People a Asking: What Does the Future Hold for Elon Musk and Tesla?
On Tuesday, news broke that the Department of Justice had started a probe into Elon Musk’s 7 August ‘420’ Tweet: “Am considering taking Tesla private at $420. Funding secured.”
The news of the DOJ inquiry sent Tesla stock tumbling yet again, continuing what has been an extremely tumultuous Y 2018 for Mr. Musk and Tesla
Since the beginning of Y 2018, Mr.Musk has lashed out an an analyst on an earnings call; accused someone of being a pedophile; accepted and smoked a marijuana joint from Joe Rogan on video; started a feud with the media about “fake news”; maybe trapped rapper Azealia Banks in his own house; gotten into a fight about stealing a picture of a farting unicorn; and headbutted 1 of his M3s on the production line.
Plus, now Mr. Musk is dating indie musician Grimes (pictured above).
So, we came out with 4 possible futures for Tesla and Elon Musk.
Tesla Moves Along
The drama surrounding Musk, and news of execs fleeing Tesla is that the company has gotten better at the one thing a car company really needs to do: make cars. Tesla hit an important milestone earlier this year of producing 5,000 M3s in a week, though it seems to have once again slowed down after hitting that peak.
Going the by preorder numbers, at 1 time there were about 500,000 people interested in buying a M 3 and preordered with $1,000 refundable deposits, Many of those have now cancelled their preorder, but still: the demand was there.
In order to produce 500,000 M3s, you need to make about 9,500 cars per week. Tesla is still far away from hitting that production mark, but it says it is closing the gap.
Tesla sells the most purely EVs on the road by a wide margin, even with its production headaches.
Audi’s much-anticipated e-tron, meant to compete against the MX, was unveiledMonday in San Francisco, with slower acceleration, shorter range, and Germanic styling.
UBS analysts admitted that Audi’s “e-tron underscores that catching up with Tesla is more difficult than expected by many.”
So let us say Mr. Musk hires a COO to help him run Tesla’s day-to-day business, curtails his 120-hour workweeks and Ambien habit, and repopulates the emptying C-suite, and the company’s complicated financial debt engineering does not blow up in its face, plus getting a Tesla serviced stops being a nightmare. Then Mr. Musk can remain a deeply impulsive and perhaps personally troubled guy, but Tesla starts to produce more and more electric vehicles at a significant profit margin to a public eager to buy them.
The Odds: Good, and much more likely than recent news coverage would suggest. By mid-2019, Tesla could be a smoothly running company once again.
Tesla Gets Acquired
Tesla’s next earnings report is due at the end of October, and how it looks could swing things dramatically one way or the other. The company was quick to highlight that it had surpassed the 5,000-cars-a-week milestone, but that number seems to have dipped back down for Q-3, and the company seems to be slowing to something more like 4,000 cars per week. That 5,000-per-week target was supposed to be a starting point for Tesla, not a high-water mark.
An earnings report showing weak production numbers could cause Moody’s to downgrade Tesla’s bond rating yet again in Y 2018. While Mr. Musk has claimed that Tesla will not need to raise money again in Y 2018, analysts across the board disagree, with Morgan Stanley estimating the company needs to raise at least $1-B this year.
Tesla is already carrying $10-B in debt, and it is likely that Tesla will need to issue even more “convertible debt” a type of debt that can either be repaid in stock or cash.
Convertible debt is risky, mainly because if a company’s stock price is not trading above a set price, lenders can demand to simply be paid in cash.
Tesla has $920-M in convertible debt due in March 2019, and its stock would need to be trading at 359.9/share in order for lenders to take their payment in stock, else they can demand $920-M cash. For a cash-strapped company that has not traded over 359.9 for the vast majority of Y 2018, this is a huge problem.
The nightmare scenario for Tesla is that weak earnings reports send its stock price down even further, it finds itself unable to raise more money as institutional investors start to become leery, and is forced to pay off its convertible debt in cash.
