging that there's execution risk is like celebrating a championship before the season has even started.

3. Elon Musk's obvious confidence in Tesla is a good thing, but you should not oversimplify the details of his stock purchases. Business Insider has more on this at http://www.businessinsider.com/elon-musk-borrows-150-million....

4. Raising capital for companies is one of the things that firms like Goldman Sachs and Morgan Stanley do.

As for Morgan Stanley analysts taking a positive view on Tesla's prospects, consider that in July 2008, Morgan Stanley was advising clients to buy Lehman Brothers stock because "we think near-term risk of incremental write-downs is balanced by solid liquidity and capital footing."

Tesla may or may not be successful long-term, and its stock may or may not be a good investment at current prices, but I think your analysis here is akin to looking at the exterior of the vehicle without examining what's under the hood.

Credit sales do not come from government money. They work similar to Emissions trading, that is, other manufacturers who do not produce clean vehicles have to buy them. So all that money is coming from other manufacturers. (ironically, many of them are of course giant behemoths who have been given massive direct subsidies by their respective governments)

That said, Tesla clearly has a brilliant track record of putting money to use. They built a frickin fully electric luxury sedan in 2 years on a $450M budget.

I think you're missing the point: a direct subsidy is not the only way that businesses derive revenue from government.

The ZEV credits are granted to Tesla by California. By regulation, other car manufacturers have effectively been forced to purchase these, giving them value. Put simply: these credits only exist and have value because of government.

You can play games with semantics, and political pundits can argue about the merits of programs like California's, but those doing due diligence on Tesla should understand the regulations and how these credits may be valued in the future. For instance, if more auto manufacturers develop electric vehicles, the value of the credits will likely decrease over time, perhaps substantially, while the competition in the EV market will at the same time increase. Will Tesla suffer substantially in this scenario? Maybe or maybe not, but I haven't seen many analyses of the company delve into this, at least around here.

As for Tesla's track record: I think one can be truly impressed by what the company has accomplished thus far from a technology perspective without jumping to the premature conclusion that the company's investment has produced a viable long-term business.

Yes of course, but theres a very big difference between a direct subsidy with hard cash (or a loan guarantee) and an open-to-all incentive system, not last in public perception.

Your wording simply suggested to me that you thought these were somehow backed with government money. I'm sorry if I misinterpreted here.

Musk has said in conference calls that their 25% margin target is not predicated (at all) on credit revenue, but he can't magically make money appear, so that remains to be seen.

There is a very worthwhile recap of the regulatory credits systems here:

http://www.teslamotorsclub.com/showthread.php/16357-Regulato...

It's semantics. The net effect is that the government forces the transfer - It's no different than if they had taxed it and granted it.

Huh? Much everything the government does to markets is incentive based regulation. The whole tax-code might be considered such.

If it weren't for government force, those credits that netted Tesla millions would never have been purchased. Therefore, they have the same net effect as if the government had taken the money from the buyers and given it to Tesla. That is logically equivalent to a government subsidy for Tesla (or any company in their position).

1. I think my point about repaying the loan and changing perception toward perception is largely geared toward conservative lawmakers and politicians. Some (like Romney and Palin) have grouped Tesla with the likes of Solyndra, calling them "losers". Even some of the public have the perception that Tesla received bailout money (which isn't true because the DOE loan is separate). But for the public it was around the same time as the government bailout of GM, etc. So, paying off the loan clears up misperceptions, and this can help their case with being able to sell directly to consumers in states such as Texas and N Carolina (with their bills being voted on).

2. Totally agree Tesla was smart to do it now and agree that execution isn't guaranteeing success. But money in the hands of a wise person can really accelerate a roadmap and enlarge success. I personally think Tesla is at an inflection point where the money will be very well spent and will accelerate growth and demand.

3. Regarding Elon Musk's purchase, it's true he's borrowing a bunch of money but even that still signals his confidence in the stock and its current price. And I think that's overall good to ensure investors since the stock has been very volatile of late.

4. It's true investment banks have made terrible mistakes in the past, but still lots of investors and institutions are influenced by the top investment banks. Fidelity owns $1.5b of common stock and Morgan Stanley owns $500m of TSLA common stock (as of 3/31/13, http://www.nasdaq.com/symbol/tsla/institutional-holdings). Lots of institutions and funds are starting to invest in TSLA and this is providing upward pressure on the stock over time (especially if TSLA keeps meeting/surpassing expectations.

The next big milestone for Tesla is reaching 25% gross margin (which is rarely had in the auto industry). Elon Musk is promising they'll reach this milestone 4th quarter this year. If they reach it this year, it is nothing short of miraculous.

