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In August 2018, Elon Musk announced that Saudi Arabia’s public investment fund had agreed to take Tesla private at $420 (a 20% premium to the then stock price of $350). The “funding secured” tweet that put Elon Musk in feud with SEC implied that Saudi’s PIF was ready to pay as much as $60B for the largest BUYOUT transaction in history that put Tesla’s valuation close to $80B. Elon Musk wrote a letter to investors and explained his motivations and the benefits of going private, the reasons were sheltering from short sellers and attacks that the company was receiving as well as shifting his focus and energy to production instead of dealing with analysts and short term quarterly earning pressure. He wrote,
“First, a final decision has not yet been made, but the reason for doing this is all about creating the environment for Tesla to operate best. 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. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.”
Saudi Arabia’s Public Investment Fund (PIF) wanted to spend close to $60B and take Tesla private to shield it from massive short selling attacks and to move forward their “Strategic Vision 2030” which would lead the country to diversify away from fossil fuels and oil and to fortify their footsteps on clean / sustainable energy track.
The deal ultimately fell apart and Saudi PIF sold their billions of dollars of Tesla stake and instead invested $3B in Lucid Motors in several rounds between 2018 – 2021. The latest round that they invested in Lucid was in February 2021, when they invested $200M in parallel with PIPE investors. I will get back to the PIPE deal and Sep 1 sell off at the end of this article.
In 2021, Saudi Arabia’s PIF took Lucid Motors public via SPAC but ironically, since early March and as soon as the hype deflated, the company and its largest backer have both fallen prey to what they wanted to shield Tesla from. The stock has been a sweet target for short sellers and option writers since the DA. Short interest since April (until Aug 31) has been in the range of 35M – 65M. Since their merger on July 26th until Aug 31 the average short interest has been close to 50M on the float of 207M (Churchill public shareholders). The short borrowing rate even hit the high of 160% late August in anticipation of PIPE sell-off on Sep 1.
Aug 27 Short Borrowing fee
Lucid management’s underpromising strategy, their dovish public relations, the Radio Silence tuned in at their IR dept and their ambiguous production timeline for 2021 have not helped to fend off short sellers but have rather encouraged and rewarded those who have been betting against Lucid in the past several months. The company has been under short selling attack for several months. Any announcements made by Mr. Rawlinson has been followed by a significant dip in the stock. The insightful mic-drop Motor trend review on August 25 was followed by a 13% drop before the Sep 1 PIPE lockup expiration and surprisingly, most of the PIPE investors sold off and left during the first week of September, which triggered a 20% intraday drop on Sep 1. The company’s surprising decision to announce cashless warrant redemption on Sep 8 (with half of initial dilution effect, while giving up +$900M that could be received on cash redemption) didn’t also bring the expected result. The stock went down 5% on Sep 8 [instead of 2.2%], leaving the investors wondering what warrant redemption scenario had been priced in the stock? Furthermore, when the best-case scenario decision was followed by the worst-case scenario stock price movement, it raised eyebrows.
I don’t have answer to many of the questions retail investors ask. I don’t know why Lucid decided to do cashless warrant redemption. I can just guess that the management is confident that at some point the shares they didn’t issue for warrant redemption will cover the $4.5B capital they need to raise by Q4’ 2022, to bridge the company to its positive-cashflow era. I also don’t know why Saudi PIF purchased a large stake in McLaren in July (https://www.reuters.com/world/middle-east/saudis-pif-talks-buy-stake-mclaren-group-sky-news-2021-07-16/) or they bought a 30% stake in Pagani in August (https://www.bloomberg.com/news/articles/2021-08-19/saudi-wealth-fund-buys-a-stake-in-italian-supercar-maker-pagani). I also don’t know why Koenigsegg ended their “electrification technology” joint venture and strategic partnership with NEVS early September (Google the story). I can just guess a few hints based on “Mosaic Theory”. Similarly, I don’t know why Lucid Motors is under short sellers attack, but I know the implication; Continued short attack will increase the cost of capital for Lucid and will prevent Lucid from ramping production and it gives times to their competitors to catch up technologically. This is probably the only thing worth pointing to in Adam Jonas’ equity research paper published yesterday. He clearly confessed that Lucid is technologically ahead of all other car companies and this is what Lucid needs to preserve. In my opinion, the high cost of capital caused by short attacks might inevitably erode Lucid Motor’s power to ramp up production and will make it harder for the company to invest in R&D to keep their edge.
