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Capital Raise

First, Congrats on an Amazing Q4. As a Tesla stock holder, and future Tesla owner as soon as the X and/or super car comes out, I would like to see a large capital raise. The stock volatility is very distracting. At a $10 bil valuation, I would like to see you raise $2 bil. As opposed to the traditional methods that are often dilutive and brings down the stock price so the Investment banks customers can profit and get an easy free lunch, I suggest raising the money through a strategic partner. AAPl comes to mind as they won't get any better return on their cash and perhaps both companies can benefit on working together on UI technologies for the car. AAPl also has much of their cash outside of the US which is worth less to them due to taxes and repatriotixation. At some point TSLA will need additional factories outside the US so this could be a good fit. The best part, although dilutive by 20% or so, TSLA stock probably would not go down on the news because:

1) The stability of $ 2 bil on balance sheet. Short thesis goes away and volatility in stock will reduce substantially.
2) The seal of approval from a stable company like apple. TSLA would probably go up on the news despite the dilution on the thoughts "If Apple thinks it is a good investment, it probably is.
3) More folks will be willing to invest with a rock solid balance sheet
4) This would allow TSLA to move up the delivery date of the X. Capital resources would be less of an issue. I think this is critical because I think time will show a high priced SUV will be a better seller than a high priced Sedan. SUV's are the top selling vehicle for Porsche and Lexus. They will be for Tesla as well. I feel the best shot for TSLA to ship 40,000 units in 2014, is by having both the X and the S for most of the fiscal year. It would not surprise me if the X out sells the S in its very first year. Most importantly, this reduces the risk of any slowdown in S sales as you get past the early adopters. Porsche only sells about 28,000 Panamera's and has only sold 100,000 since 2009. Launching the X sooner reduces sales risk on having only one product for 7 more quarters. Although costs will be higher, the successful launch of a second high volume model will more than compensate for the hit to profits and margins in the short term.
5) The additional stock wil be in strong hands that are not selling as opposed to hedge fund customers of the large brokers. Again, this will result in the stock not going down on the dilutive news.
6) The raise takes away a big piece of uncertainty that the shorts keep pointing to that a capital raise is coming. Again, volatility will be reduced so the stock is more investable.

Other strategic partners that would have similar effect of completing a capital raise without a big hit to the stock include in rough order of market impact BRK/a, GOOG, GE, and then the various car companies... A new car partner may have more impact than the existing ones.

I am looking forward to the completion of a capital raise quickly so I can substantially increase my investment position.

Wait till C notes hit 35%. Pool turns into ocean.

But who really cares at this point. They raised 1b on the fly! This is huge for mid to long term.

Does anyone know of any other CEO that has put so much of his personal wealth on the line in an offering?

Does anyone know of such a large follow on offering has ever happened from a similar cap (or bigger) company?

I'm scratching my head here...

The 100M is <5% of Musk's net worth.

Congrats to the management team, very smart move raising $1 bil plus at this valuation. All of us shareholders owe Elon a big thank you and debt of gratitude for investing in this round as that is what made the valuation higher than when it was announced. In all my years of investing I have never seen a secondary price higher than when it has been announced. Perhaps it happened, but I never saw it !

I think it happened on the previous capital raise, too.

JZ, per the balance sheet, Tesla invested approximately $500M for the Model S in equipment. I was listening to the CC and my understand was the Tesla was modifying Model S to make it easier to manufacture with tighter tolerances... I think it is like incorporating "lock and key" features in parts to facilitate assembly, welding, etc. Just speculation on my part.

I read that Model X manufacturing will cost an extra $200M. I think they will have to have separate stamping presses, extrusion, welding, assembly line, etc. Otherwise, it is not practical to swamp dies that weigh over a ton and aligning them takes time and money.

The enabling tech for Gen III is battery. They need a battery with double the energy density at half the cost. This will take time. Over 5 years in my opinion, especially to reach mass production and cost targets.