The next big milestone for Tesla is reaching 25% gross margin (which is rarely had in the auto industry). Elon Musk is promising they'll reach this milestone 4th quarter this year. If they reach it this year, it is nothing short of miraculous.

I would say so, considering they're at 5% now.

Edit: Strike that. It's actually 2%. Musk had this to say:

"I am highly confident that we will have a gross margin of at least 25%, and — I mean, the emphasis on at least. I think we will do better than those numbers. So, I want to be very clear about that."

The man is all in. I'll give him that.

I thought 1st quarter gross margin was 5% w/o the zev credits. Elon Musk said that that was the average in the quarter, meaning that they started lower and ended higher than the 5% average. I think they're well on their way to 25% by the end of the year. In the conference call Elon shared that it took several months for the gross margin improvements they make to show up materially, meaning that they will have implemented most of their gross margin improvements months ahead of the 4th quarter. This is why Elon is so confident with 25% gross margin by the end of the year... because most of the manufacturing improvements have already been made and it just takes time to realize the increased margins.

I thought I read 5% somewhere, but went and looked it up and saw 2%. Probably depends on how you count it. Either way, that is a huge increase. Musk has a long history of exaggerating, which is what I suspect he's doing here.

It's not conservative law makers that are in the way. It's car dealerships. That type of local law is very common and widespread. Expect Tesla to submit to it eventually.

I disagree with this point. I don't think the laws are there to thwart competition, but to stop manufacturers from exploiting their own dealers. If, for example, a Ford dealer takes on the risk of setting up shop it would be crummy for Ford to come in and annihilate them. Tesla is operating under a completely different sales model, I don't think you're going to see judges slavishly ruling to the letter of the law.

I don't think so.

The whole point of the various laws is to make sure the dealers have a presence and are not cut out by the manufacturers, which is exactly what Tesla is trying to do.

There's nothing different about that, except that Tesla is trying any way conceivable to get around those laws and nobody else is. It's not surprising that they're updating the laws to catch up with Tesla's hacks that clearly circumvent the intent of the laws.

Put another way, not only will the car dealers get pissed, but why would ford, toyota, honda, GM, etc allow Tesla to operate with an advantage? One way or another, Tesla will wind up playing by the same rules as everyone else. And given how local and how dug-in the dealerships' political power is, I'm guessing they will suck it up and sell though dealers.

I hope I'm wrong. I would love to see manufacturer-run car stores.

Tesla never had dealerships, but GM and all the others did. These laws do exist, as you say, to prevent the manufacturer from cutting out the dealer after benefiting from the service the dealer provides to its customers, but Tesla never had any dealerships they could unfairly circumvent.

Those laws exist because dealers were able to get them passed, not because there is any sound reasoning behind them. Without them, the dealers would not exist today. They're not going to let tesla ruin that without a big fight.

I hope Tesla wins. I hate these made-by-middlemen-to-protect-middlemen laws. Recently in Turkey, there was a huge fight between banks and goldsmiths because banks decided to trade gold as well at better rates than offered by goldsmiths. Lots of fight later, banks are now restricted to accept and trade in 2-3 gold types. But I hope the industry is going to open up.

It is the middleman's job to remain relevant in changing economies, not resist changes so that relevancy is guaranteed. I think competition laws should be encouraged.

Yes this is the main point. Car dealerships were understandably nervous that the major automakers could suddenly implement a direct model in their state/location. They could decimate them overnight due to advantageous economics of selling directly to the public. The problem here is that Tesla never had a dealership network that it asked to go all in on their product only to come in behind them later and sell direct. What car dealerships really worry about is that if Tesla proves this to be the better sales model for 2013+ the big guys will want/need to copy this approach. That would be disastrous for them.

A few months back a preliminary injunction sought by some dealers in Massachusetts was denied. Sure there'll be a fight, but I think Tesla is going to end up on top.

http://www.teslamotors.com/it_CH/forum/forums/massachusetts-...

The dealers claim they are protecting consumers from the automakers.

I keep wondering where I can find an example of a person who clearly is not an owner/employee/etc of a dealer who genuinely feels protected. There are probably far more people who enjoy going to the Apple Store (which was created by the same guy who now works at Tesla to set up Tesla's showrooms) than who enjoy the dealership experience.

Also, in a lot of the rest of the world, there apparently are no independent dealers, and that seems to be pretty non-disasterous.

I honestly have no idea what the nominal protections are supposed to be, or what they were supposed to be once upon a time. It's not like they offer awesome warranties themselves, or even provide good value for repairs.

