Is Tesla a Ponzi Scheme? - Well, kind of
In April, Mike Jackson, CEO of AutoNation, voiced a thought that many have had before. If you dig a bit, in some ways, Tesla Motors looks a lot like a Ponzi scheme. Is it though? Let’s have a look at the facts.
Tesla, arguably, isn't primarily in the business of selling cars
Tesla Motors, on the face of it, sells electric cars. It seems like a pretty simple fact that cars are Tesla’s main product. Simple, obvious…but not necessarily true.
Tesla posts a loss every year. It’s debatable if Tesla could actually make money if they weren’t pouring money into R&D and similar endeavors. But, somehow, the company continues to rise in value. Could it be that despite what the balance sheet shows, Tesla might be profitable after all?
Imagine if you had a company worth $100. You lose $10 your first year, sell off $5 of the company, and the company goes up in value by 20%. The $95 of company you have left after the sale is now worth $114. You cover your $10 loss, and your share of the company is worth $4 more than you had to start. Your business could lose money every year, and your share of the company would continue to increase in value, so long as you could keep the stock rising.
Considering you’re essentially borrowing from those newly buying stocks to pay yourself and those who have previously bought stocks, despite losses every year in the actual business of this fictional company, this sure seems like a Ponzi scheme. Is this what Tesla is doing?
The case that Tesla is a Ponzi Scheme
Looking at the numbers, it’s clear that Tesla doesn’t make most of their money from selling cars. In fact, Tesla gets (far) more from debt and sale of equity - every single year - then they do from selling cars. Take, for example, the last 5 full years, looking at Tesla’s gross income (revenue minus cost of goods sold) vs. debt and equity sales:
This year, they’ve raised nearly 4 Billion dollars of debt and equity.
Let’s frame this another way.
Tesla has ‘made money’ every single year since 2013, if you count the equity sold. Even more if you count debt. Here’s the kicker, though. If you (falsely - but it gets the point across) simplify things by assuming that Tesla owned 100% of itself in 2011, and take the value of the company on December 1 of each year as the 'value of the company' that year, the value of the unsold portion of the company has continued to rise at a rate far in excess of the money Tesla loses selling cars. This despite the fact that the sold portion is deducted from the remaining value.
So long as Tesla’s stock continues to rise, they can continue to lose money doing business every year, and still profit - for themselves and previous investors - from the proceeds of new investors. And they can do this indefinitely, so long as they get continued investment. Sure seems like a Ponzi scheme.
Tesla's technology, itself, isn't anything others couldn't do
To add salt to the wound, Tesla’s technology, taken piecemeal, doesn’t appear to be anything special.
Take, for example, autopilot. When it came out, there were comparable technologies from several other companies. Non-commercially, various research bodies, universities, and companies like Google, had technology that was far superior. But the media and the market lost their minds, because it wasn’t just autopilot, it was ‘Tesla autopilot’, and that makes all the difference.
They also manage to get away with all kinds of unbelievable shenanigans. They release life-critical software as Beta, and tell you that you’re responsible for your own safety if you choose to use it. Because it’s on the market, they immediately become considered the leading edge in autonomy.
Instead of running a proper optimization program on their cars, they attach a bunch of sensors, and add cost to every vehicle to make them tunable as they figure out how to tune them on the fly. Instead of being lambasted for selling non-optimized cars, they get lauded, because their cars now ‘get better over time’.
This extends to other Musk ventures. For example, unlike stodgy old NASA, he wants to put humans on Mars post-haste. The catch being that these people should be ready to die to make that happen. Revolutionary!
The Counter-argument - Tesla sells stories, and that's valuable
All of this looks pretty bad. But there’s another side to the story.
Perhaps Tesla’s primary product isn’t cars, but maybe it’s not stocks either. Tesla, in fact, is a company of storytellers. Very effective ones.
Undeniably, Tesla has had an outsized effect on the market. When they started, an electric car was a novelty that simply didn’t have a viable market. Almost single-handedly, they made electric cars not only practical and saleable, but cool and highly prized. Major car manufacturers and governments alike are talking about moving away from internal combustion altogether, in a matter of years, not decades.
Similarly, Musk has accelerated the pace of solar power adoption and leaped commercial space travel forward.
It’s not any part of Tesla’s technology that impresses. It’s the whole package. It’s the experience. It’s the marketing. It’s the vision. Ultimately, it’s the story. Buying a Tesla isn’t like buying another car. You’re becoming part of a narrative, not just making a purchase.
