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Exclusive Breakdown of Tesla Inc (TSLA)’s 2022 Convertible Notes And Why You Should Buy Them

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Social Capital CEO Chamath Palihapitiya was one of the show-stoppers at the recent Sohn Investment Conference in New York, pitching a Tesla Inc (NASDAQ:TSLA) play that he believed had little downside risk and huge upside potential. Chamath’s fund, which is focused on investing in companies which could play a positive role in the development of humanity, believes Tesla is such a company and that the stock has huge growth potential.

However, Chamath also stressed the capital intensive nature of Tesla Inc (NASDAQ:TSLA)’s business model and the risks that go along with that. As such, he admitted trepidation at being naked long stocks such as Tesla and instead sought another course of investment in the company. What he found was 2022 convertible Tesla bonds, which he pitched to great effect at the Sohn Conference. We’ll take a look at his comments on Tesla and the bonds in question below, before breaking down the specifics of the play. Also, don’t miss the full transcript of Chamath’s presentation, which is well worth a read.

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Let’s first take a look at some of the comments from Chamath Palihapitiya regarding Tesla Inc (NASDAQ:TSLA), beginning with his thoughts on the company’s growth potential.

“…what we see is a business that very reasonably in a decade, can get to about 5% of the global car market. Now to put 5% share of the car market in perspective, it is about half or less than half of the leading incumbents. And what’s great for Tesla is their cost basis and their operational balance sheet is completely different from these companies. They spend dramatically less on R&D. They don’t have pension obligations. They don’t spend anything on a dealer network. They spend nothing on advertising. They sell software at premium service, so their economic model at selling cars is really meaningful and when we do the waterfall of those economics and think about this business in the context of a Porsche or even for a BMW, and you look at that multiple, what you see is a business that could be worth hundreds of billions of dollars in a decade.”

Let’s next take a look at what Chamath had to say about Tesla’s 2022 convertible bonds and why they may be the safest play to score from the potential hundreds of billions of dollars in Tesla growth.

“Why do we love the convertible bonds? It pays a reasonable coupon, it has a reasonable conversion price, which is only about 4% or 5%. So what does that mean? To the average investor in the room, what that means is for all of us, we can buy these converts and we’re guaranteed not to lose money as long as Tesla’s worth at least $15 billion. Now let’s put that in context. Today, it’s a $50 billion market cap. Even if the equity goes entirely to zero, we’re protected. Because as long as somebody is going to pay $15 billion, which is about less than one-times 2018 sales, or a little bit more than two-times what Google tried to buy this company for in 2013, we get all of our money back. But more importantly, while our downside is protected, on the off chance that this guy (Elon Musk) pulls it off, we get 95-plus percent of the upside.”

Sounds pretty impressive right? But is it really that easy to find a play in the market with such lopsided risk/reward potential? To answer that question we contacted Ankur Daga, one of Insider Monkey’s contributors, who broke down the odds of Tesla’s success and failure and concurred with Chamath’s thesis that the bonds were a worthy investment. Check out his thoughts and projections on the next page.

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