5. Elon will finally tell us what the hyperloop is, now that Tesla is profitable and doing well.

I sometimes wonder if that's a clever joke on his part -- put out this crazy-sounding sci-fi idea by name only and never tell anyone what it is.

It's already public knowledge: http://en.wikipedia.org/wiki/Hyperloop

That's fairly content free.

So is Hyperloop.

Great except for the part where current shareholders' stakes are diluted.

There is no scenario under which that wouldn't happen eventually. Tesla needs cash to fuel its next vehicle programs and growth. If it didn't get it, the growth story Shareholders should be glad, as I am, that they were able to raise at the price they did. They shown they can convert cash into value. They need to do it.

The article doesn't say anything about that. I could be wrong, but I'm surprised if you can legally dilute a public stock.

The article does not have to say it. When a company does a secondary offering, that is a dilution, by definition.

Dilution by secondary offering does not require shareholder approval, up to a threshold. On the NASDAQ, the threshold is 20%. A company could, if it felt like it, dilute by 20% every single year for twenty years, and leave the original shareholders with 4% of the company.

The theory is that because the secondary offering will take place at fair market value, the cash raised will adequately compensate the existing shareholders for the dilution.

Ah, I see, that makes sense. I don't know what I was thinking. Of course selling stock is dilution, it's not like the company has extra stock it is holding in itself.

After reading through all the comments in the dilution thread I think I finally understand:

The value of a stock is determined by what people are willing to pay for it on the market, and if a company simply issues more stock, its entirely possible that the price of the stock will go up, go down, or stay the same.

This is of course only true for public companies, and in the case of private companies dilution is a completely different issue.

Lots of companies routinely dilute as a form of raising capital (to take advantage of a high valuation, or frequently out of desperation).

This is one of the most common forms of funding for young (or weak), publicly traded biotech and pharma companies.

It was very frequently done during the dotcom bubble days.

If you create more stock, you dilute the ownership of current holders. It's inherent in the concept of an offering, and very much legal.

Can you expand on this a bit. Dilution itself is usually not a problem when fundraising, the expectation is that the new funds will increase the Net Present Value of the company more than the dilution. Are you saying this is not true or is there some functional reason why dilution is bad in this particular case?

Dilution is always bad. It means you own less of the company. It's necessary in order to finance a company like Tesla, but bad nonetheless.

But the price of Tesla is not based on such things like cash flow and future profits. So I'm not sure it is bad - for now.

The alternative to dilution is not having capital for expansion and getting crushed by competitors that do. So I dispute that dilution is in itself bad.

Hence the "necessary to finance a company like Tesla".

Owning less of a much larger pie does seems sensible from a monetary standpoint. It seems like you are optimizing for percentage ownership of the company instead of actual value of your stake?

You are mixing up your definitions.

Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted.

Financing a company may create dilution and still put the shareholder in a better spot ultimately. For Tesla, a high-growth capital-intensive business, you can bet on the dilution part happening (they have to get the money from somewhere). The better off part is still an open question.

>Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted.

No, this isn't true at all. If it were, companies would never issue new shares, since shareholders wouldn't allow it.

That's not what "dilution" means. Dilution necessarily reduces the per share value of the stock. Always. That is the definition of the word. Shareholders allow it because the company gets money in return for that dilution, which will presumably increase the value of their shares over time.

>Dilution necessarily reduces the per share value of the stock. Always.

No. This is wrong. Dilution is the reduction in percentage of ownership of the company, not a reduction in the stock price. It may reduce, increase, or leave the price of the stock unchanged depending on whether or not the market thinks the company will make good use of the incoming money.

I hate to turn this into finance 101, but there seems to be some confusion here.

Owner a has 50 shares. Owner B has 50 shares. Total is 100 shares. They decide they want to give Jim Bob some shares for his birthday. They issue 50 more shares to do so. Owners A and B have been diluted and the value of their shares has decreased. That is dilution.

You cannot increase the number of shares in a company without decreasing the value of the shares. This is a hard, mathematical relationship.

Dilution is not financing. Dilution does not change the value of a company. Dilution is bad. When someone way up this thread quipped "yeah, it's great except for the dilution" (paraphrased), that is what he meant (I think - forgive me if I misread). In other words, "Yawn. Tesla is still in business".

Everyone seems to be confusing the definition of dilution with the reasons someone might choose to be diluted.

What people are getting at is that if at the same time as the dilution the market places a greater value on shares (due to what they think a company can do with the money). Then they don't necessarily have to lose value over the short term.

>I hate to turn this into finance 101, but there seems to be some confusion here.

