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Tesla, TSLA, General Motors, GM, Valuation Comparison And Elon Musk’s Personal Debt

On Wednesday, Tesla Motors, Inc. (NASDAQ: TSLA) announced its full-year and fourth quarter 2015 financial results. The company reported a fourth quarter loss of $0.87 missing the Wall Street analyst consensus of a profit of $0.10 by 970 percent. Tesla reported that $0.13 of the $0.87 loss was attributable to “mostly to unrealized losses from foreign currency revaluation” in the company’s shareholder letter hosted with Shareholder.com.

On Tuesday, Tesla sister company, for which Tesla CEO Elon Musk serves as chairman and his cousin, Lyndon Rive, serves as CEO, SolarCity, Inc. (NASDAQ: SCTY) also reported its full-year and fourth quarter 2015 financial results. SolarCity reported a per share loss of $2.37, beating a reduced Wall Street consensus of a loss of $2.59 by 8.5 percent.

Valuation comparison between General Motors and Tesla; Elon Musk's levered financial position.
SCTY stock is down by 34.0 percent since the results were announced and by 70.1 percent over the past 12 months. TSLA shares have rallied marginally since the Wednesday evening announcement, by 5.1 percent; over the past 12-month period the shares have fallen by 26.1 percent. TSLA shares have fallen 47.3 percent from their all-time high, $286.65, printed on July 20, 2015.

According to the NASDAQ, Elon Musk owns 28,371,342 TSLA shares and 21,275,994 SCTY shares, currently valued at $4.29 billion and $369.78 million respectively.

On February 10, the day after SolarCity announced its financial results, which saw SCTY shares plummet, GuruFocus reported on the loans Musk has secured using his TSLA stock holdings. According to the website, Musk’s margin of safety with his loans has fallen from 48 percent to 9.5 percent.

Current valuation of TSLA shares may be unsustainable; a further share price slide could trigger margin calls for CEO Elon Musk.
Stockbrokers and other financial institutions will accept stock holdings as collateral on loans, typical loaning a maximum of 70 percent of a stock’s value, as reported by TD. Stock traders sometimes use these loans to buy more stock than they can afford, taking on levered positions, amplifying both profits and losses. CEOs and others who receive stock as part of their compensation packages have also been known to use these loans to secure cash, allowing them to maintain their holdings without sacrificing their personal liquidity.

If Musk’s 9.5 percent margin of safety reported by GuruFocus is correct, it would mean that a $15 drop, down to about $135, in TSLA shares could force the CEO to raise cash to meet a margin call. One way Musk might raise cash is by selling some of his TSLA or SCTY shares, which could force the prices of the stocks down further, possibly triggering more margin calls, possibly beginning a vicious cycle for Musk, as well as SolarCity and Tesla shareholders.

Musk may have also used his SCTY shares to secure loans.

It has been noted that at least a portion of Musk’s loans have been issued by financial institutions that hold underwriting relationships with Tesla: there is a large incentive for these institutions to support the price of both SCTY and TSLA.

Since Tesla reported its financial results on Wednesday, shares of TSLA and SCTY have traded relatively flat on much-higher than regular turnover, a market state described by some observers as churning, as reported by Dave Manuel.

It is not uncommon for publicly traded companies to miss EPS estimates by 5 or 10 percent and witness little change in their stock price. However, for a company to miss earnings by 970 percent, and for its sister company’s shares to be sold so heavily just the previous day, suggests that there could be two groups of participants in the markets for TSLA and SCTY shares: longtime investors who have lost patience with the management teams and are selling, and new investors who appear to be defending the stocks, seemingly illogically, given the companies’ dismal financial performance.

Questions regarding Tesla CEO Elon Musk's financial position and the valuation of TSLA shares have surfaced.
Could the institutions who have issued margin loans to Musk be desperately attempting to protect the stocks, hoping that the trend in each will turn, thereby avoiding a margin call? If this is the case, how much more capital are these institutions willing to risk propping up shares of companies that have performed so poorly? Have TSLA and SCTY shares bottomed? The answer to these questions may become apparent in the coming trading sessions of each.

There is no doubt that Tesla is an innovative company. However, the idea that electric cars are more environmentally friendly than gas-powered cars has been disputed in a study by the National Bureau of Economic Research, as reported by Investor’s Business Daily.

A comparison of electric and gas-powered cars caused the study’s authors to conclude “that electric cars, despite the hype, aren’t as environmentally clean as gasoline-powered cars.”

This does not mean that the idea of an electric car company is not viable — it does, however, suggest that electric cars are a niche market, and that there really isn’t much difference in the business model between General Motors Company (NYSE: GM) and Tesla.

The stock market, however, values each of the companies very differently.

General Motors produced close to 1 million vehicles in 2015. Clean Technica reports that Tesla “delivered” 50,580 vehicles in 2015.

Tesla appears to have delivered about 5 percent of the number of cars that General Motors did in 2015.

General Motors reported $152.36 billion in sales in 2015. Tesla reported $4.05 billion in sales in 2015, or about 2.7 percent of General Motors’, seemingly in-line with productions figures.

The stock market, however, values General Motors as a whole (its market capitalization) at $42.80 billion, while it values Tesla at $19.78 billion, or 46.2 percent of General Motors’.

That Tesla’s production is 5 percent of GM’s, that Tesla’s sales are 2.7 percent of GM’s, and that the market is valuing Tesla as being worth 46.2 percent of GM, is puzzling.

Tesla has an ambitious plan to produce 500,000 vehicles in 2020. Assuming that GM’s production remains flat (it will likely grow, though not at the same pace as Tesla’s), this means that Tesla, if it meets its goals, could produce about 50 percent as many vehicles as GM in 2020. If this happens, it would seem that Tesla would deserve to be valued at about 50 percent of GM: in 2020, not in 2016.

Forward price earnings ratios for each company further compound this view. Based on 2017 earnings estimates, the market is giving General Motors a forward PE of 4.78, and Tesla a forward PE of 38.73. To the stock market, a dollar produced by Tesla is worth 8.1 times more than a dollar produced by GM, which would seem completely unsustainable. Given that Tesla is a young, innovative, and fashionable company, a forward PE ratio twice the size of GM’s might be appropriate; 8.1 times seems absurd.

If Tesla was revalued with a PE twice that of GM’s its shares would trade near $38.

Over time, the PE ratios of each company will almost certainly converge. The question that will be decided by the market will be whether GM valuation needs to come up, or Tesla valuation needs to come down.

If this convergence happened on Tuesday and was shared equally by each, GM shares would rally by about 355 percent to near $126, while Tesla shares would see their price cut by about 45 percent, to near $85.00.

[Photo by Justin Sullivan/Getty Images]