Short-Term TSLA Price Movements - 2016

[pGo]

Why would institutional owners and board members sell at $26-28 if SCTY is about to be profitable? Does Musk know something that they do not?

I think it is more likely that Musk has chosen the least bad solution. Better to take the criticism for the purchase rather than face the public demise of the company.

Love this. If it is broadcasted heavily that scty is going to be profitable, and common investors would believe that, they would say no to the cheap sale. Instead, nobody believe that story. Oh my lord. Elon is seriously nuts.

 

[30seconds]

Isn't that nice? 5-year notes for 20-year income streams? Same problem, later year. Like I said already, if they were selling 20-year notes, they would be in the clear.

Unless SolarCity will completely pay off installation costs in the first 5 years of the income stream, they have a continuous refinancing problem. They've locked in the homeowner's interest rate for 20 years, but their bond interest rate is not locked in and could rise catastrophically -- or they could simply be unable to find financing.

These are the risks a *bank* has. A bank takes short-term deposits and hands out 30-year mortgages. (And if they've handed out a huge number of mortgages at 4%, and then deposit rates rise to 5% or depositors withdraw all their money, they have *serious problems*.) To evaluate SCTY, you have to look at the financial metrics you look at for banks. Since the financial statements are not presented like a bank's financial statement, I've found that extremely difficult. And I don't like investing in banks most of the time anyway.

Yes I agree that there is a mismatch between liability maturations and that during a banking crisis that rollover financing for notes maturing will become much more difficult. However there is a big difference between 3mo and 5yr terms and that there is an ongoing established payment stream at the time of rollover.

The problem I have with this acquisition is the massive SG&A costs SCTY has relative to the rest of the income statement. That's why I was hoping that the Tesla/SCTY merger would focus more on mega installs like in Hawaii where there is 1.) cost reduction from day 1 vs. current electricity source 2.) need for integrated technologies 3.) reduction of sales costs (although lengthening of time to sale) and 4.) zero default risk.

At minimum I was hoping to see a cleaned up vision for SCTY, although the company does project positive cash flow in the near term.

 

[Drax7]

We have endured too much, and finally we had the chance to reap the rewards
Of a better than expected quarter , and then again we get hit with this bomb.

I already gave you the counterargument:
-- SolarCity is trying to finance the installs (20-year income streams) with 3-month bonds. These have to be refinanced every three months.
-- in a financial crisis where people lose their homes like 2008, default rates will go up, and lenders will be skittish about refinancing. Lenders could be skittish about refinancing for any number of other reasons.
-- Accordingly, a financial crisis could cause SolarCity to be unable to refinance its debt. At which point they go bust due to a liquidity crisis, future income stream or no future income stream.
-- Alternatively, lenders could agree to refinance SolarCity but demand much higher interest rates (either because interest rates go up in general, or because they fear default risk). So SolarCity could find themselves borrowing at 12% interest rates -- and as a result, losing money. On existing installs.

It's basically a bank run scenario, because *SolarCity is a shadow bank* right now. A bank without access to the FDIC or the Federal Reserve, so a bank with a high risk of bank runs.

As I said in another thread, if SolarCity had 20-year non-callable bonds, or equity, financing all its solar installs, they'd be secure. They don't.

This mismatch of securities duration can result in bankruptcy . The S&L crisis of the early 90s
Is such an example.

 

[pGo]

The reason I say this is a family deal in the 3rd world country is this:

"Musk has said that the directors with personal stakes in the deal will recuse themselves from board discussions at both companies. But the notion that the boards can possibly judge this deal independently is a joke. The seven Tesla directors include Musk and four others close to him: Brad Buss, the former CFO of SolarCity; Antonio Gracias, a member of the board of SolarCity and Musk’s company SpaceX; venture investor Stephen Jurvetson, a board member of SpaceX; and Kimbal Musk, Elon Musk’s brother. SolarCity’s eight-member board includes Musk and four other intimates: Lyndon and Peter Rive, who are company co-founders, brothers and Musk’s cousins; John Fisher, a business partner of Jurvetson’s; and Gracias."

Elon Musk's Tesla-SolarCity deal makes a lot of sense — but only for Elon Musk

 

[neroden]

The problem I have with this acquisition is the massive SG&A costs SCTY has relative to the rest of the income statement.

Well, FWIW, Musk said multiple times in the conference call that a merger would cut SCTY sales costs substantially.

 

[Johan]

charlie munger on musk,"he is a certified genius, I've always been afraid of the guy whose IQ is 190 and he thinks its 250."

I love this quote. It makes a lot of sense.

 

[neroden]

At minimum I was hoping to see a cleaned up vision for SCTY

That's what I'd like to see too, though my defintiion of "cleaned up" is mostly about a less bank-like operation.