There does indeed seem to be some confusion. The problem is you're the one who is confused.

>Owner a has 50 shares. Owner B has 50 shares. Total is 100 shares. They decide they want to give Jim Bob some shares for his birthday. They issue 50 more shares to do so. Owners A and B have been diluted and the value of their shares has decreased. That is dilution.

The part where they issued new shares is dilution. But the part where they give them away, guaranteeing a drop in the price of the stock, is not.

In the real world corporations don't give stock away. They will sell those 50 shares on the open market and use the money to, say, buy capital equipment. In most cases the price of the shares will remain unchanged, because the value of the company's assets have increased by a corresponding amount. The price is absolutely not guaranteed to go down.

Issuing new shares has no more effect on the share price than raising capital through other means like borrowing from the bank or issuing bonds.

This is sort of silly - they're trading the new shares for lots of money, which now belongs to everyone who owns the shares. So they own a smaller share of the total company, but that company now includes itself plus $500M in new money that wasn't there before. If the company is properly priced at the moment, it's a net neutral transaction. If it's overpriced, it's great for the current shareholders.

This has thead has gotten a bit out of context. I don't have anything more to add. I was trying to explain why the original post felt the need to point out that dilution is bad for shareholders, and apparently did a poor job.

This is generally not considered an issue. When you take investment, your %age ownership of the company goes down but the market cap increases according to the dollar amount you raised (or more, if investors are optimistic about your ability to use the cash.) So the value of your equity stays the same or increases.

That's not true at all. The market cap does not inherently increase according to the dollar amount you raised.

Cash on a balance sheet almost never gets a one to one value in a public corporation. In fact quite the opposite, it almost always gets a significant discount.

If you need a great example of this, take a look at how the market valued Apple's cash vs market cap as their cash exploded to the moon rapidly while their market cap imploded (or Microsoft's similar demonstration a decade prior). Berkshire Hathaway has also regularly demonstrated this principle in action over the last 20 years. Cisco has been demonstrating it for a decade as well. None of these companies have seen their market valuations well supported or increased by huge cash positions, their cash is and was always heavily discounted (in the case of MSFT and AAPL it's not viewed as particularly valuable because it can't or won't likely be used to fuel growth, but rather discharged gradually as a modest dividend, or left to rot on the balance sheet earning very little; in the case of Berkshire, the market would rather see Buffett doing acquisitions or holding equities to boost the return (both of which he prefers to cash)).

There are a lot of companies that are publicly traded, where if you calculated their cash as part of their market valuation, they'd be trading at extremely low discounts (eg AAPL at 6 times earnings). The market is simply telling you in those cases that it does not believe their cash is very valuable.

The market cap does not inherently increase according to the dollar amount you raised.

Good point. It all comes down to the (perceived) return on investment that a company can get using its cash.

In cases where companies are selling stock to raise cash it's usually perceived that the company will be able to get a decent ROI. So in most cases where a company raises cash (through funding or sale of stock) their market value will stay constant or increase. This is Tesla's situation.

In contrast Apple/Google/Cisco have shown very little ability to get a high return on investment on any additional cash, because they already have so much. This ROI is perceived by investors to be lower than what the investors could get on their own, which is why the cash is discounted.

The stock has risen from 85 to 91 on the news and is now holding there for a few days already. You may have been diluted on percentages, but the money value of your stock has increased far more.

Also note that a large part of this money was raised in convertible debt, where shares won't show up in the float for many years (certainly in Tesla-time-periods).

The dilution is peanuts compared to the premium they paid in the first place for Elon Musk's reality distortion field.

edit: to further explain what I have apparently not (judging by the speed with which I got the first downvote), what I am saying is that Tesla trades at a massive premium to any normal way of valuing a public company - far more than the dilution of another offering. Clearly, the people investing in Tesla are not worried about dilution, and are betting on the Big Plan and the ability of Elon Musk to create something absolutely freaking massive. Either that, or they're just not doing the math. But I'd bet on the former.

Tesla strikes me as having a lot more growth potential than any other publicly traded company I'm aware of, if things go well for Tesla. I certainly think its value is based upon future earnings potential, and not current revenue.

On the other hand, if Tesla continues to raise funds every six months in a manner similar to the recent secondary offering, buying and holding the stock for a long time will probably not turn out to be the fantastic deal for shareholders that it has a good chance of being if Tesla chooses to bootstrap from here to 20 million cars/year.

Elon seems more interested in accelerating EV adoption than making his shareholders rich, so we'll probably see more of these secondary offerings if they can happen on terms Tesla finds reasonably good.

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