Recently, Tesla Motors has been making headlines for its ambitious plans. However, the specifics of these aspirations remain somewhat unclear. According to the Tesla Motors website, the company is committed to accelerating the global shift toward sustainable transport.
This mission sounds impressive, but we’re left wondering just what sustainable transport entails and the necessity for expediting the transition. Regardless, let us assume this is indeed a worthy endeavor.
Elon Musk, the audacious CEO, clearly believes it is. He has so much conviction that he continues to raise the stakes. By 2018, the company aims to ramp up production to 500,000 electric vehicles annually.
This target is ambitious; achieving such a volume would mean nearly a tenfold increase from last year’s deliveries of 50,580 vehicles. Can they truly accomplish this?
Wall Street seems to think so. Despite the challenges, investors and major banks fully support Tesla’s ambitious goal.
Today’s Leading Provider of Spectacle and Persuasion
Just last week, Tesla Motors successfully raised $1.46 billion from a new stock offering of 6.8 million shares priced at $215 each, with lead underwriters including Morgan Stanley, Goldman Sachs, Deutsche Bank, Citigroup, and Bank of America Merrill Lynch, as reported by IFR.
Over the past six years, Tesla has raised more than $4.5 billion through various debt and equity offerings. The recent $1.46 billion will primarily fund $2.25 billion in capital investments that Musk deems necessary to prepare for the high-volume production of the Model 3.
Clearly, Musk is dedicated to his vision, which is commendable. However, it may also cloud our perception of Tesla’s true business model.
Tesla does not generate profits. Consequently, its core operation revolves around capital consumption. Investors with a blend of optimism and naivety pour funds into Tesla, which the company then consumes. This leads us to ponder what business Tesla is genuinely engaged in.
One might argue that the business model resembles that of P.T. Barnum, the renowned 19th-century showman, who thrived on spectacle and clever promotions. In this respect, it seems Musk’s real business might not be sustainable transport at all, but rather the art of parting fools from their money—much like Barnum did.
How Elon Musk Encourages Investors to Disperse Their Wealth
Matthew DeBord from Business Insider provides a clear perspective on how Musk enables investors to part with their money:
“It’s quite predictable: Tesla will face market challenges or a lack of noteworthy news, causing the stock to drop below $200, sometimes even dipping below $150. (Consider that this company went public in 2010 at $17 a share.)
“Then, an announcement like the significant Model 3 pre-orders emerges, and the stock shoots up, allowing Musk and his team to tap into the risk-loving capital linked to Tesla’s market valuation.
“An observer might conclude that this pattern is unsustainable. But Tesla has been selling shares since its IPO, when both Daimler and Toyota took stakes. If you can tolerate the volatility, Tesla offers the potential for rapid returns—claiming it will be worth far more when countless electric vehicles adorned with its logo fill the roads.”
Not surprisingly, the allure of quick returns is irresistible to some investors. Who worries about the fundamentals of the business when stock prices continue to climb? Wall Street then strategically capitalizes on these opportunities, moving stock offerings like hot cakes at a lively fair.
“Wall Street thrives on this volatility as it provides opportunities for lucrative returns,” adds DeBord. “Firms like Goldman Sachs and Morgan Stanley relish the fees involved, putting Musk in an advantageous position.”
It’s possible that Musk and Tesla may fulfill their mission and promises. Perhaps they will achieve the challenging goal of producing 500,000 vehicles by 2018 and discover a way to generate profit. Indeed, all of this could happen, and Tesla’s stock may very well double again.
However, we suspect that Tesla may exhaust its pool of optimistic investors before realizing these goals. To note, the company reported a net loss of $282.3 million for the first quarter.
Sincerely,
MN Gordon
for Economic Prism
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