 

[Foghat]

Isn't that nice? 5-year notes for 20-year income streams? Same problem, later year. Like I said already, if they were selling 20-year notes, they would be in the clear.

Unless SolarCity will completely pay off installation costs in the first 5 years of the income stream, they have a continuous refinancing problem. They've locked in the homeowner's interest rate for 20 years, but their bond interest rate is not locked in and could rise catastrophically -- or they could simply be unable to find financing.

These are the risks a *bank* has. A bank takes short-term deposits and hands out 30-year mortgages. (And if they've handed out a huge number of mortgages at 4%, and then deposit rates rise to 5% or depositors withdraw all their money, they have *serious problems*.) To evaluate SCTY, you have to look at the financial metrics you look at for banks. Since the financial statements are not presented like a bank's financial statement, I've found that extremely difficult. And I don't like investing in banks most of the time anyway.

Honest question, are just spewing because you have some short interest in Solarcity?

You clearly don't understand how Solarcity financing works. They get financing initially through tax equity financing. They then can chose to solar asset backed securitization. Thus far they've been oversubscribed on all securitizations as well as have a long list of new tax equity partners and most that have done tax equity deals woth the multiple time in increasing amounts over time.

Once the deals are done that the rate they pay, which is sub 6% average across all ABS deals. Regardless of anything that happens on Wall Street. (The same with the solar bonds they offer on their website, which is a very very small amount of capital to basically use as revolving debt credit line and nothing more)

Solarcity then receives a revenue from the installed systems (either purchased, loan payments, lease, or ppa payments, or a combination there of) and tax equity investors get their piece as well as yeild to abs investors and so on. At the end of the day then Solarcity recieves a piece of profit as well. In addition, Solarcity gets *all* revenue from year 21-30 of consumer contracts signed at that point, which is a significant number as powerwall, smart home thermoststs, ovens, refrigerators, HVAC systems become common and connected to solar system as a whole in its consumption of delivered electricity. This year, Solarcity will have contracts with over 250,000 people that have this year 21-30 option.

This is just a cliff note version, but one that clearly would assist in your future diligence in Solarcity... Unless again, you're just hyping up your short position to get others to follow suit.

 

[neroden]

Honest question, are just spewing because you have some short interest in Solarcity?

You clearly don't understand how Solarcity financing works. They get financing initially through tax equity financing. They then can chose to solar asset backed securitization. Thus far they've been oversubscribed on all securitizations as well as have a long list of new tax equity partners and most that have done tax equity deals woth the multiple time in increasing amounts over time.

Once the deals are done that the rate they pay, which is sub 6% average across all ABS deals.

Prove that they have their sub-6% rate locked in for 20 years, and I'll become a bull. I've probably done more due diligence than you have, and I simply can't find that evidence. Looks like they don't.


Duration mismatch kills.

I have no position in SCTY. I researched it fairly extensively, and the financial situation is opaque. As I said not too many weeks ago, it may be great, it may not, but they are not releasing enough information to *tell*.

 

[doggusfluffy]

So SCTY did ~27m volume today and gradually fell at a fairly steady rate. Was this shorts unwinding positions or is there another theory?

 

[neroden]

3) Solar City's bond yields do not signal a company in distress. It signals a market that is bunching in Solar City with every other company that has anything to do with Solar power, and doesn't understand Solar City.

Doesn't matter! When you're in the banking business, the perception of your depositors / those who lend to you is reality. That's how bank runs work.

4) Solar City's brand, customers, assets and cash flow are what matter.

Nope! Not when you're in the banking business. Ask anyone who evaluates banks. They don't evaluate them by assets and cash flow... interest rate spread and duration match are more relevant!

5) Battery storage is a game changer. Solar + Storage will make net metering somewhat irrelevant, at least for Solar City. In 5 years, almost every Tesla owner will own a Powerwal, and a lot of Tesla owners will own Solar systems through Solar City.

Why yes. This part is great.

 

[ggies07]

The reason I say this is a family deal in the 3rd world country is this:

"Musk has said that the directors with personal stakes in the deal will recuse themselves from board discussions at both companies. But the notion that the boards can possibly judge this deal independently is a joke. The seven Tesla directors include Musk and four others close to him: Brad Buss, the former CFO of SolarCity; Antonio Gracias, a member of the board of SolarCity and Musk’s company SpaceX; venture investor Stephen Jurvetson, a board member of SpaceX; and Kimbal Musk, Elon Musk’s brother. SolarCity’s eight-member board includes Musk and four other intimates: Lyndon and Peter Rive, who are company co-founders, brothers and Musk’s cousins; John Fisher, a business partner of Jurvetson’s; and Gracias."

