It’s Good If People Want Tesla Stock
Also Goldman’s treasurer, Credit Suisse’s ex-CEO, PG&E and COKE.
It’s Good If People Want Tesla Stock
Also Goldman’s treasurer, Credit Suisse’s ex-CEO, PG&E and COKE.
If you run a company, and it uses a lot of cash, and a lot of people are really excited about your company’s business and prospects, and they want to buy stock in your company, and their buying frenzy causes the price of your stock to triple in the course of a few months to the point that your company is worth $140 billion despite a lengthy and unbroken string of annual net losses, then:
- What you should do is sell stock, at those high prices, to the people who are dying to buy it, and then use the money to do stuff at your company; and
- That would be good, for your company.
You know? I type a lot of obvious things in this column, but it rarely gets more obvious than that. If you have a company that needs money, and people are dying to give you money at enormous valuations, what you do is take their money, and be happy about it.
Elon Musk knows:
Tesla Inc. is selling about $2 billion of common stock, taking advantage of its surging shares just two weeks after Elon Musk said raising capital didn’t make sense.
Assuming underwriters exercise their option to purchase additional securities, the offering could bring in about $2.3 billion in proceeds, Tesla said in a statement. That will help fund as much as $3.5 billion in capital expenditures this year, a plan the company disclosed less than an hour earlier in a regulatory filing.
Tesla shares pared a decline of as much as 7.2% before the start of regular trading Thursday and were down 4% to $736.65 at the open. The stock had more than tripled since the company released the first of two straight positive earnings reports in October.
Yes, right, duh.
And yet while this analysis is obvious, it feels somehow old-fashioned. U.S. public stock markets, it is fashionable to say—and I have said it—are not really for raising capital anymore. Big public companies now mostly use the stock market as a way to return capital to investors; U.S. public companies now buy back hundreds of billions of dollars more stock than they sell. Public stock prices are now supposed to influence capital allocation only in indirect ways: Venture capitalists give money to small startups because they hope to take them public in a receptive market years from now, bond investors lend money to public companies because their stock prices inspire confidence, employees prefer to work at companies whose stock grants appreciate, that sort of thing. It just feels sort of naive and unsophisticated to think that public companies would want to have a high stock price so that they can sell stock for a lot of money. Who sells stock, these days? Well, Tesla.
Once you accept the consensus that public companies don’t benefit directly from their stock prices, you start to wonder why a company would want to be public at all. A fluctuating stock price is, in the standard terminology, a “distraction.” Employees and executives and investors all focus on the stock price, and worry about it, but they shouldn’t, because it is meaningless for the actual success of the business. (The stock price doesn’t affect the business because the business would never raise money by selling stock at the stock price, how gauche.) If the company were private, it could focus on its long-term success without the uncompensated distraction of public markets.
And so you see private-company founders talk disparagingly about public markets and try to stay private longer. And you even see public-company CEOs muse about how they’d rather be private and free of distraction.
For instance Elon Musk. One day in August of 2018, Musk announced that he was “considering taking Tesla private at $420. Funding secured.” The stock was trading at around $340 at the time. He explained his logic: “As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders.”
It turned out that Tesla didn’t go private, because his funding wasn’t secured. The tens of billions of dollars that he thought he could raise from Saudi Arabia didn’t come through. It is hard to raise tens of billions of dollars from a small group of large investors. Not everyone is enthusiastic about pumping billions of dollars into a mostly money-losing electric car company. But some people are! I wrote about them, back in August 2018:
If Musk wants to find a widespread pool of investors willing to take a gamble on his vision for Tesla, he has found them. The obvious mechanism for finding a large group of investors to buy shares in a company without expecting to control that company is also the correct one: You list the shares publicly, and let the people who want to buy them, buy them. You don’t need to travel to Saudi Arabia to find someone who’ll put money into Tesla without demanding any control rights in return. They’re right there in front of you. They’re the people who already own the stock.
Still Musk’s view was so in line with the popular consensus about the essentially distracting nature of public markets that even last week, when Tesla’s stock price got as high as $969, Felix Salmon could write:
Tesla stock has been in Ludicrous Mode for the past few days. Given its bonkers gyrations, it's now easy to see why CEO Elon Musk might feel that he was right all along in wanting to take the company private back in 2018. …
Tesla's rising share price this year has been good for Musk's pay package and his wealth, but it has also turned the stock into an arena for short-term, high-stakes gamblers. … The stock market is failing at its primary role of price discovery, the determination of how much securities and companies are worth. ...
The bull case for Tesla is predicated on the company raising another $10 billion in equity capital, plus possibly much more than that in debt. Public investors don't like that kind of dilution, but a private investor willing to buy the company for $76 billion in 2018 would probably be happy to put another $10 billion in right now.
