Tesla (NASDAQ:TSLA) is probably one of the most complex stocks on the Street to analyze. On the one hand, it's a company that's building products which have the potential to revolutionize the transportation industry. However, on the other hand, there's founder and CEO Elon Musk whose unpredictable behavior and blunders—often fueled by odd or poorly thought out tweets—have the potential to destroy the enterprise he so famously built.
Just days after he abandoned a half-backed plan to take Tesla private, this past Tuesday, Musk was back on Twitter, denying that he cried during a New York Times interview earlier this month and trading barbs with a follower who criticized him for calling a cave explorer in Thailand a pedophile back in July. His latest Twitter appearance comes following a two-week drama that played out after he disclosed on August 7 that he had “funding secured” to take Tesla private at $420 a share, without telling stakeholders the funding source for this massive undertaking.
The news triggered a short-lived rally in Tesla, pushing shares 13% higher. But the stock plunged after the company released a statement confirming Musk’s tweet to go private, but with no mention of financing.
Tesla's abrupt rise and fall has reportedly prompted a subpoena from the regulator, Securities and Exchange Commission, which, according to some reports, is looking into the possibility of stock manipulation. As for analysis of Musk's behavior is probably a job for a psychologist. Still, if you own shares of Tesla just because Musk’s vision and leadership were inspiring, this is probably the right time to revisit the risk-reward equation. At this point, in our view, the risks far exceed the rewards.
Cash Crunch Back In Focus
Wall Street is broadly divided on Tesla. Of 27 analysts tracked by Thomson Reuters I/B/E/S, 10 have hold ratings on the stock, nine recommend buying and eight recommend selling.
Tesla is the most short-sold stock in the United States, with investors betting around $10.18 billion that the company’s shares will fall, according to financial technology and analytics firm S3 Partners. Of course, Tesla has proved short-sellers wrong many times in the past.
Nonetheless, despite all the drama and mystery surrounding Musk, it’s a fact that Tesla has revolutionized the auto industry and paved the way for early adoption of electric cars. However, the company hasn’t yet shown a profit. Yet its share price has jumped 1,581% since going public in 2010, which makes Tesla's valuation higher than Ford's (NYSE:F) or General Motors' (NYSE:GM). But Tesla's goal of rapidly building affordable cars for mass markets has proven difficult for the company to achieve.
After the past two weeks’ of upheaval which has put Elon Musk’s credibility and future at stake, investor focus is back to Tesla’s cash crunch which likely prompted Musk's failed private buyout effort. According to a Reuters report, Tesla may need to borrow up to $2 billion by the end of the year to stay afloat. Analysts are also forecasting a continued cash burn in the second half of 2018.
During the conference call at the time of the company's Q2 earnings report on August 1, Musk reiterated that Tesla will turn profitable and cash-flow positive in the current quarter as production of the Model 3 almost doubles versus the prior one. But given Tesla’s poor track record on guidance and Musk’s recent odd behavior, it’s likely that Tesla will again need to go back to the market to raise cash.
Currently Tesla has $1.3 billion in debt coming due in the next 12 months, while it has just $1.3 billion of cash in the bank after backing out $942 million of customer deposits on cars. For debt investors, this won’t be an appropriate time to commit funds to a company whose CEO is under severe pressure and faces the possibility of various allegations including stock manipulation.
Bottom Line
The extreme volatility of Tesla shares, which closed last night at $305.01 is a clear signal that the market is having trouble making sense of where Tesla is headed. In a recent note, JPMorgan & Chase analyst Ryan Brinkman said, if he had to value Tesla on "fundamentals alone," the stock may fall to $195 by December if there is no buyout. The investment bank had set its previous, $308 price target on August 8, based on Musk's optimism about a go-private deal.
This type of bearish sentiment suggests that a segment of the market has already started to price Tesla without Musk at the helm. We believe this overhang will continue to weigh on the stock going forward unless there is a fundamental shift in Musk's behavior. We're not convinced that will happen. For serious investors, it’s better to stay on the sidelines and watch the drama unfold.