Tesla (TSLA) is generating interest as it appears to be heeding the market's calls for a capital raise. However, Goldman Sachs (GS) and Citigroup (C) may be the more interesting participants in the company's recent filings.
Shares of the Palo Alto, California-based automaker popped in pre-market trading Thursday after a document yet to be approved by the SEC indicated CEO Elon Musk is interested in buying $10 million of the company's stock, adding to the up to $2.3 billion offered by underwriters.
The filing indicating Musk's interest followed an SEC-approved document announcing a mixed-shelf offering. The Gigafactory in Shanghai is indicated as a key factor in facilitating growth that will require the extra capital.
The necessity of the move has apparently come to outweigh the CEO's preference not to access capital, as Musk only recently came around to seeing "the merit" in doing so.
Analysts anticipating the cash raise also anticipated Thursday's stock pop, but warned of its temporary effect.
"While we wouldn't be surprised if a successful fundraise (along with the new SEC settlement) temporarily boosted the stock price, we remain Underweight with a $192 price target," Barclays analyst Brian Johnson said.
What's likely more interesting than Barclays' bearish outlook on the shares is the bearish outlook from the very banks underwriting the deal.
"We and Goldman Sachs and Citigroup, as representatives of the several underwriters named below, intend to enter into an underwriting agreement with respect to the shares being offered," the filing states, naming Wells Fargo (WFC) , Deutsche Bank (DB) , Morgan Stanley (MS) , Credit Suisse (CS) , Merrill Lynch, Pierce, Fenner & Smith, and Societe Generale (SCGLY) as underwriters.
"We think the result likely fuels bearish investors' concerns about waning demand - especially as these disappointing results came even as the company expanded Model 3 deliveries internationally and began offering $35k variants of the Model 3," Goldman Sachs analyst David Tamberino said. "Altogether, we think the delivery results will put pressure on TSLA's shares, and corroborates our belief that volume expectations for the company's products in 2019 are too high with consumer demand likely lower as subsidies phase out in the US."
He indicated that further downward pressure on EBITDA and free cash flow estimates is likely to pick up steam in 2019. The firm's 12-month price target remains at $210 per share.
"More negatives than positives in Q1 as Tesla swings back to a sizable loss & FCF burn, putting greater emphasis on the need to bolster balance sheet cushion, in our view," Citi analyst Itay Michaeli said in a note to clients just one week ago, maintaining a "Sell" rating.
Short-sellers indicated that the investment banking divisions of each of the banks are conversely hoping for solid performance for the stock.
11. I-banks underwriting the deal are clearly hoping:
The smaller than expected equity slice
Will cause $TSLA stock to perform well enough, for long enough, to avoid future legal liability
— Gabe Hoffman (@GabeHoff) May 2, 2019
It would appear that each bank's analysts believe that to be an overly optimistic outlook as demand trajectory is tempered.
What's Left Out
What's also interesting about the filing is that it leaves out any mention of the robotaxi and insurance businesses that were much touted by Musk in April.
"I feel very confident predicting that there will be autonomous robotaxis from Tesla next year - not in all jurisdictions because we won't have regulatory approval everywhere," Musk said last month. "From our standpoint, if you fast forward a year, maybe a year and three months, but next year for sure, we'll have over a million robotaxis on the road."
"Robotaxis will be an extremely high demand for a very long time," he added.
Insurance, a business Tesla had indicated was ready for a rollout later this year and could aid profitability, was likewise left unmentioned.
The idea of a tech-focused insurance product has been a recent focus for bulls betting on further growth in the road ahead for Tesla.
Tesla is starting Tesla insurance next month! They track your car. They can set your rate based on what you actually do. This is genius. $TSLA
— Ross Gerber (@GerberKawasaki) April 24, 2019
Musk and Margin Calls
Additionally, Musk's indicated interest in the purchase of shares coincides with the extension of credit from the numerous banks engaged in the shelf offering leveraged against shares.
"Goldman Sachs has made various extensions of credit to Mr. Musk and the Trust," the filing states. "Interest on these loans accrues at market rates, and Goldman Sachs Bank USA received customary fees and expense reimbursements in connection with these loans. As of April 30, 2019, the outstanding balance under these loans is approximately $213.0 million."
Speculation is that the total amount of credit extended to Musk is near $1 billion at this point, fomenting fears of a margin call as the stock price eroded. Short-sellers have seized upon this storyline, warning that it will play a key role in confirming their bearish perspective.
12. Elon Musk is borrowing ANOTHER $10 million from the banks to invest in the deal
He was over $600 million in margin debt 2 years ago
The filings don't disclose his total margin debt now
It's likely close to $1 billion
This is MADNESS by Elon Musk
— Gabe Hoffman (@GabeHoff) May 2, 2019
The filing also acknowledges this risk.
"Elon Musk has pledged shares of our common stock to secure certain bank borrowings. If these shares are sold pursuant to the pledges, such sales could cause our stock price to decline," the filing notes as a risk factor.
To avoid such a fate, the filing notes that that Musk could continue to pledge more shares if the stock price erodes.
As far back as 2016, many stock watchers were already worried about a margin call on the company.
"There were a few cases where one company was doing considerably better than another, and I borrowed money," Musk told the Wall Street Journal at the time. "The odds that a margin call cannot be addressed are almost zero."
Musk also has millions more shares on top of the more than 13 million already collateralized to mitigate any fears of liquidating the shares pledged, which would be added to if his preliminary interest is confirmed.
At the very least, the capital raise takes an imminent threat off the table.
"This takes the 'immediate bankruptcy' scenario largely off the table," said TheStreet's Anton Wahlman, a columnist who writes about the auto industry, and is currently short Tesla. "It gives the company at least two quarters worth of breathing room to actually pay its bills, and plug the working capital deficit."
Size of this offering is just enough to plug the working capital deficit. $TSLA pic.twitter.com/UoSzmd62b8
— Charley Grant (@CGrantWSJ) May 2, 2019
Tesla opened the day up about 4% on Thursday as the near-term threat fades. Whether that thesis can stand in the long term will be a storyline to monitor as the year progresses and more details on the amount pledged by each bank is disclosed.