The remaining parts of Morgan Stanley Lucid equity research published today is “A Tale of the Two Companies”. I don’t want to dig up the history and go as early as 2019 and refer to Adam Jonas’ $10 bear case price target for Tesla, but I want to have a quick review of his 2020-2021 journey and the climax of his equity research with “The Chosen One” paper published on January 5, and end with his most recent publication on Lucid. Comparing his assumptions on Tesla with those of Lucid will shed light on the tale of the two worlds he is depicting for his readers. Had he chosen the title “The Cursed One” for his Lucid Motors equity research published yesterday, he would have caught even more attention.
Any equity research and forecast are as good as the underlying assumptions. A journey through Adam Jonas price targets for Tesla during the past 15 months gets interesting when his assumptions are defluffed. Adam Jonas had an underweight rating on Tesla until September 2020. His price targets have been trailing Tesla’s price target and he only priced in 2 segments (revenue streams) for Tesla until Sep 2020: Core Tesla Auto Sales (+95% of the revenue) and Mobility business (less than 5% of the revenue).
Adam Jonas Tesla Price Targets May 2020 - present
Mobility Service / Transportation as a Service (TaaS)
What is Mobility business he and few other analysts are referring to? It is a purely imaginary Transportation-as-a-service (TaaS) business model that doesn’t exist and as of today it doesn’t even have a remote chance of becoming a reality, but this imaginary business segments that has been born out of Elon Musk’s jokes and teases has gradually taken bigger and bigger part of Adam Jonas Tesla price target. Until October 15, 2020 Adam had less than 5% of his price target assigned to this remote imagination, but on oct 15, 2020 he suddenly increased the value of Tesla TaaS from $7 per share to $41 per share. This implies Adam Jonas valued the imaginary business at valuation 5 times bigger than Lyft at the time (Lyft was close to $8B mid-October). Fast forward to today, he still values this non-existent business segment at $75 per share ($75 x 1.119B fully diluted shares = $84B), which is slightly less than Lyft and Uber Combined (Lyft + Uber market cap on Sep 14, 2021 = $17B + $73B = $90B)
In October 2020, he wrote,
“We forecast a launch of 1,000 cars (from the existing fleet) in Tesla Mobility by 2021, rising to 500k cars by 2030, which would account for 2.7% of our Tesla global fleet estimate (18.6mm units) by that year. Our previous assumption for the Tesla Mobility fleet was 240k units by 2030. We assume $45,000 per cost car (vs. $60k previously) and a 7-year useful life, and other savings, driving our exit OP margin of Tesla mobility to 14.7% (10.4% previously). We use a 10% WACC (11% previously) and a 4% terminal growth rate (2% previously) implying an exit PE multiple of 17.3x (11.3x previously). Taken together, our valuation of Tesla Mobility rises to $42bn ($41/share) vs. $7.3bn ($7/share) previously.”
2021 is coming to end and neither Tesla has launched TaaS, nor they have any plans of launching it this year or next year. I can understand that it is easy for Adam Jonas to imagine Tesla will double its TaaS fleet to 500K (from his previously assumed 240K), but how could he suddenly improve the OP margin assumption by 40%?
Tesla as a 3rd Party powertrain
After the 5-to-1 stock split in summer of 2020 and the cosmetic change that sent the stock price soaring, Adam Jonas changed his rating on Tesla to Equal Weight on Sep 22, 2020, right after the battery day. He increased PT to $272 but suddenly assumed a new revenue stream to Tesla and put a lofty valuation on it. He assigned $62 of his price target which valued this segment at $65B and constituted 22.7% of his price target. He valued it based on the sales of 2.5M units by 2030 with 20% EBITDA margin and 17x terminal EBITDA, using 9% WACC. Fast forward to today, Adam values this segment at $88 per share. This implies another non-existent segment is valued more than Daimler (Mercedes Benz). How many powertrain & batteries has Tesla sold to other companies since mid-2020? ZERO! How many do they plan to sell in 2022? ZERO! For Adam Jonas, however, zero means a hundred billion dollars at one company and zero at another company. Companies are equal when it comes to imaginations, but some companies are more equal.
In his research paper on Lucid, Adam Jonas writes,
“Lucid has identified future opportunities in which it could act as a powertrain supplier to other OEMs, or could venture further into Energy Storage Systems. At this point, we give the company no credit in our financial model for these future initiatives, given how early stage it is.”
How is it possible that Adam Jonas estimates that Tesla will sell 5.6M EVs in 2030 and 2.5M powertrain in the same year (3rd party parts equal 45% of the volume), but for Lucid, a company that has had over a decade history of providing parts to Formula-E, that number is Zero? If Adam Jonas treated the two imaginations the same, even the lowballed 2030 MS estimated volume of 310K would value Lucid’s 3rd party powertrain business segment close to $5B.
