An investment firm shorted Tesla Motors’ stock on Tuesday after issuing a report stating the company’s financial model is a kind of “Ponzi scheme” strikingly similar to the one created by “Enron.”
“Tesla’s financing model is fragile; it is attempting to manage multiple financial instrument models under the same accounting umbrella — to our knowledge, one of the last companies to attempt this level of financial innovation was Enron,” a Devonshire Research Group’s report states. One minor “misstep in the next two years,” the group adds, “risks entering a death spiral.”
Devonshire, a leading tech investment firm, cast doubt on the company’s CEO Elon Musk’s ability to expand the electric vehicle market, suggesting the complex financial instruments Tesla used from 2013 to 2015 put make the company unsustainable and unpredictable going forward. The report all but said Musk’s mission to cover the world in electric vehicles is too ambitious, especially considering the huge amount of risk involved with the venture.
During those two years, the report states, the world’s largest electric vehicle maker managed to ‘convince Nevada to subsidize creation of battery factories and lithium mines,” and “green” subsidies to prop up the initial price of both the Model X and Model 3 vehicles.
Tesla accepted $1,000 deposits in 2016 for the pre-order of the Model 3, a vehicle that has yet to be produced. And in return for the deposits, the group’s report states, the company was able to use “high pre-orders to boost share price” as well as issue new shares.
Devonshire’s research warns that Tesla, because of the exotic tools it uses to hide its financial stability, is “operationally vulnerable to setbacks.” The group calculates that there is an 80 percent probability that Tesla’s Model 3, and the company’s future financial strength, will tumble into a fiery heap as a result of what Devonshire says is its Ponzi scheme-like business operation.
And if several mishaps do occur during the production stage of the Model 3, then those expecting a Model 3 in their driveway will likely be left high and dry by the time the car is scheduled to be delivered, in 2017.
The nuts and bolts of Tesla’s financial base, according to Devonshire, is a type of pyramid scheme called Future-Earning Pyramidal Financing (FEPF) wherein the company raises capital to cover future losses rather than future profitable returns. “When performed maliciously with intent to defraud,” the report adds, “FEPF forms the dynamic underlying illegal Ponzi, pyramid” schemes.
The assumption, therefore, according to the report, is that the future losses will be masked by a second round of capital raises (a traditional pyramid scheme), allowing some investors to bail out with a profit, while other investors, perhaps lower on the totem poll, will have to cope with guaranteed loses.
And if Tesla falls flat because of a Model 3 failure, the report states, then the company would likely need to declare itself a public good in need of being propped up further by government subsidies, which will be needed to create a trove of national electric vehicle charging stations.
But the fact that the company’s subsidies cater to wealthy car owners makes the public good argument problematic. These subsidies help contribute to income inequality, according to Devonshire.
Devonshire pointed to a new vehicle experience survey conducted by automotive research group Strategic Vision to illustrate its point. The survey shows that “Tesla owners have double the average household income of other EV owners ($293,200). As a result, they are more likely to be adding a Tesla to their household fleet (51%) rather than replacing a vehicle with its purchase.”
Devonshire’s warning comes on the heels of another report the group conducted in late March showing that everything about the Tesla — from its headlights, to its chassis, to the way it is produced — creates massive damage to the environment.
Tesla, as insiders explain, relies on a lightweight frame to maintain its sustainable credibility. One of the best ways to accomplish this feat, the company wagers, is through the use of a massive lithium ion battery. These batteries, according to the March report, rank dead last in greenhouse gas emissions, ratcheting up to 12.5kg of carbon emissions equivalent emitted per kg of battery.
Tesla vehicles also create 86 percent more deaths from air pollution than conventional vehicles, Devonshire pointed out. These statistics, according to the group’s March report, eat into the efficacy of Tesla’s sustainability claims and ultimately degrade the brand’s credibility.
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