Meanwhile, Tesla can sell 100,000/year Model S+X in the US, Europe, Japan, China. They need national Supercharge networks, Service, etc. Prices could drop with economies of scale. 500 mile battery at the price of the current 85 KW-hr battery. Regular 85 KW-hr could go for $65k with tech package, leather and SC use. Make $1B net profit/year.

Now Tesla has >$700M after paying off the DOE loan.

Bubba2000 -- what about an 85 at half the weight? What range would that get? I bet over 300. I think it's just a matter of scaling battery production to get the price down to overall 30K point. Doesn't have to go 500 miles right of the bat (maybe it will, who knows with improved software).

Just have to get a compelling geniii out there.

Think after a year of MX on the market, the geniii will be ready to go. Especially with the new influx of funds.

I think Tesla is getting a reputation as being on the cutting edge producing a car that gets better the longer you own it. I think people will trust it will improve range and extend the supercharger network at the same time.

The market is more then ready for Geniii right now. Just a matter of prepping production/organization to be ready for it. And I think that is sooner then later now.

Jk2014 - but TM is not ready yet.
Today TM can build Gen3... take 60 kWh battery and improve efficency by ~30% and you have 265 EPA. How to get 30% - smaller car (drag), less weight, 200 hp engine ( MX front motor), narrower tires, etc.
What is missing (TM not being there) ?
- 50% cost reduction
- inter city charging structure ( super chargers )
- service
- mature manufacturing team and processes
- manufacturing equipment
- battery supply
- smooth delivery process
- etc
The MS and MX need to earn the money and build the above. Production you can not turn on like a faucet. It takes years to ramp up production. Worst thing would be... Here guys this is Gen3 and because demand you have to wait 5 years to get one. Also by that time the design is way outdated. I think Teslas time table is very smart.

I agree with Kleist's assessment. Tesla is working to optimize Model S, X design to reduce manufacturing cost as wells as optimize the supply chain, logistics. However, GenIII will need batteries with lower cost/KW-hr and higher density. Higher density means lighter car and low KW-hr requirements. I think it will be minimum of 40-60 KW-hr to get the necessary range. Tesla is shooting for a price range of $30-40k which is going to be a challenge.

In terms of Tesla stock, I think the max valuation will be when version 3.0 of Model S and X hit the market with a 500 mile battery, safety features like collision avoidance, smart cruise control, refined interior, etc. Gen III will be announced and the stock will be priced way up there... probably market cap around $100+B. Competition will be catching up, just like it did with Apple. By then, it may be time to take money off the table. I suspect GenIII margins will be compressed, just like it happened with PCs, laptops, etc. I want to be out long before then.

With $800M after pay off the DOE loan, Elon has the resources and he is not going to stand still. He has an incredibly successful track record.

How much cost/kwh will be reduced when Tesla starts putting in huge (30k car/year) product orders to Panasonic (and other battery related suppliers) soon?

How many suppliers do you think will bend over backwards now to work with Tesla? I think costs will come down faster then you might think.

Everything is negotiable, especially now Tesla is making waves and will be a fantastic customer to supplier's bottom line.

It will take time to build out Tesla's organization to meet Geniii demand. The preparation of Geniii production infrastructure is the opportunity beginning to take shape this coming year...

Learning through 1 to 2 years with MS and MX should give enough prep I feel.

50% battery cost reduction - MS uses 8000 cell, Gen3 uses 4000 cell ( in bulk cost per cell approx the same )
What cells do you need ? Today 85kWh / 8000 = ~11Wh per cell, Gen3 60 kWh / 4000 = 15 Wh per cell. So only about 40 % more capacity per cell ( today Panasonic is already having ~13 Wh cells - not sure if they are good for car applications ).
Establishing a new production is always the same ( I did 9 high tech factories in 20 years )
- new team takes 2 years to reach first level of competence - folks actually know what their job means
- another team 3 years to mature - having depth in the mfg operation meaning multiple people can do the job
Guess what : 2012 MS, 2014 MX and 2017 Gen3 = 2 years + 3 years. Somebody at TM read the book !
I bought stock and made a reservation once I heard Elon's Oxford seminar - he deeply understands how to actually make things ( manufacuring ). TM's ramp up plan is right on point.

