Tesla Motor’s move to acquire solar panel company SolarCity is likely part of Tesla’s plan to corral “loss-tolerant” investors in an attempt to avoid possible financial ruin, according to the head of a tech research group.
The CEO of Tesla and SolarCity, Elon Musk, owns 22 percent in the highly tax-subsidized solar panel company and 21 percent of debt-riddled Tesla. Musk claimed in a Tuesday blog post ahead of the merger announcement that the new company will be a one-stop shop for Tesla’s green energy-obsessed customers.
Yet the merger is also in keeping with Musk’s mode of operation, Salome Gvaramia, the COO of tech company research group Devonshire Research Group, told The Daily Caller News Foundation. The fusion is all too predictable, Gvaramia explained, adding it’s probably the best way Musk knows to finance a giant colossus like Tesla.
“Tesla must court additional loss-tolerant investors to support its growth,” she said, adding that, “SolarCity has such investors. It’s neither a surprising move to us, nor the last time Tesla will try to expand” using this method.
Loss-intolerant investors, according to DRG’s research in May, are a category of investors capable of tolerating massive amount of losses in an enterprise, company, or asset with or without knowledge of the loss – a type of pyramid scheme, in other words.
Gvaramia went on to say that the two combined companies “will accelerate the depletion of cash ahead of the Model 3 launch, so Tesla will need more cash even faster” if it intends on raising the amount of money needed to produce the new, supposedly inexpensive, sedan.
Ultimately, focusing on these “loss-tolerant” investors, she said, is “not a good recipe by any technology strategy perspective.”
DRG’s research shows that Tesla’s brand can only survive as long as it can continue to find larger “loss-tolerant investors” – the group’s research points to Panasonic as one example of a loss tolerant investor willing to dump money on Tesla. Panasonic invested massive amounts of money into Tesla’s new giant Nevada-based Gigafactory, a 1.9 million square foot monstrosity in Nevada slated to cost more than $64 million.
If it fails to invest in Tesla at an aggressive enough rate, DRG noted, then the entire financing scheme collapses, unless of course, Musk can find successively larger investors.
Meanwhile, Tesla’s debt continues to rise, moving up to $480 million in the first quarter of 2016. It also continues to burn through cash, due in large part to operating losses of $249 million in the quarter, and its overall investments ($234 million) to build its vehicles.
Musk’s electric vehicle company will need much more investments — in fact, it will need more than $2.25 billion to meet demand for its Tesla Model 3.
Gvaramia believes that Musk fundamentally misunderstands the entire financial industry, an ignorance leading to the kind of stultifying mistakes that could lead to the downfall of Tesla and SolarCity, as well as the investors willing to sink money in the former.
“When a company’s executives misunderstand modern corporate finance and technology strategy, they can make profound miscalculations and errors of judgment; this will not be the last mistake Tesla’s management makes,” she said about Musk’s proposal to meld the two countries.
One such misjudgment, according to tech analyst and venture capitalist Peter S. Cohan, is Tesla’s inability to understand the solar panel and electric vehicle industry.
The mega electric vehicle company’s industry, Cohan noted in Forbes, earned just 3.89 percent return on invested capital (ROIC), while SolarCity’s industry earns a 9.65 percent – both of which pale in comparison to the S&P 500 industry average ROIC of 12.45 percent. The industry is simply not attractive enough to investors, Cohan explained.
Shareholders are bound to share the same viewpoint, analysts claim.
Colin Rusch, an analyst with investment firm Oppenheimer & Co., downgraded Tesla to perform from outperform in a research note published Tuesday, saying analysts with the firm expect “a robust shareholder fight over this acquisition centered on corporate governance.”
“We believe investors are likely to view this transaction as a bailout for SCTY and a distraction to Tesla’s own production hurdles,” Rusch said in the note.
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