As all of the existing M3 preorders get fulfilled, Tesla discovers there’s weak demand for its semi-affordable electric sedan, and fails to start turning the profits it so badly needs.
But Tesla has a great brand, a great product, and a lot of physical infrastructure set up to produce EV.
As Tesla’s valuation plummets, acquisition particularly considering that Mr. Musk has so much of his personal fortune tied up in Tesla could start to be on the table. Tesla has anti-takeover provisions in its governing documents meant to snap up any common stock and fend off hostile takeovers, but a friendly acquisition, particularly 1 that would allow Mr. Musk to remain in his position as CEO, could be viable.
Odds: Decent. A cheap Tesla is an enticing acquisition target for a variety of companies including traditional auto manufacturers. Tesla’s financial future is far from certain.
Elon Is Forced Out From Tesla
Besides Steve Jobs at the height of his time at Apple, or perhaps Mark Zuckerberg at Facebook, there is no other person so closely tied with a company as Elon Musk and Tesla.
The problem is that Steve Jobs and Mark Zuckerberg were focused on 1 company only. Mr. Musk is pulled in all sorts of directions, whether that is the Boring Company, a goofy idea that has mainly dug some holes and sold a few flamethrowers, or DeepMind Technologies, a plan to create a cyperpunk-ish interface between human and computer that will allow us to outpace AIs before they destroy us all.
Elon Musk is vital to the brand of Tesla. He is able to generate tons free advertising simply by being who he is. He is also by all accounts a brilliant engineer with a keen eye for how to make things both functional and desirable. But his Twitter account has now brought both the Department of Justice (DOJ) and the SEC knocking on Tesla’s door. Tesla’s board of directors is stacked with Elon’s friends and family, and so far seems unlikely to force him out of his role as CEO. But activist investor groups already mounted attempts to oust Mr. Musk as Chairman of the Board in June of 2018, and there should be a lot more ammunition to use against him next year.
Also worth noting: One of the risk factors in Tesla’s own financial statements is that Elon Musk owns about 22% of Tesla’s stock and has borrowed heavily against that stock about 33% of his total holdings.
If the stock price of Tesla dips too low, the lending institutions Mr. Musk has borrowed from would issue a margin call on his stock. This would send Tesla’s stock plummeting, and likely force even a very friendly board to demand that he step down.
This sort of margin call is not a hypothetical.
Odds: Slim, particularly the margin call scenario. But the odds rise every time Elon Musk does something seen as unstable, or brings more negative publicity on the company. And with so much of his cash tied into Tesla stock, self-preservation may kick in, meaning Mr. Musk might voluntarily step down.
Elon Musk Goes to Jail
While headlines about criminal investigations may give you visions of Mr. Musk being perp-walked down courthouse steps in handcuffs, there’s almost no chance of this happening.
In order to find him criminally liable for fraud, the government would have to prove that he intentionally Tweeted that he planned take the company private when in fact he had no such plan to do so.
Barring a smoking gun e-Mail or text from Mr. Musk, it is hard to imagine a way that this ends in criminal charges ever being filed against him.
On the other hand, the investigation by the SEC is much harder to predict.
After all, when Mr. Musk Tweeted “Funding secured,” it now appears that funding was not secured. Unlike a federal prosecutor, the SEC does not have to prove that he intentionally was misleading investors, just that he made a false statement via his ‘420’ Tweet.
The SEC and Tesla has a range of options here, from the SEC seeking to bar Mr. Musk from serving running a public company because he made a false or reckless statement, and settling with Tesla and Mr. Musk quietly settling out of court with a significant fine. This is a weird case about a weird Tweet from a weird guy. It’s really hard to tell where this all lands.
Odds: Musk serving jail time is not likely. But Tesla writing a check to the SEC with more than a few zeroes in it is very likely.
|HeffX-LTN Analysis for TSLA:||Overall||Short||Intermediate||Long|
|Bearish (-0.36)||Neutral (-0.20)||Bearish (-0.29)||Very Bearish (-0.58)|
By Jake Swearingen
Paul Ebeling, Editor
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