Will Maxwell Technologies (MXWL) Help Tesla (TSLA)?
Peter Sayles |
Tesla announced today – February 4 – it is buying Maxwell Technologies (NASDAQ: MXWL) for $218 million.
Maxwell Technologies makes “ultracapacitors, devices that can store and rapidly deliver surges of energy.”
Tesla is paying a 55% premium – at $4.75/share – to MXWL’s previous share price.
The buyout is an all stock deal. This means MXWL shareholders will receive Tesla’s stock as a result of the buyout.
The buyout is a way for Tesla to become more efficient at producing batteries for its cars.
Oppenheimer analyst Colin Rusch loved the acquisition. And thinks MXWL will “be integral in evolving TSLA’s pack design and performance, particularly in heavier vehicles that rely on regenerative braking for system economics.”
Tesla’s shares rose modestly on the day – up less than one percent.
Whether you think this will help Tesla or not is still up for debate. But it sure doesn’t help solve any of Tesla’s bigger problems.
We wrote about one of the biggest overhangs right in front of Tesla’s face – namely its $920 million convertible bond due March 1. We laid out everything you need to know about this bond. And why it’ll determine whether Tesla’s shares sore or plummet. (Click here to read it now).
But here’s a couple points for you to consider on why you should avoid this stock moving forward. Or even short (Disclaimer: We currently have an open short position on Tesla).
Maxwell’s Revenue Is Decreasing
It’s one thing buying a company who’s revenues are soaring.
Yet Maxwell’s revenues are doing the opposite. Maxwell reported revenue of $167 million in 2015. It’s 2017 revenues came in at $135 million – down 19%.
Worse, its revenues from China were down almost 50% from 2015-2017. And its revenues from U.S. were down 34%.
This year doesn’t look much better. Revenues are down 8% through the first nine months of this year.
Maxwell reports earnings in a couple weeks. We’ll have to see if things are looking up for them.
Investors don’t mind when a company acquires another whose revenues are soaring. Why? Because the growth in revenue will offset the debt or share dilution from the acquisition.
On the surface, Maxwell doesn’t check this box.
Maxwell Technologies Loses Money Every Year
Tesla has never made money in a full fiscal year in its history.
This is the main reason we’re bearish on Tesla in the first place. It’s also why we don’t think any company or hedge fund will buy Tesla (at its current $50 billion valuation). Especially not Apple. (Read our post here on who we think Apple should buy instead).
Maxwell doesn’t make any money either. It lost over $30 million through the first nine months of 2018 – around $10 million per quarter. It has yet to report its year-end results. But another $10 million loss puts the total at $40 million.
Want to know a major reason?
Because Maxwell is paying its C-Suite and employees all of its gross profit.
Let’s just look at its nine months for 2018.
Maxwell made a gross profit of $17.5 million. It paid out over $28 million in Selling, General, and Administrative (SG&A) expenses.
Why even worry about how much it spends on research and development when it spends all of its gross profit (and then some) on salaries?
We could guarantee our doors wouldn’t be operating very long if MightyTrades operated this way…
But let’s bring this back to Tesla.
Tesla had net income of $140 million in the fourth quarter (which it reported January 30).
Tesla just recently became profitable – although it still lost $1 billion in fiscal 2018. Now it’s taking on a company which likely lost $40 million this year.
Tesla Is Diluting Its Shareholders Again
The acquisition of Maxwell is an all stock deal.
Maxwell’s shares will be converted into Tesla’s shares.
Tesla’s market cap is just over $50 billion. So adding an extra $218 million doesn’t seem like a big deal.
Tesla won’t return that capital via dividends or share buybacks.
Current investors are just “stuck” with it. Just like the acquisition of SolarCity – which also loses millions of dollars per year.
And we think they’ll be disappointed moving forward to as Tesla will need to find ways to raise more money to fund its expansion.
Tesla Shifted The Narrative Back In Its Favor
It’s no surprise Tesla is one of the most polarizing stocks in the world right now.
The whole appeal around Tesla is what “could be.”
It’s the narrative that gives Elon multiple free passes on promises that have yet to be fulfilled – whether it’s through buying the stock, giving it debt, and the like.
But Tesla isn’t doing well if anyone looks under the hood.
It just laid off 7% of its workforce last month. It had a similar sized layoff eight months prior. It’s exploring plans to cancel production in the Model X & Y.
And, of course, it loses billions of dollars each year.
Yet somehow investors still hope and pray Elon will pull off all the promises he’s made… rewarding Tesla with a $50 billion valuation.
Buying Maxwell shifts the narrative away from its problems… and makes it seem like the acquisition is a monumental move. One which gives Tesla the efficiency it needs to make profitable batteries and cars.
As long as the narrative is in place, then bears will need to continue to exercise patience.
The Maxwell acquisition will create plenty of synergies within Tesla’s battery manufacturing process.
It gets access to Maxwell’s patents and other intellectual property. Which is a positive.
But Maxwell’s revenues are declining. It loses millions of dollars a year. And it only further contributes to Tesla’s losses.
We’re not chalking up this acquisition as a win.