Elon Musk's Tesla-SolarCity deal makes a lot of sense — but only for Elon Musk

Maybe you dismissed my post, so I'll post it again to your comment. Are you and others mad that you are losing money or mad that Elon could potentially speed up the process of making our world a better place. What's more important?

Actually, this plan is exactly what all those oil men did in the early 1900s. I'm re-reading Internal Combustion, and the major executives from the oil and coal companies, like Standard Oil, would join the board of a new EV startup or the company that started electric trains, Milwaukee Electric Railway, and eventually ruin them for profit. Except this time, Elon is on both these companies and wants to combine them for the greater good of our future and not for profit.

 

[Vitold]

[...]

On Elon not caring about the share price: Earlier in the year, the more jubilent versions of "DTU" theory(that I promulgated with others) had that Elon had our back and was gaming for a share price rise to fuel goodies later in the year. He has taken the bewildering approach of grabbing the goodies at the expense of share price instead. Its fine and appropriate for a CEO to not attempt to manage share price, but he will find all his plans will unravel in a material way if the share price unravels.
[...]

Elon cares about growing business, and mission. It's up to the market to price it properly. If I remember correctly few years ago EM said that TSLA was probably overpriced (at that time).

Many here forget that Tesla is TM and TE. Musk said that TE could be half of Tesla's revenues. For that to happen TE needs reliable outlet to sell their product and EM thinks, just like with Tesla Motors stores, he can do it cheaper, more personal and faster than dealers can (in this case SolarCity, Sunpower etc)

 

[austinEV]

Honest question, are just spewing because you have some short interest in Solarcity?

You clearly don't understand how Solarcity financing works. They get financing initially through tax equity financing. They then can chose to solar asset backed securitization. Thus far they've been oversubscribed on all securitizations as well as have a long list of new tax equity partners and most that have done tax equity deals woth the multiple time in increasing amounts over time.

Once the deals are done that the rate they pay, which is sub 6% average across all ABS deals. Regardless of anything that happens on Wall Street. (The same with the solar bonds they offer on their website, which is a very very small amount of capital to basically use as revolving debt credit line and nothing more)

Solarcity then receives a revenue from the installed systems (either purchased, loan payments, lease, or ppa payments, or a combination there of) and tax equity investors get their piece as well as yeild to abs investors and so on. At the end of the day then Solarcity recieves a piece of profit as well. In addition, Solarcity gets *all* revenue from year 21-30 of consumer contracts signed at that point, which is a significant number as powerwall, smart home thermoststs, ovens, refrigerators, HVAC systems become common and connected to solar system as a whole in its consumption of delivered electricity. This year, Solarcity will have contracts with over 250,000 people that have this year 21-30 option.

This is just a cliff note version, but one that clearly would assist in your future diligence in Solarcity... Unless again, you're just hyping up your short position to get others to follow suit.

You are doing us a service by providing the Bull perspective. Don't get insulted if people question and doubt, we have a right to! I was happy to ignore SCTY before yesterday, now a bunch of new people are going to have new and basic questions! It is way too early to start painting critics as FUDsters.

 

[Perfectlogic]

Solarcity has received 99% of all payments due since 200

It's important to remember that most of the loans/installs have been done very recently due to the exponential nature of SCTYs growth over recent years. Rarely do loans default early on so I wouldn't use this 99% figure as proof of anything. The economy has also been chugging along in recent years, the real test is when 08 happens. And when the utility rate drops below what SCTY customers are paying.

The PPAs customers agree to starts out just below the current utility rate and then goes up something like 3%/y over 20 years. Batteries as you know are about to make grid balancing cheaper which will lower the cost of electricity. Falling cost of [utility] scale solar and wind will at least keep wholesale electricity generation at the price it is today, and probably make that part of the cost chain cheaper too within 5-10 years.

In 10 years todays SCTY customers will be paying nearly 20c/kwh and the utility rate might have dropped close to 10c/kwh. In this scenario I'm sure people will try to find a way to get out of the contract with SCTY, not sure how easy that would be though.

 

[Johan]

You are doing us a service by providing the Bull perspective. Don't get insulted if people question and doubt, we have a right to! I was happy to ignore SCTY before yesterday, now a bunch of new people are going to have new and basic questions! It is way too early to start painting critics as FUDsters.

Good post. @Foghat, I know you've gone deep when it comes to SCTY. I know @SBenson did the same and that you ended up with different conclusions. That's OK though. You're almost like to arch mermaids from a big movie.

Edit: LOL. Auto correct for the win: mermaids = nemesises.

 

[Drax7]

Honest question, are just spewing because you have some short interest in Solarcity?

You clearly don't understand how Solarcity financing works. They get financing initially through tax equity financing. They then can chose to solar asset backed securitization. Thus far they've been oversubscribed on all securitizations as well as have a long list of new tax equity partners and most that have done tax equity deals woth the multiple time in increasing amounts over time.