In summer 2020, Elon Musk announced they are selling insurance for Tesla cars. Adam Jonas, in November 2020 valued Tesla insurance business at $15 per share and fast forward to today he has valued it at $30 per share, which implies it is 20% below Allstate valuation! Seriously? Tesla has zero insurance underwriting operations, they are just brokering auto policies only in CA with the help of Markel’s subsidiary. How is this small segment going to be a business as big as Allstate and become successful with 50% penetration and 18% underwriting margin (even higher than progressive)? How can it compete with other insurance companies across all US states in such a highly regulated industry? This is what Adam Jonas need to answer, but if the imaginary business segments that don’t even exist can be valued as big as Daimler or Uber and Lyft combined, then why not the insurance? It can even be bigger than Progressive one day. On Nov 18, he wrote
“By 2030, we assume a 69% loss ratio and 17% expense ratio. Based on our discussions with Morgan Stanley’s Insurance team, we understand the industry average loss ratio is typically around 75% with a 25% expense ratio. Progressive leads the industry with a 70% loss ratio (more accurate pricing) and a 21% expense ratio, and a high single digit underwriting margin (combined ratio). We forecast Tesla to achieve a better than Progressive 10% underwriting margin by 2026, rising to 14% by 2030 and improving to 17% in the very long term”
Compared to November 2020, he has doubled the assigned value to the insurance business, and assumes Tesla achieves 50% penetration of its fleet by 2030 (rising to nearly 100% by 2040) with an 18% underwriting margin by 2030.
After AI day last month, I was expecting Adam Jonas to price in Tesla's Bots and electric UFOs segment (non-existent today but does it really matter?) and assign a valuation to it. I am sure many of his fans are waiting for it too.
Adam Jonas has valued Tesla’s energy business at $85B, however as mentioned earlier, he doesn’t give any credit to Lucid for their energy business. Lucid is currently using their energy storage system in their Casa Grande, AZ AMP-1 to save energy. I wish Adam Jonas at least priced in a lower SG&A for their lower utility bills in his projected income statement. They deserved this much credit, didn't they?
Adam Jonas values Tesla Network service (Software, FSD, IoT, charging, etc) at $253 per share, which is $283B based on 1.119B fully diluted shares. He assumes $100 ARPU on 14.4M connected fleet. The FSD has been controversial in the past several months and it is not known whether it can be a successful product without Lidar, however the success of FSD and L5 ADAS (in very long term) have been implied in Adam Jonas pricing of the Network Service for Tesla. When it comes to Lucid, however, Adam Jonas writes,
“While we are more cautious on the adoption of fully autonomous Level 5 driving until beyond 2040 due to technological, moral and legal challenges, we forecast the US to have >80% of its miles from Level 4 or Level 5 autonomous technology by 2050. This will lead to significant changes to the urban mobility transportation networks. We also believe that the autonomous race will be controlled by the largest, most well capitalized mega-tech players such as Google owned Waymo, as well as from the likes of Tesla, GM Cruise, amongst others (Aurora/ATG, Ford's Argo, Motional/Aptiv/Hyundai). We see the players that hold a key advantage today as being the ones that have: 1) access to capital, 2) can bring in the best software and AI engineering talent, 3) get access to real-world driving mileage data and 4) can train the neural net over a large fleet size. While L2/L3 ADAS tech is the first step to fully driverless technology and most OEMs can partner with suppliers such as Aptiv for ADAS offerings, we see long-term risks for those OEMs who do not have tech developed in-house and will be forced to license and pay for the technology. In saying this, Lucid can still partner with players and/or build out their own autonomous capabilities over the long-term but at this early stage we see potential obsolescence risk to their current autonomous tech unless they are able to invest at the same rates as leading players.”
I completely agree that Lucid will need access to cheap capital to retain talent and build their own autonomous capabilities (and/or partnership with big tech players), here I get back to my previous conclusion that short selling attacks and the heavy pressure on stock price [if not stopped] will inevitably increase Lucid’s cost of capital, will decrease their capability to hire and retain talent and will erode their ability to spend on R&D in near term. The negative impact of short selling attacks not only hamper Lucid’s competency in AD field, but makes it difficult for them to ramp production and manufacture at scale; It also further delays positive cashflow generation which consequently slows R&D spending fueled by internally generated cash. Furthermore, if Lucid can’t keep investing on their technology (which is ahead of Tesla and way ahead of other OEMs at the moment), their technology will become obsolete and other competitors will catch up and Lucid will lose its tech edge. Adam Jonas shares this view,
“We believe that Lucid's leading technology in battery packs and motors and design will provide a compelling product for consumers to select from. However, we question the sustainability of the technological edge that Lucid currently possess and we debate its durability over the long term.”
