420. That was the figure in dollars proposed by Elon Musk as a per share price that he would take Tesla (TSLA) private -- with financing already secured. It's also a number beloved by cannabis users and investors.
So, is this market on drugs?
1. How is it possibly legal for a CEO/ Board member (Musk is also Chairman) to release this information via tweet? God knows he's not great at following the rules, but this is egregious. As of this writing, Tesla has not filed an 8-K with the SEC regarding this development. It has issued a statement on its website.
The blog post and the tweets are equally inadequate in terms of SEC disclosure.
2. How is Tesla worth $80 billion? That's right, the transaction mooted by Musk would value TSLA at $80 billion, and I see that various news outlets are "mis-reporting" the number, as usual. Tesla had 170 million shares outstanding as of June 30 and net debt (excluding capital leases and restricted cash) of $8.7 billion. Add those two figures together, and in a go private transaction debt must be considered, and you get $80.1 billion.
Ferrari (RACE) , which is extremely profitable and has a gross margin more than double Tesla's 25% target (which the company missed badly in the first half), has an enterprise value of $26.8 billion. Could Tesla really be worth three Ferraris? Is that even conceivable?
Based on work I did for my private clients, I concluded that Tesla's fixed charges for the next 12 months would be $3.2 billion. So, Tesla would have to make $3.2 billion in EBITDA in 2019 to make a positive economic return. I'm seeing a $3.3 billion estimate for 2019 EBITDA for Tesla on FactSet, so analysts are essentially forecasting Tesla breaks even next year.
On that basis, an $80.1 billion valuation would equate to 25x EBITDA for Tesla.
I have no superlatives to describe that, but auto companies are lucky to get 5 timesforward EBITDA in the best of times, and the U.S. automakers are nowhere near that valuation now.
So, no one in his right mind would pay 25 timesfor a company that makes cars. The propulsion system is irrelevant and anyone who thinks Tesla is ahead of its many competitors in the race to full autonomy should stop doing so much Peter Lynch-style research on cannabis stocks.
Tesla is light years behind General Motors (GM) Cruise division and Alphabet's (GOOGL) Waymo division and seems to also be behind Uber and Baidu's (BIDU) Apollo consortium in the race to Mobility as a Service (MaaS) solutions.
On the other front, advanced driver assistance systems (ADAS), Tesla's Autopilot continues to register only at Level II on the SAE's classification system while Audi's new A8 (though they will have to turn this off due to regulatory requirements for models sold in the U.S.) and NIO's ES8 are capable of Level III ADAS today.
So, with sober eyes this seems like a blatant attempt to fry short-sellers. To be sure, it's working.
Tesla has $920 million of converts coming due in March 2019 with a conversion feature of $359.87. Based on my modeling, Tesla simply cannot afford to settle those securities in cash, so maybe "levitating" TSLA shares above $360 via magic tweets and company blog posts is the way to go.
Keep on tweetin'!