Tesla And Making Money Out Of Thin Air

Well as far as I am concerned Tesla makes very nice cars but is not a good company that I would steer well clear of from an investment perspective. Its junk bond rating of B3/Caa1, tells you that there is a very good chance that this company will actually go bankrupt over the next 5 years. If that happens the shares will be worth a big fat zero. There is a very good reason behind this rating it has $10 billion of debt on its books Link1.

It also makes a huge loss every quarter, equivalent to $16 per share and yet people are prepared to pay $375+ a share for the privilege. You know what - that is nuts at the price of $379 a share yesterday the company had a market capitalization of $64 billion making it bigger than Ford or General Motors.


So what happened yesterday? The stock was trading at around $340 per share when Musk tweeted that he was thinking of taking the company private by offering those that want to cash out $420 a share that would value the company at an even crazier $70 billion valuation. The shares promptly shot up to around $370 per share, trading was suspended for an hour then resumed and closed around the $379, a 10% gain on the day.

If he pulls this off, then it really would be an amazing achievement because he needs to sell even more debt in a leveraged buyout to buy out those that wish to sell at the $420 price and also to buy out some existing debt holders at a premium to the current price of their debt... So basically he needs some people to be dumb enough to buy newly issued debt to fund.

I would think a lot would want to cash out at $420 a share, of course, he owns around 19.9% of the stock so will not be buying himself out but that still means he may need to raise $40 billion or perhaps even $50 billion. I suppose anything is possible but ultimately you are going to need to persuade a lot of sophisticated investors to take a big risk to buy that debt and with a junk bond rating that is going to be very difficult.. Nonetheless in a single tweet Musk added around $6 billion to his company's valuation yesterday so we can call it the $6 billion tweet. In my view, this company has a great brand name, a visionary leader and good support but it is worth more like $15 billion maximum (and probably substantially less than that).

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