Once the deals are done that the rate they pay, which is sub 6% average across all ABS deals. Regardless of anything that happens on Wall Street. (The same with the solar bonds they offer on their website, which is a very very small amount of capital to basically use as revolving debt credit line and nothing more)

Solarcity then receives a revenue from the installed systems (either purchased, loan payments, lease, or ppa payments, or a combination there of) and tax equity investors get their piece as well as yeild to abs investors and so on. At the end of the day then Solarcity recieves a piece of profit as well. In addition, Solarcity gets *all* revenue from year 21-30 of consumer contracts signed at that point, which is a significant number as powerwall, smart home thermoststs, ovens, refrigerators, HVAC systems become common and connected to solar system as a whole in its consumption of delivered electricity. This year, Solarcity will have contracts with over 250,000 people that have this year 21-30 option.

This is just a cliff note version, but one that clearly would assist in your future diligence in Solarcity... Unless again, you're just hyping up your short position to get others to follow suit.

There are only two people in the world that understand that.

 

[pGo]

Maybe you dismissed my post, so I'll post it again to your comment. Are you and others mad that you are losing money or mad that Elon could potentially speed up the process of making our world a better place. What's more important?

There is a strong counter argument to everything Elon said today, and the stock price today also speaks the result louder than you and I.

I am mad because the combined company is not what I thought about when I invested in Tesla. I am mad because now I am having second thoughts about Elon's motives. I don't see synergy he is talking about with a combined company. I see him not able to focus with Model X, let alone the complex financing done with the solar city model. I thought Model 3 was a winner, but now he'll have a newer excuse to get derailed (just like he did in the past few years - but it was still the same goal). Solar panels are a commodity. Elon was having a tough time answering the question about cost benefits of the silevo technology. He's now have to build two GFs? Panasonic has only invested a handful of millions so far in the first GF.

I live in florida. Even with the synergy he talks about won't help me get rid of the power lines I have in the next few years. There are so many markets like that where solar still doesn't make sense. If it did, why does solar city have to spend $.5-$.75 to acquire customers? Solar is a hyper competitive market and not everyone wants it unless its cheaper from day 1.

 

[Causalien]

Honest question, are just spewing because you have some short interest in Solarcity?

You clearly don't understand how Solarcity financing works. They get financing initially through tax equity financing. They then can chose to solar asset backed securitization. Thus far they've been oversubscribed on all securitizations as well as have a long list of new tax equity partners and most that have done tax equity deals woth the multiple time in increasing amounts over time.

Once the deals are done that the rate they pay, which is sub 6% average across all ABS deals. Regardless of anything that happens on Wall Street. (The same with the solar bonds they offer on their website, which is a very very small amount of capital to basically use as revolving debt credit line and nothing more)

Solarcity then receives a revenue from the installed systems (either purchased, loan payments, lease, or ppa payments, or a combination there of) and tax equity investors get their piece as well as yeild to abs investors and so on. At the end of the day then Solarcity recieves a piece of profit as well. In addition, Solarcity gets *all* revenue from year 21-30 of consumer contracts signed at that point, which is a significant number as powerwall, smart home thermoststs, ovens, refrigerators, HVAC systems become common and connected to solar system as a whole in its consumption of delivered electricity. This year, Solarcity will have contracts with over 250,000 people that have this year 21-30 option.

This is just a cliff note version, but one that clearly would assist in your future diligence in Solarcity... Unless again, you're just hyping up your short position to get others to follow suit.

A quick note since I am still going iver the finances.

You need to understand that we understand this. ABS securitization problem happens when it seizes up. i.e. no one wants to buy. Yes, it is bot a simple revolving loan, but drying up of buyers is the same as having to refinance at a higher rate.

If you think this cannot happen, I simply point you to 2008~2011. Bear sterns, Lehman.

I would also like to point out that if anyone commenting here is an executive or employee of the companies involved, tread carefully.

Disclosure: TSLA IPO shareholder. Unemployed and unaffiliated with anybody and reservation holder of Model 3.

 

[Johan]

A quick note since I am still going iver the finances.

You need to understand that we understand this. ABS securitization problem happens when it seizes up. i.e. no one wants to buy. Yes, it is bot a simple revolving loan, but drying up of buyers is the same as having to refinance at a higher rate.

If you think this cannot happen, I simply point you to 2008~2011. Bear sterns, Lehman.

I would also like to point out that if anyone commenting here is an executive or employee of the companies involved, tread carefully.

Disclosure: TSLA IPO shareholder. Unemployed and unaffiliated with anybody and reservation holder of Model 3.

Don't get paranoid - the SEC isn't coming after you.

That said, I appreciate your analysis that SCTY's financing may be sub prime.