Thanks to Elon Musk, Tesla becomes a mess
Am considering taking Tesla private at $420. Funding secured” tweeted by Elon Musk, the CEO of Tesla Inc., it was as if a bombshell exploded in the Wall Street on 7 August 2018. But a week later, Mr Musk announced to keep the company public, consequently he came under investigation for price manipulation. Since the stock price has jumped out of its bull ship and landed at $294.79 on September 17th. It seems like the electronic car company has fallen into a vicious cycle with a series of scandals. Perhaps now it’s time to have a close look back on what all has happened.
Tesla Motors, Inc., founded in 2003, is an electric automobile manufacturer, who operates through the Energy generation and storage segment. The Company has two fully electric vehicles, the Model S sedan and the Model X, and also offers Model 3, a sedan designed for the mass market.
The company went public on June 29, 2010, on NASDAQ. The up-to-date 5-year P/E ratio is 99.9, and 5-year PEG ratio is 3.2, both far beyond S&P 500 average which is 17.5 and 1.1 separately. In the last 10 years, Tesla's balance sheet has seen a 550-time growth, yet the earnings have remained negative throughout and its hard to believe that this pattern is breaking any time in the near future. The stock price fluctuations have decreased since last year, reflecting a high pressure faced by the company not only from newcomers such as Tencent-backed Nio but also from traditional players who plan to explore the electric car area. As the icon of the company, Musk should take some step to bring confidence to investors, but obviously, his actions seem to have the opposite effect.
Each word on Twitter posted by Mr Musk said the same story, that he was quite confident of the privatization deal at $420 if supported by the contingent vote. The stock price thus inflated 11% on the news, further fueled by the news of Saudi Arabia's fund, to a close price of $397. How did a single 9-word post have such a big impact, several points should be taken into notice.
The first is the share price of $420. The question begs to be asked, where did the price come from, as no investment bank had done the valuation work for Tesla? Was the price fair for such a company with lasting loss over years? Even with this price, the funding is still insufficient to cover the soaring expenses. However, some loyal shareholders were convinced that the pricing still undervalued the real value of the growing company at the time when the post occurred. But today, the erratic leader's behaviors may consume the last confidence of those shareholders, further deteriorated by the unfulfilled production plan.
The second concern is that where would the fund come from. According to insiders, there was no significant money transfer over that period on the Wall Street. Nevertheless, all the clues link to the Saudi Arabia's Public Investment Fund (PIF), who became eighth-biggest shareholder just before the bombing post. Ironically, PIF invested $1billion in Tesla-rival Lucid Motors on this Monday, showing the fund targets automobile industry instead of Tesla specifically.
In addition, the company has $1.2 billion convertible debt which will mature in the next 6 months, pushing the company to raise new capital and thus increasing the cost of financing. Considering Moody puts Tesla's debt on the triple-C bracket and Standard & Poor's rates its debt as B-, both below the investment threshold, hence issuing debt might not necessarily be cheaper than issuing equity.
Another issue is why the leader wanted to privatize Tesla. One could be personal reasons, such as gaining more control, or just because the leader peeved about dramatic short positions on Tesla? The CEO holds 20% of the shares but lost many during the frantic period. Despite operating in the automobile industry, Musk regards it more as a technology company. From its financial report, it does show that Tesla is in the growing period, as it is the only one with negative EBITDA margin compared to its automobile peers who have stable operation situation. But with respect to the huge capitalisation, the company is hard to be acquired by a single venture capital. There is no good reason for the aggressive move, and it may just be the personal irregular behaviour to blame, like most people believe.
The last issue is whether Twitter is a suitable platform to announce the structural change. As early as 2013, SEC said that social media is suitable for company announcements only if investors are alerted. The serious tone of Musk's post is a good sign of public announcement, but not the content.
Electric cars are the future of short-distance transportation. Tesla leads the progress, but it is suspected if the company could smile until the last. Not only has the price dropped after the episode, but the Chief Accounting Officer has also left the company. Musk might be able to pick up from the mess he created and stir Tesla towards successful territories like SpaceX.
WRITTEN BY XINTONG LI FOR BESA
PLEASE DIRECT ANY INQUIRY TO AS.BESA @UNIBOCCONI.IT