Some will argue that the stories Tesla weaves make them worth their exorbitant valuation. Certainly, these stories are bringing value to the market, and to the public, and there are plenty of people who are buying into them.
Understanding that Musk’s true product is stories, in my opinion, explains a lot. For example, it’s why there are constant announcements about the next big thing, whether that is a car, a rocket, a hyperloop, or a boring machine. The hype needs to be kept alive. If the story stays alive, it doesn’t matter if they’re losing money selling cars. But if the hype dies, Tesla dies.
Will Tesla be able to keep selling stories, or will the shine eventually come off? Only time can tell.
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This article has aged like fine wine. Great call, Steven Weinberg!
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6 年Steven, great read. Something you could add is that Tesla has since their 2010 IPO raised $19 billion in capital and for that have delivered $9+ in negative cash flow. In the next 19 months they are looking at $2.5 billion in maturing debt and over $600 million in interest payments while the model 3 ramp up is still in "production hell" and only by using 3 shifts, rebuilding an estimated 40% of the parts which is sure to make every model 3 a money loser. The only bright spot is that they are selling $5000 a pop autonomous software that doesn't exists that is pure profit. Before every earning call, Elon Musk starts tweeting and leaking emails that promise the world in order to calm stock holders. Without the high stock price, Tesla's debt rating would sink more in Junk territory and wouldn't be able to raise more capital. Look at the latest propaganda/fake news tweeted and leaked by Tesla as evidence. I had a good laugh when he tweeted that Tesla would not need to raise capital in 2018 and that they would be profitable and cash flow positive. Looking at their SEC filling, it is clear that's impossible. I expect Q1 2018 earning calls to sound like this: "1. We still have issues, lost more money, burned more cash but we are building 2k cars a week and fixed most issues (omitting the triple shift fact). 2. Next quarter we will produce 6k cars a week and everything will be rosy. (don't bet on it) 3. We are also announcing the model Y and opening advance reservation at $3000 a pop (the next ponzi scheme)" Another interest piece of info is that Elon Musk and friends (it's a clique) use Tesla, SpaceX, and Solar City as one. Many of the same faces are on the board and are investors in all three companies. There is also a lot of collaboration between Tesla and SpaceX and it's not very clear who is paying for this collaboration (Is the gov paying SpaceX to spend time working on Tesla's problems?). One major issue I see is how SolarCity's Solar Bond Program is primarily funded by SpaceX's which uses government advance payments for launches. SpaceX then receives high interest payments which is payed by raising even more debt by Tesla. For me that looks, smells. and tastes like a ponzi scheme. When Tesla implodes it will be the biggest implosion since Enron!
Winter is coming!
7 年Hi Steven, Nice headline, but I am wondering if you have simply misidentified the true reason for Tesla and it's current business model. I think that Tesla is working towards shifting the transportation industry as a whole towards electrification and power storage. The companies he has built or bought seem to be largely, vertically oriented and supplied with the value added products and technology he needs to transform the market. So, pretty car, super fast, super slick, super fuel efficient all done with existing technologies that many have access to. Observe the rest of the automobile world, especially look at GM and its valuation on the market right now. They all need money and Tesla has it. What if GM offered to manufacture Tesla under license? Production problems fixed. Everyone who makes automobiles are going electric. Everyone. Volvo, Honda, Jaguar, Ford, Toyota, CAT, Volkswagen. Everyone. Some to a stated lessor of greater degree but again at the risk of being repetitive. Everyone. What happens when they start sourcing batteries for large scale production? Solar City that's what. Trump would happily point at American companies doing business in America employing Americans to make American cars and American batteries. It's a capital "C" conservative, capitalists wet dream. Wow! Are his shareholders going to lose money in the future? I don't know. The model you supplied concerning the income stream of Tesla is very interesting. I wonder if you projected Tesla and its position five years from now how it would look and how accurate a prophesy it would be. Very interesting article though and I sure enjoyed reading it. Jeffrey
Managing Partner at Venters Recruits and Rockstar Recruiting
7 年Steven, you should be on Bay Street. Great read.
What makes Tesla different from mining, pharmaceutical, and other R&D companies with negative EPS? As long as there are believers, the story will live forever. it's true, not every "start up" company survives, let's just hope that Tesla does, for its courage.