“The stock market is failing at its primary role of price discovery,” sure, but the old-time-y view, the one that is now out of fashion, was that the primary role of the stock market was to allow companies to raise money to invest in making cars or whatever. And Tesla, unusually for a large modern public company, does need to raise money from stock investors to build cars. “Public investors don't like that kind of dilution,” maybe—the stock opened down today but rallied; as of 11 a.m. it was up on the day—but in any case the recent enormous run in the stock price sort of cures that problem; not liking dilution at $767 is better than being enthusiastic about dilution at $340. “A private investor willing to buy the company for $76 billion in 2018 would probably be happy to put another $10 billion in right now,” maybe, but that private investor didn’t exist back in 2018.
The point here is that the public markets work really really well for Elon Musk and Tesla in a very straightforward and old-fashioned way. Musk has a pitch—about the technology in his cars, about their environmental virtues, about his own extremely online personality—that resonates with the public, in a way that makes a lot of dispersed individual investors excited about buying his stock, which in turn allows him to sell lots of stock for lots of money to pay for building cars. He needs the money, they want to give it to him; he wants to make weird jokes on Twitter, they want to laugh at those jokes. It is just a good fit. The trend, these days, is to sort of overthink what public markets are for, and to dislike what they’ve become. But in Tesla’s case it’s simple and it works.
I have only two quibbles. One is, only $2 billion? Not even 1.5% of the market cap? Sure, Musk “ said during an earnings call two weeks ago that Tesla could fund itself without Wall Street’s help,” but still. If they have $3.5 billion of capex need, if “the bull case for Tesla is predicated on the company raising another $10 billion in equity capital,” if people are always worrying about their cash needs, and if the stock has gone on an insane tear for the last couple of months, why not raise more? The people are clamoring for Tesla stock, why not give them what they want?
The other quibble is, if I were running Tesla—and this is part of why I’m not—I’d probably announce a stock buyback program today too. Why not. 1 Sell, like, $10 billion of stock today, use $8 billion of it to build cars and stuff, and set aside $2 billion to use to buy stock if it dips below $500. “We are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla,” Musk said, back when he was complaining about being public, and since then the swings have only gotten wilder. But the right answer is to embrace the swings. Make them work for you: When the stock is too high, sell stock; when the stock is too low, buy it back.
I used to work at Goldman Sachs Group Inc., and I always enjoy reading stories about Goldman that depict the firm as sort of a high-class literary salon, even though they do not especially match my experience. There’s that time that former Goldman President Gary Cohn didn’t get the job of chief executive officer because board members mentioned “crossing the Rubicon” and he didn’t get the reference. And then there’s whatever this is, about current Goldman Treasurer Beth Hammack:
“She’s brilliant and she can explain the most complicated things in standard English,” said Marty Chavez, the bank’s former chief financial officer. “Once I thought of challenging her and asked if she could explain something in a Haiku,” he said, recalling a conversation about liquidity coverage ratios. By the next morning, her response was waiting in his inbox. “That’s Beth.”
Was there a seasonal word? “Snow falls on West Street. / New Year. We must window-dress / the HQLAs.” I wish I had stories to contribute here. “One time my desk played exquisite corpse to make a pitchbook, we each contributed a page while seeing only one previous page,” that sort of thing. “My deal presentations to the commitments committee had to be in the form of a game of Questions.” “I once prepared a bond prospectus without using the letter ‘e.’” But, no, when I worked there it pretty much felt like an investment bank. I guess I wasn’t senior enough. Once you’re a partner it is all classical allusions and poetry challenges.
Often, when I read about senior investment bankers, I am puzzled by their life choices, and reminded of why I never became a senior investment banker:
Credit Suisse Group AG’s unexpected decision to oust Chief Executive Officer Tidjane Thiam came with an unusual kicker: he’d get the chance to present the bank’s results one last time.
For the 57-year-old, who just lost a bitter boardroom battle over a spying scandal that rattled the Swiss elites, it’s an opportunity to showcase his turnaround and salvage a legacy that won him the support of key investors, despite a share price that nearly halved. His first public appearance since Friday’s ouster is also a chance to break his silence on the circumstances of his departure, though there’s little precedent on how this could play out.
See, I feel like if I were fired from a job after a bitter power struggle, I would not demand, as a condition of my departure, that I get to do a bit more work? “Fine, I’ll go, but let me come back on Thursday to give one last PowerPoint presentation”? Thiam and I are very different people. The numbers were good, and I suppose he’s proud of his work. Still.
The basic deal is that, if you are a company, and you do bad things to people, you have to pay them money to make up for it. If you do really bad things to a whole lot of people, you will have to give them more money than you have. In the ordinary course, the way U.S. bankruptcy and corporate law works is that if a company owes people more money than it can pay, those people get to own the company instead. Thus, if a company does bad enough things to enough people, the remedy is that those people end up owning the company.