But has any of your factories scaled from 0 units/week to 400 units/week in 6 months? It appears to me that one must take into account the force multiplying factors of intense motivation and learning of a core team over a production ramp such as this.

Many, many people at Tesla have developed core competencies very quickly. These same people will train and develop a cadre of new technicians in an efficient manner, etc. The level of knowledge is extremely good right now and I think that alone does wonders to accelerate scaling.

I feel Tesla is the hottest company with the hottest stock it highly incentives employees to stay for a long time. I believe other car companies will have a difficult time persuading managers/technicians/executives/engineers to leave. Also, don't think their is a risk of talent starting there own car company either. Turn over should be very low.

The icon CEO with a highly developed vision is another special force multiplier.

Therefore, I feel the standard protocol of 2 years/3 years might not apply exactly to Tesla.

And by the way... When I picked up my car in March we toured the line. To the untrained eye it might look impressive, but all I saw were inefficencies ( bad habit of mine )... they have ample opportunity left. If TM can brake even with the production line in 1Q then 25% GM is in easy reach by YE.

Jk - I have done factories that ramped from 0 to 200 a week in 3 month and others that ramped from 0 to 2 million a week in 6 month. I have worked in factories that make 2-3 million pieces a day - and all highly complex processes. The problem with cars is that they are big and take a lot of space.
It is not the engineering competence... what needs to grow is the manufacturing competence. To give you an example: my car was in service next to the factory and needed a small spare part. It took 15 days to get the spare part. I am currently in a mature mfg line, if I need a couple parts the mfg manager can tell me from top of his head in 2 seconds if he can me the part or not ( he is sure about his build plan and what he has ). Ask the same question to an new manufacturing team and it takes 2 weeks to get an answer ( they need to go back and read their plans and re-calculate the inventory ). I was just smiling when my car was 15 days waiting for one part.

Jk - but Tesla is following the protocol. I agree motovation is a strong driver - without it would even take longer.
The penalty is high when you do not do your due diligence. Our first factory in China upper management thought we should do it faster... Result in the end we lost 2-3 years and billions of dollars because the mess they created... Big people got fired for that disaster.

I agree, an effective training program to develop mature manufacturing personnel is critical to scaling efficiently. Continuous and concurrent. Should be called Tesla university. Take the best talent off the line, bring them into train new manufacturing techs in what they need to be good at right now. Have them go through scenario simulations, certification, etc... Cycle talent off and on the line all the time to bring in current knowledge. Hire/train personnel at incremental levels proportional to targeted unit output. Have career development progressions. Certifications to get promoted, etc... Training program should be integral to maintaining core competencies. Especially in such the dynamic and continuous growth environment of Tesla.

I feel Tesla will do this (or does). There have been many, many mistakes and problems already and I bet your example of lack of knowledge happen everyday and may take the expressed 2year/3year maturation. I don't doubt it will. But, also have to look at the automation process (machines doing labor), having an accelerating effect on production capability in addition to a large, mature human knowledge base. And motivation and quality of labor force being hired. Tesla is emerging as a highly desired brand. I feel this is important in accelerating maturity. Bottom line, line workers will pay attention. Take notes. Check their answers twice. Minimize their mistakes. Want to get better. I ask you, have you had such a high level of brand heat and respectability behind you when hiring/training/maintaining your staff and personnel? This seems like special situation, and it will reflect on through the quality of personnel and speed at which this personal can adapt and develop.

I just feel that Tesla will be ready for GenIII sooner than later (2015), and think the metrics will demonstrate this in the next couple years. This current 1.02b offering has changed my opinion.