Back to Adam Jonas Lucid’s equity research, the biggest objection to his price target is that he has lowballed the [already] watered-down company’s projections. Lucid initially had 6000 production estimate for 2021 and the delivery start of late June. After DA, Lucid pushed its delivery timeline to 2H’2021 and slashed its 2021 production volume to just 577. Adam Jonas has even slashed the watered down 577 production volume in 2021 to 400 units sold (-30%). 2021 is not a material year anyway, but Morgan Stanley has slashed their 2022 units sold even more aggressively (7000 units vs company’s 20000 projections, or 65% cut! For 2025, the company has projected 135,000 units but MS estimate is 95000 units (-30%). MS also projects 25000 units for 2023 (vs Lucid’s 36000 units). While it is more probable that Lucid will beat their “low-bar” 2022 projection and produce 25000 in 2022, not in 2023. If Adam Jonas only sticked to the Company’s projected $14B 2025 Revenue, and applied the same 4.8x EV/Sales multiple he uses for Tesla, Lucid’s base case PT would be north of $40 (Let’s not forget Tesla is trading at 5.5x Morgan Stanley estimated 2025 sales of $151B). Even using the same valuation Morgan Stanley uses for Tesla, assuming 14x 2030 exit EBITDA with 8% WACC BUT lower exit EBITDA margin of 15%, while assuming company’s watered-down financial projections, Lucid's Fair Value will be $23 per share (DCF).
Adam Jonas doubts Lucid luxurious EVs would have the demand that the company projects (due to their price point), thus he slashes the company’s projected volume by 30% - 60% during the next 9 years to construct his model, yet he concludes the 2030 ATP is $50K due to more mass market EVs. The contradiction is that, if Lucid goes down the luxury ladder and build lower price EVs (to fetch ATP of $50K similar to Tesla in 2030), the volume should inevitably go even higher than the company’s projection, and I wonder why Adam Jonas didn’t give them the credit for the higher volume but slashed the revenue forecast by lowering the ATP per unit?!
Adam Jonas believes -$5 to the current $20 is ascribed due to the slower top line growth, however if Lucid can beat their low-bar projected 2021 Sales and update their sales forecast for 2022, Adam Jonas will get better aligned with the public market opinion and Lucid management’s projections.
I am wrapping up this note with a reference to my writing on July 27th . One day after Lucid mergers, I wrote on WSB (https://www.reddit.com/r/wallstreetbets/comments/oss4my/why_pipes_wont_sell_off_all_their_lcid_shares/) and tried to bring my reasons why PIPE investors won’t sell off and leave upon lockup expiration. Even though the stock was drifting lower from $23 to $20 between Aug 25 and Aug 31, the option market was signaling the bullish bets (increasing Sep 3 call options premium and volume, decreasing Sep 3 put option premium and volume). The Sep 1 sell off was surprising in scope and proved that I was wrong (66M shares were sold pre-market only). PIPE investors sold off en masse, evidently by the 150M daily volume on Sep 1. PIPE investors (excluding PIF) owned 152.67M shares and the average daily volume has been 11M between April 1 – August 31. Since April, the stock never had a 5-day average volume above 20M, however the 5 day average volume between Sep 1 - Sep 7 hit the high of 50M. This implies that the majority of PIPE investors have sold and left, however those shares were bought aggressively by the buyers who have been eyeing PIPE price since February. It is still unknown which of the PIPE investors sold and what institutions bought those shares, but we will figure out in Q4.
I believe Lucid management should know better why institutions sold off as soon as they found a chance. I know they tried to persuade those investors to stay, they spent lots of time in NYC in June and July. There were some [leaked?] rumors that Lucid even produced 198 cars for the big investors. The reason why PIPE investors sold as soon as possible is the subject that can be discussed for weeks and months, however the obvious implication is that, these capital partners were not great fit for Lucid. Lucid apparently didn’t vet their partners well either and they were not selective enough. Rivian CEO has emphasized several times that his company remains “very selective” regarding any potential financing partners (Rivian raises $2.5 billion in aggressive plan to beat Tesla and Nikola with the first all-electric pickup (cnbc.com)). PIF, with their massive resource on hand, could easily invest the whole $2.5B as a PIPE investor and didn’t need capital partners. The motivation for seeking so many (+50) large and small PIPE investors is still a mystery. They didn’t help the company in any other specific way (apart from providing capital) and they sold and left as soon as they could.