This almost always ends up being kind of ironic, because in cases like this, where a big company does something so existentially bad that it is bankrupted, the bad thing will tend to be a central aspect of the company. You just rarely have companies that (1) are mostly in sweet wholesome inoffensive profitable businesses but (2) have a sideline in doing massive harm to people. The paradigmatic case is more like the opioid settlement we discussed last August, in which, to compensate for the harm that Purdue Pharma has done by marketing addictive opioids, Purdue Pharma will be put into a public beneficiary trust “that would allow the profits from all drug sales, including the opioid painkiller OxyContin, to go to the plaintiffs — largely states, cities, towns and tribes.” Purdue Pharma harmed people by selling addictive opioids, and the remedy is that now its victims get to sell the addictive opioids and keep the profits. 2 I don’t know.
This is considerably less ironic, but still:
PG&E Corp. proposes to pay half of its $13.5 billion settlement with California wildfire victims in company shares, a move that would make victims the utility’s largest shareholders—and jeopardize payments if PG&E sparks future fires.
As part of its plan to exit bankruptcy, PG&E would pay fire-victim claims through a trust funded with equal parts cash and stock. The trust would own 20.9% of PG&E’s shares upon the company’s emergence from chapter 11, PG&E has said, and would gradually sell the stakes over several years to compensate individuals who lost family members and property.
While share-funded trusts have been used before to settle claims from asbestos victims and others, some legal experts say the PG&E trust would pose an unusual set of risks for claimants, tying their payment prospects to a company still scrambling to reduce the threat that its aging electrical grid will start fires. Since the fall of 2017, state investigators have linked PG&E equipment to 18 wildfires that killed 107 people and destroyed more than 15,700 homes.
“There’s no question that for a period of two years, the wildfire victims will end up bearing the risk of future wildfires,” said Mike Danko, an attorney who represents fire victims.
Considerably less ironic because starting fires is less of a central part of PG&E’s business than selling addictive opioids is of Purdue’s business. (Or selling cigarettes is of tobacco companies’ businesses, etc.) PG&E could keep supplying electrical power, but stop starting fires, and that would be good for the victims; there is no conflict of interest. On the other hand if PG&E keeps starting fires, then you have the awkward situation of reducing the recovery of previous victims to pay for the future victims. The rule is the rule: If you own a company and it does a lot of harm, you have to give the company to the people it harmed, even if you only own the company because you’re one of the people it previously harmed.
The Two Cokes
We talked back in December about a company called Coca-Cola Consolidated Inc. It’s a Coke bottler: It bottles and distributes the fizzy beverage known as Coke, but it is not the large famous company that owns the recipe for Coke. That large famous company is called Coca-Cola Co.; it has a market capitalization of over $250 billion, a bunch of famous brands, and the stock ticker KO. Coca-Cola Consolidated has a market capitalization of about $2.6 billion, a chief executive officer who “believes that the business is really owned by God,” and the clearly superior stock ticker COKE.
The reason we talked about this company in December is that short sellers kept writing notes arguing that it was overvalued, and a key element of that argument was basically “people keep buying this stock COKE thinking that it’s Coke, but actually KO is Coke.” (Here’s an Upslope Capital note from May 2019, and a Bireme Capital one from November.) Which, fine, was surely true. I mean, it’s true that actually KO is Coke, and I could easily believe that people were confused; one key argument was that if you searched “Coke” in the hugely popular Robinhood mobile brokerage app, the first result was “Coca-Cola (COKE).” But why was it a short argument? I wrote at the time:
Of course for this to be a really good short thesis you might want another component, along the lines of “… and then something will happen that will cause people to stop being confused and dump COKE for KO.” I don’t know what that catalyst would be. The people buying COKE because it’s the first search result for “Coke” are presumably not also the people reading short research notes?
Anyway last night Bloomberg’s Joe Weisenthal tweeted a screenshot of a mobile ad for Robinhood apparently suggesting a sample portfolio of AAPL (Apple Inc., a $1.4 trillion household-name company), NFLX (Netflix Inc., a $167 billion household-name company), TSLA (Tesla Inc., a $140 billion household-name company), SNAP (Snap Inc., a $25 billion company that makes a mobile app that is popular with young people anyway), and COKE. Not KO, COKE. Is Robinhood confused about which Coke is Coke? Or is Robinhood just reflecting which Coke is popular on its platform? Is COKE the preferred Coke on Robinhood because its users are confused, or because its users are aware of other people’s confusion and enthusiastic about riding the momentum? Does it matter?
I guess my point here is that if your thesis is “users of a hugely popular and fast-growing brokerage app have confused this company with a larger and better company, and are flocking to buy it in a self-reinforcing cycle that has led the brokerage itself to promote this company to people who want the other one,” that is … kind of … a …. long thesis?
The stock is down about 23% since that May 2019 short note, so what do I know, though it’s up about 4% since we discussed it in December.
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This is to be clear largely a joke; there are good reasons why not. But many of those reasons are sort of perception and marketing reasons. The financial logic is sound, or sound-ish.
More accurately it harmed people by selling the opioids, and now cities and states have to pay to treat the victims, so the cities and states will get to sell the opioids and use the profits to pay to treat people for opioid addiction. Still weird.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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