Goldman Goes Bonkers Over Tesla

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Investors beware!

Goldman Sachs has inflicted on the universe another report, a 43-page thing (before the 4-page disclosure addendum) with the usual mix of persuasive small-print annotated spreadsheets and reasonable-looking charts, in which it painted different scenarios of Tesla’s future, including two where CEO Elon Musk would be the next “Steve Jobs” or “Henry Ford,” which gave the stock nosebleed valuations of $442 and $478 a share respectively.

Independent, objective research? You gotta be kidding.

Goldman sucked more fees out of the various Tesla money-grabs than any other bank – and has big plans to redouble its efforts. The report even spells out the amount of Tesla’s future money grabs: $6 billion over the next four years.

To mollify critics that might otherwise claim Goldman had created just another promo piece to advance its search for fees, it also raised its price target but “only” to $200, from $170. That this is $40 below Tuesday’s close makes the report look somehow conservative on the surface. At the same time, it validates the trajectory of the price, which is up, and gives Goldman a chance to raise its price target again down the road.

The report purports to “quantify the full value of Tesla by modeling the ‘disruptive’ upside case,”  not only based on the car itself but also on the batteries as a storage device for the electrical grid:

To measure what is truly transformational, we need to draw on the experience of past technologies like the iPhone, the Ford Model-T, and selected consumer durables like refrigerators/laundry appliances/dishwashers. All of these were new technologies that were widely adopted and radically revolutionized consumption patterns.

In scenario 1, only the second-best case, Elon becomes the next “Steve Jobs” whose “disruptive technology” was the iPhone. Tesla would conquer 2.7% of the global auto market by 2025. Sounds great. French automaker PSA Peugeot Citroën had $75 billion in revenues and sold 2.8 million vehicles in 2013 for a global market share of 3.4%. So, 11 years from now, Tesla’s projected 2.7% share would still be behind where PSA is today. Tesla had $2 billion in revenues in 2013, and its share of the 83.5 million vehicles sold worldwide isn’t even a rounding error. But it sports a market cap of $28.8 billion, over four times that of PSA’s $6.6 billion. The companies have one thing in common, though: they both lost money.

It would be too painful to compare Tesla’s metrics to those of a successful luxury automaker, like BMW.

As a first step to get to this small but illusory 2.7% market share by 2025, Tesla would have to raise another $6 billion in capital over the next four years (ka-ching!), Goldman says. Other people’s cash is something Tesla knows how to get and burn through.

Tesla’s Model S looks great – as do many cars at that price point. I see them a lot in San Francisco, where it’s a cool, somehow “sustainable” status symbol. It’s probably a very good car to drive, as you’d expect from something in that price category. And I’m glad it has arrived on the scene.

But an electric car as a “disruptive technology?” I mean, come on.

On September 14, 1899 – about 115 years ago – a guy named Henry Bliss got run over by a taxi at West 74th Street and Central Park West in Manhattan. A plaque there points out that it was the first automobile fatality in the “Western Hemisphere.” The taxi was an electric vehicle. As were 90% of the taxis in New York City and about 30% of all cars sold in the US. Electric cars aren’t exactly new. What has kept them from dominating to this day? The difficulties associated with batteries. While batteries have improved immensely, these difficulties are still the same: cost, weight, range, and charging time.

So why did Goldman go bonkers over Tesla?

When Tesla went public in June 2010 and raised $266 million with enormous hoopla, fanfare, and hype, Goldman was one of the lead underwriters, and raked in the fees.

When in June 2011, Tesla did a follow-on offering, selling about 6.1 million shares at $28.76 ($175 million) to the public and another load in a private placement – including 644,475 shares to an affiliate of Daimler – Goldman was acting as sole book-running manager for the public offering, and raked in the fees.

In October 2012, Tesla did another follow-on offering, selling about 7 million shares at $28.25 a share ($197 million) to the public. Goldman was acting as sole book-running manager and raked in the fees.

In May 2013, Tesla did another follow-on offering, selling about 3.3 million shares at $92.24 a share to the public, along with $600 million in convertible notes (to pay back the loan it got from the generous taxpayer via the Department of Energy), for a total of over $1 billion. Among the lead bankers on the deal: Goldman. It had a field day raking in the fees.

In February 2014, Tesla went back to Wall Street and sold $1.6 billion in convertible notes. It listed all the usual reasons, from general corporate purposes to accelerating growth, but this time there was a new wrinkle, the “Gigafactory” where Tesla would produce batteries and change the world. Goldman acted as one of the book-running managers and raked in a ton of fees.

Each offering was larger than the prior one, as the company burns through more and more cash. Future offerings are going to be even larger. In its report, Goldman proposed $6 billion in total over the next four years.

What the report failed to spell out is that Goldman would get the lion’s share of those fees, and that those fees would be larger if the amounts of the offerings are larger, and that can only happen if the stock price gets hyped into the stratosphere. Hence, the motivation for Goldman’s awesome promo piece, in one elegant symbol: $.

Wall Street once again stands out as history’s most glorious, most efficient, sophisticated, and prolific “gigafactory,” to use Tesla’s newfangled term, for the production of self-serving BS. Investors beware!

But even Goldman couldn’t suppress some troubling indications: Model S sales in the US have flat-lined at about 1,500 to 1,600 units per month, down from over 2000 in August. So Goldman postulates nervously that “growth needs to come from Asia.” Ah yes, China, the deus ex machina for everything. On the proven philosophy, if you can’t sell enough of them in the US, go try China.

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