Rivian is also a very interesting case and is related to this post. Late August Rivian filed for IPO and it was announced they are seeking $80B valuation. Rivian has raised $10.5B so far (while Lucid has raised $7.5B so far) and according to Bloomberg, Morgan Stanley, JP Morgan and Goldman Sachs are underwriters for the IPO (Rivian Auto Files for IPO, EV Startup Seeks $80 Billion Valuation - Bloomberg). Rivian aims to IPO around Thanksgiving, so these days it should be on a roadshow with potential institutional investors. Even though the final valuation is not confirmed yet, the banks and the company are marketing the IPO to potential investors at $70B - $80B valuation. Please note that the underwriters will likely form a syndicate together and agree to assume the risk of buying the entire public offering and sell the shares to public at the IPO price. If the $80B valuation is too thorny, the underwriters risk losing billions on the offering and not finding the buyers at that valuation. However, at this stage, it appears the underwriters and company feel confident about the IPO valuation (or they wouldn’t prematurely announce it to the public just to cut it back later). When finding similar companies for [public market] valuation, the best precedent for Rivian is Lucid Motors, which is trading less than half of Rivian's valuation. Rivian has 10,000 order by Amazon for 2022 (100,000 order for the next 10 years) and Lucid has over 11,000 orders right now. From sales volume and production capacity perspective, the companies are at a very similar stage. From technology perspective, Lucid is ahead of Rivian. Now, the interesting point is, Adam Jonas of Morgan Stanley believes Lucid Motors fair value is $12 per share ($20B) while at the same time the bank agrees to risk and underwrite and sell Rivian at $80B valuation. Of course Adam Jonas is in the equity research dept and the Rivian IPO is handled at the investment banking department, but such a huge valuation gap between two similar companies is astonishing. How on earth is it possible that Morgan Stanley feels confident and markets Rivian at $80B while marketing Lucid at $20B? Isn’t it because Morgan Stanley knows that Lucid is under short sellers’ attack and has become a “toxic stock” and if it wasn’t for the attack, its value would be much higher than this? After all, Morgan Stanley doesn’t risk anything if their equity research dept downplays Lucid Motors as a $20B company but it later increases in value, but they certainly risk huge amount of capital if their investment bank dept values Rivian at $80B and later sellers don’t pay that much for it on the IPO day. Hence, I conclude that Morgan Stanley should be more careful and confident about its judgment of Rivian’s valuation. As soon as I know more about Rivian’s projections and the IPO valuation, I will be happy to compare it with Lucid and Tesla on WSB. Perhaps we find out it is not a tale of two companies but the tale of three companies.
A few days ago an InvestorPlace contributor named Will Ashworth wrote about Lucid Motors and referred to my WSB article about PIPE sell off (LCID Stock: Lucid Group’s Future Trajectory Is in Saudi Arabia’s Hands | InvestorPlace). It appears Will Ashworth is teasing me a little bit for being wrong on my expectation of PIPE sell off. I would applaud him way more if he forecasted before Sep 1 that the PIPE investors will sell off. However, just because the PIPE sell off caught most investors off guard, it is really unreasonable to jump the gun and conclude that the PIF will sell off too. Will is trying to persuade his readers that Saudis are unpredictable and will sell off and run away too. This is such a remote tail-risk that is not even worth thinking about. Saudis were so farsighted that they were chasing Tesla 3 years ago and were ready to spend $60B to make it private in 2018, it was way before any analyst or investor even consider Tesla investable. With their Strategic Vision 2030 roadmap, assuming that they will dump and leave the company they built from scratch is insane. The future of Lucid and future of Saudi Arabia’s ambitions to go green and diversify away from fossil fuels go hand in hand. The way Will Ashworth connect the investment world to something purely political (Saudi journalist) is also very repellent. I still believe investment decisions are way more agnostic and rational/economical than political. Not that politics don’t play the role, there might be some people out there hating, shorting or attacking Lucid because they don’t like Saudis, however I don’t believe that’s the mainstream.
Adam Jonas also wrote about the remote possibility of PIF sell off,
“Lucid has disclosed in their S1 that Ayar Third Investment Company, an affiliate of the PIF from the Kingdom of Saudi Arabia, is the majority stockholder and holds approximately 62.7% of Lucid's common stock. We point this out as a potential risk to the stock in the event that the majority shareholder decides to liquidate part of their stake as this could add material selling pressure to the stock.”
PIF will more likely increase its stake in Lucid Motors and decrease the float in the weeks and months ahead, rather than liquidating their stake.