Clearly they will need to hit critical milestones a long the way. Maintain highest safety standards. I feel they will meet these requirements more efficiently then expected given Tesla's as a highly sought after work place and potential to continue being a great work place for many years to come.

I am not seeing Gen III in 2015. Remember, Model X is end of 2014.

2015 would be a year or less after that, for 10X the manufacturing rate!

Instead, 2015 might see a supercar and/or Model S update, to insure the car does not grow stale while they spend the next two years focusing on Gen III.

danielccc -- you might be right. I think it would be pressing it to get it out by the end of 2015.

However, I feel this capital raise helped change/accelerate things a little. Might be able to execute the plan to build out the rest of the Fremont factory now. If they can get the factory itself physically ready for 200k/year capacity, while prepping a core GenIII production work force, then it may just becomes a matter of multiplying the MS/MX 50k/year organizational structures. MS and MX production will probably produce 50k/year for about a year. That organizational structure can be how they build out GenIII organization. (50k/year org times 4). It will be just a matter of finalizing the GenIII production model, then plug into developed/tested 50k/year production organizations. Maturity on an organizational structure level will just as proficient as it is for the MS/MX line. Therefore, I don't feel it would be much of leap to establish a safe competent geniii in the next 2-2.5 years.

Lastly look at how they improved operational costs from Q4 last year to Q1. It's pretty amazing. If you saw many inefficiencies on your tour in march, imagine if they continue to improve even further at the same pace as their quarterlies reflect?

Jk - yes, you are getting it. Non manfucturing folks have no idea about the gold mine manufacturing can be. To give you another example : the area I am working in currently has the same tooling for the the last 15 years. So it is very mature and has had a lot of improvements over the years. Now we are faced with higher demand and in principle wechave to buy more equipment. 4 weeks of 5 engineers using their brains for 10% of their time found another 15% percent improvement in throughput and by the way quality improves by 30%... so we can make at least 10% more parts at zero capital cost. Cost avoidance $25 million for another tool + 1 million anual service contract + x amount for manufacturing floor space etc.
Best thing is Elon knows exactly that. An extra year spend on manufacturing efficency is more important then bringing MX or Gen3 to market a year ealier. Most Silicon Valley start ups fail because they try to grow to fast. Eager rapid growth can be death for sure...

Elon's summary of all the factors was that by the time you get to 10X the volume, your costs drop by half.

BTW, reservation payments are now 2.5k instead of 5k. Non refundable too.

This means these new deposits are not a liability. This will reflect well in greater stockholder equity.

This change from reservation payments to non refundable deposits appears to be a direct result of the capital raise.

Now there is not a great need to accumulate enticing refundable payments at 5k for working capital, now they have this new cash available. Won't have to deal with the headache of cancelations and refunds or liability issues nay sayers keep harping on.

Non refundable deposits help to create more certainty for production. Help reduce order to delivery time. Great move here.

Just hope they hashed this out with California DMV first...

i need a little information:
what about the option for the actual shareholder ? how is the ratio ? have i got the option right also if i live in italy ? sorry for all this question but it's the first time for me that i partecipate at a capital rise...

@jk2014

Where do you see the non-refundable payment? I just looked and it still say refundable and when you click on the purchase agreement it has the following statement:

"Status of Your Deposit: Custom Ordered Vehicle. You will have two weeks from the date you accept this Agreement to make changes to or cancel your custom order. During this two week period, your deposit amount is fully refundable."

Looks like it is refundable, but for only 2 weeks.

Yes, but that's almost instantaneous compared to the reservation-based system.

Does anyone know if the terms of the DOE loan are published somewhere? I heard that Elon has an obligation to keep 65% ownership of the company under the DOE loan terms, which seems weird to me. Would that mean he has to invest more in case the valuation of TSLA goes up? Also 65% seems crazy, especially since we are talking about a 10 Billion $ market cap.


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