Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Tesla Mortgages Factory

There is evidence that Tesla Motors (NASDAQ: TSLA) is out of cash. Elon Musk’s electric carmaker is planning to mortgage its main factory in Freemont, California.

Tesla has changed its lending arrangements so the company can borrow against its $1.8 billion vehicle factory, Thomson-Reuters IFR reported on 8 May 2018. Musk’s company made the move because it has only $543 million in credit left, a filing indicates.

It is easy to see why Tesla needs to borrow, the company reported a free cash flow of -$1.127 billion on 31 March 2018, Ycharts data indicates. Tesla reported a “net income” of -$2.341 billion, losing $389.22 million in cash from operations and a “profit margin” of -20.82% on the same day.

Tesla Might be Broke

This news shows us that the $60.23 billion enterprise value, $51.30 billion market capitalization, and $302.11 million stock price reported for Tesla on 9 May 2018, are pure fantasy. Instead, the company is really worth far loss probably around $27.27 billion which was the total asset value on 31 March 2018.

A likely scenario here is that Tesla is broke. It had $21.98 billion in total liabilities and $10.76 billion long-term debt on 31 March 2018, but only $12.47 billion in revenues and $2.666 billion in cash and short-term investments on the same day.

These figures indicate that borrowing against the Freemont factory will not save Tesla. If the 5.3-million square foot facility is only worth $1.8 billion, Tesla will not be able to borrow more much more than that against it, and it has $10.76 billion in debt.

Is Tesla’s Land more valuable than the factory?

Musk might be betting that the plant’s contents especially the robotic production lines and skilled workforce might be worth a lot more than that. The mogul might be turning to real estate to finance his electric dreams. Building land in the San Francisco Bay area is in short supply.

A condemned and abandoned house on a 9,100-square foot lot in Freemont sold for $1.2 million in April, The San Jose Mercury News reported. The lot is one of the few building sites left in the city. Therefore it might make more sense to move the Tesla factory to the Midwest or Nevada, demolish buildings, and sell the land.

That might make it easy for Musk to borrow a lot of money he cannot pay back on the factory. Financiers might loan him the money figuring it will be a good way to get their hands on the land it sits on.

Will Musk Sell Tesla?

If the real estate deal fails, there is another way Musk can get the money to save Tesla. He can sell a stake in the company to another automaker. Many of them would undoubtedly buy part of Tesla to get their hands on its technology, loyal customers, and high-prestige brand.

Volkswagen (OTC: VLKAY) which is reportedly planning to spend up to $82.5 billion in electric cars is an obvious candidate. Buying Tesla would give VW an American Gigafactory and control of its supercharger network, which can be added to the charging station network Volkswagen is building in the United States.

Volkswagen certainly has the money to buy Tesla, it reported $45.18 billion in cash and short-term investments on 31 December 2017. A homegrown buyer for Tesla is Ford Motor (NYSE: F) which is planning to invest $11 billion to bring out 40 electric models by 2022, Reuters reported. Ford also has the money to buy Tesla it reported $40.07 billion in cash and short-term investments on 31 March 2018.

My guess is the only thing stopping another automaker from scooping up Tesla is the imbecilic market capitalization. Once that crashes, an organization like Ford will buy it and quite probably move auto production to cheaper locales in the Midwest or the South.

The most likely scenario now is that Musk will soon announce some sort of arrangement with another automaker. One probable development is that the other automaker will take over Tesla’s debts, and possibly production at Freemont and management of the Gigafactory; Musk’s famed battery production facility in Storey County, Nevada.

Another potential solution is that production of the Model 3 and other cars might be outsourced to more traditional auto factories in the Midwest or the south. The Model 3 might end up being built in Michigan by the union autoworkers Musk despises

Tesla fans are likely to be severely disappointed by their hero in the near future. The Tesla brand will survive but it is likely to be another just subsidiary of a major auto company.