TSLA Stock Analysis: Should Investors Stick With Tesla or Take the Buyout at $420?
Tesla Going Private: Was Musk Serious?
Last week, we wrote several pieces on Elon Musk’s plan to take Tesla Inc (NASDAQ:TSLA) private. However, each day brings new revelations in this wacky saga, so here is a quick summary for Tesla stock investors to stay up to date.
The story begins with Musk making a catastrophic blunder. The famous billionaire tweeted that he’d like to turn Tesla into a private company by offering public shareholders a buyout price of $420.00 per share. He also claimed, in the same tweet, to have “funding secured.”
The reaction was instantaneous. Shares of TSLA stock soared as much as 13% after Musk’s tweets. But then Tesla shares halted trading in the middle of the day. The company released a statement essentially affirming Musk’s plan to go private, but made no mention of financing. Investors started to get suspicious.
The next few days were unbelievable: TSLA stock crashed to the low $300s, regulators launched inquiries about stock manipulation, and a rapper visiting Musk’s house suggested that he had been taking drugs before going on social media. It was utter chaos.
The market reaction hasn’t been good. Investors are pricing the probability of Tesla going private at close to zero. And it doesn’t look like that will change anytime soon, so investors should buckle up for a wild ride.
Tesla Stock News
If you find the story confusing, here’s a quick breakdown of what happened in the last week, minus the bizarre feud between Musk and the rapper who stayed at his house.
Tesla is facing multiple lawsuits. The plaintiffs argue that Musk’s tweet claiming that Tesla had “funding secured” to go private at $420.00 per share was false and misleading.
The problem here is that Tesla did not have financing locked down, making Musk’s claim untrue and potentially a form of market manipulation. It is also problematic that neither the board of directors nor Tesla’s executive team had ever heard of the plan. They had absolutely no warning before Musk’s tweet hit the Internet.
Tesla shares had been trading 20% below the $420.00 target. Naturally, the price shot up immediately, crushing short-sellers who had been betting that the price would fall. The lawsuits allege that this was a deliberate move to wipe out short-sellers who had been critical of Tesla.
For years now, Musk has been at war with these short-sellers; he even cited them as the reason he wants to take Tesla private. So if the plaintiffs can prove that Musk knew his statements to be untrue, we could see Tesla face millions—if not billions—of dollars in fines.
To make matters worse, Tesla’s only potential buyer, Saudi Arabia’s sovereign wealth fund, is considering an investment in rival electric automaker Lucid Motors Inc., a move that casts further doubt on Musk’s claim. (Source: “Tesla Whipsaws Amid a Price Target Cut and Saudi Arabia Looking to Invest in an Electric Competitor (TSLA),” Business Insider, August 20, 2018.)
The Saudis would have to shell out $70.0 billion to take Tesla private. Normally, a commitment that large would force the investor (the Saudis) to keep their eggs in the Tesla basket, but if they’re going shopping elsewhere, it implies that they are not interested in a buyout.
Either that, or it is a negotiating tactic to reduce Tesla’s offering price from $420.00 per share to something more reasonable. In either case, Elon Musk is at a disadvantage. He showed his hand too early by declaring an offer price of $420.00 per share.
There are also rumors that Apple Inc. (NASDAQ:AAPL) might buy Tesla. It is an open secret that Apple has more money than it knows what to do with. As a result, analysts have always wondered whether it would buy Tesla Motors, an electric car company with an Apple-like attention to product design and user experience.
One analyst even asked Musk about it on a call. At the time, Musk said Apple was probably not interested in the deal. However, the recent drop in the TSLA stock price might have changed the conversation quite a bit, given that it would be much cheaper to buy.
The idea was floated again on Monday by Ross Gerber, CEO of Gerber Kawasaki, Inc., an investment management firm that owns Tesla shares.
“If you look at actually what Elon’s problems are every day, they are operational, which is why Tim Cook was hired by Steve Jobs back in the day,” said Gerber. “Cook is perfect for this role.” (Source: “Tesla Investor: There Couldn’t Be a Better Time for Apple to Buy a Stake in Tesla,” CNBC, August 21, 2018.)
“Apple should buy 5, 10 percent of Tesla just to get the iOS onto that Tesla screen,” added Gerber. “Part of the Tesla story is that screen in the middle of the car, and not having Apple on that screen is going to be a huge problem for them.”
The last thing to make a note of is the ratings downgrades. JPMorgan Chase & Co. (NYSE:JPM) cut its price target on TSLA stock from $305.00 to $195.00 per share. Ostensibly, their newfound bearishness is due to Musk’s failure to complete the leveraged buyout, but I don’t think that is the real reason. Tesla shares were trading higher than $305.00 when JPMorgan was ignorant of the plan and they were still bullish.
So what happened?
I think JPMorgan reassessed Tesla’s “key man” risk. It priced in the possibility that Musk will no longer be an effective CEO, or that he’ll be removed from management entirely. This completely alters the outlook of Tesla stock.
There is even trouble at Morgan Stanley (NYSE:MS), home of vaunted Tesla bull Adam Jonas. Rumors abound that he too will scale back his optimism.
Analyst Take
Elon Musk is synonymous with Tesla stock. Tesla’s entire future is dependent on him being able to scale the company while simultaneously convincing investors it was a good idea. Musk has now lost the ability to do that, so I feel that Tesla’s outlook has been compromised.
