A Threat to Tesla Stock?
Shares of Tesla Motors Inc (NASDAQ:TSLA) have been stuck on a roller coaster in recent weeks. The SolarCity Corp (NASDAQ:SCTY) merger injected tons of volatility into Tesla stock (TSLA), but things got even worse on Monday.
A handful of Tesla stock investors decided to sue the company over the proposed merger. They argue that board members violated fiduciary obligations, despite the fact that all board members with conflicts of interest recused themselves from voting on the deal. Elon Musk, who sits on both companies’ boards, was the first to recuse himself.
The visionary billionaire is a shareholder in both companies, not to mention the CEO of Tesla and chair of SolarCity. Musk’s cousin is the founder and CEO of SolarCity. With such a minefield of potential conflicts, it makes sense for Tesla stock investors to oppose the deal, except Musk didn’t vote during Tesla’s approval process. He didn’t even vote in SolarCity’s approval process either.
Regardless of their veracity, these lawsuits could seriously harm TSLA stock. For one thing, the negative attention could turn other Tesla stock investors against the deal, decreasing the likelihood of an approval. But more importantly, these lawsuits sap the company of its goodwill. And Tesla stock needs its goodwill.
The stock is far more expensive than that of other carmakers, yet it doesn’t generate any profits. Investors are willing to overlook this discrepancy because TSLA stock promises huge returns from its growth strategy. It has already rolled out self-driving technology, which the company plans to install in cars, trucks, and public transportation. But these are all long-term promises.
Tesla stock needs investors to keep their eyes fixed on a distant time horizon for this strategy to work. With the SolarCity deal, we’ve seen investors’ focus start to waver. For instance, the company recently had trouble raising funds for expansion. Until now, Tesla never had a problem with liquidity.
Investors and creditors alike were more than willing to cough up money for their expansion. Now that they are scaling up production on the Tesla “Model 3” while simultaneously pushing the “Gigafactory” toward full-capacity, Tesla has a real need for cash. But they’re finding it harder to find someone who’s willing to lend at a reasonable rate. That crunch is spooking TSLA stock investors.
Chart courtesy of Stockcharts.com
Investors will continue to panic at every twist and turn in these lawsuits. So expect Tesla stock to continue swerving. Volatility will remain high so long as there’s uncertainty about the deal.