With Rick Newman, Senior Columnist at Yahoo! Finance
On August 7, 2018, Elon Musk tweeted “Am considering taking Tesla private at $420. Funding secured.”
Elon Musk is the Founder, Chairman, Product Architect and CEO of Tesla Motors.
So, did Musk flout SEC rules by going public with this tweet? Will shareholders sue him for the tweet?
To find out, Steve speaks with Rick Newman, Senior Columnist, who is following the Musk tweet story for Yahoo! Finance.
Rick says that the tweet could cause problems because of the two words at the end of it—“Funding secured.”
Those two words made it sound as if Musk already had a deal to take the company private. But a week after that tweet, it was clear that funding had not been secured.
Did Musk Manipulate Tesla’s Stock Price? Was he trying to burn short-sellers?
After his tweet, Tesla shares jumped from $342 to $380. Subsequently, a tearful Musk appeared in an interview with The New York Times and shares dipped to about $305 (as of 8/17/2018).
Was the Musk tweet a deliberate attempt at manipulating Tesla’s stock price? Or was it inadvertent? These are questions the Securities and Exchange Commission (SEC) is looking into.
Details Behind the Numbers
The $420 take-private share price was 23 percent above its closing price of $342 the day before. After the Musk tweet, shares jumped 11 percent to $380.
Steve notes that a 23 percent premium isn’t out of the norm in such deals. Investors buy shares in startups for their growth potential. So acquirers have to pay a premium to satisfy shareholders who expect big returns down the road.
Valuation Exceeds Ford
At $420, Tesla has a $72 billion value that is well above Ford’s $38 billion value. Ford has been around for over 100 years and sells many more cars than Tesla.
Moreover, Ford makes a profit, whereas Tesla’s been recording annual losses since its founding and has also missed its profitability target dates.
Fortunately for Elon Musk, Tesla’s shareholders are very forgiving and enthusiastic about their visionary CEO. In addition, Tesla owners love their cars.
But Tesla will have to turn a profit at some point. If not, it will face a cash crunch, which will make it hard to raise more money to keep the company going.
Critics Shorting Stock
Critics say Musk is setting shareholders up for a big fall. They think Tesla shares are way overpriced and have heavily shorted the stock. Short sellers account for about 20 percent of Tesla shares.
With Tesla shares up sharply since 2016, Steve estimates short sellers have lost almost 60% of their capital. But they are hanging tight, encouraged by the share price drop to $305.
Why Take It Private?
Musk sees short sellers as a huge distraction. He wants to take the company private so he can focus on execution and profits, without quarterly reporting distractions. But private investors also demand accountability.
Some see Tesla’s bonds as a better indicator of market sentiment. For now, bond holders aren’t as bullish or forgiving as stockholders.
Musk’s Erratic Behavior
Musk has also been in the news for his erratic behavior in shareholder meetings. Some say Musk would have been fired long ago for his mercurial and erratic behavior. He’s still at the helm because people respect him for his vision and the product he has created.
Rick has covered the auto industry for a long time. With Tesla, Musk has pulled off something that’s really hard to do: a vehicle that people love, which complies with America’s onerous regulations.
Let’s hope the dust settles and Tesla rises to be another iconic American innovation.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: Tesla, the carmaker, is in the news for one big, fat, major reason. Elon Musk, its founder and CEO, may have invited a big lawsuit by tweeting that it could be going private. Rick Newman is following the story for us on Yahoo Finance. Welcome to the show, Rick.
Rick Newman: Thanks for having me.
Steve Pomeranz: So what was the announcement that our listeners should know about?
Rick Newman: Well, you said that he tweeted that he was considering taking the company private. That’s not the thing that necessarily got him into trouble. It’s these two other words he put in that tweet that are the problem.
Those two words are funding secured, which made it sound as if he already had a deal to take the company private, that he had lined up a buyer who had the money and was willing to do it. And I think, more than a week later, it’s pretty clear that that is not the case.
He does not have funding secured. We can tell that he has talked to some investors such as Saudi Arabia’s Sovereign Wealth Fund, which already owns a small stake in Tesla. But they have not indicated that they’re in any position to buy the whole company. That would take a lot of money and would be a risky bet, a very risky bet, in the first place.
So he does not have funding secured, and so the question is, as the CEO who made this public announcement which instantly pushed the stock up by a significant amount, did he manipulate the stock price? And if he did manipulate the stock price, did he do it for some deliberate purpose?
Or it was just inadvertent and the Securities and Exchange Commission is now looking into that?
Steve Pomeranz: Yeah, so they take this stuff pretty seriously. You can’t have a CEO touting his own stock, especially with the purpose of just trying to make it go higher. So in this case, he can try to burn those who were betting against the stock.
But let’s get into some of the details of this deal that he announced. Now he said he’s considering taking Tesla private for $420 a share. How much of a premium is that over where the stock was trading when the announcement was made?
Rick Newman: Stock was at about $342 a share, so it was on the order of a 20 to 25% boost in the share price, which would be a big benefit for shareholders who sold. That’s actually pretty normal because, and by the way, shareholders would have to agree to this. It would be contingent upon a shareholder approval in a vote. And that premium is pretty normal because the reason people typically own shares in a company like Tesla is you think it is going to grow.
You think the shares are going to become more valuable over time. So if you sold your shares, you’d be giving up your investment in the company’s future growth and the future profit. So to get people to do that, you do have to pay them a premium. But the question is, was Elon Musk telling the truth? It’s not necessarily a bad thing for a CEO to say something that gooses his or her company’s stock price, as long as it’s true.
Steve Pomeranz: Yeah.
Rick Newman: The real issue here is, was it true what he said?
Steve Pomeranz: Okay.
Rick Newman: And since he made that pronouncement and we’ve seen all the developments that have happened. the stock has actually fallen below the price it was at before he made this announcement. It’s just about 1% below where it was. So this is not been a favorable series of events for Tesla shareholders.
Steve Pomeranz: All right, so let’s talk about what this means in dollars. Well, first of all, if it was trading at 342, what was the value of the company based around that number?
Rick Newman: The market value of Tesla I think was around $66 billion.
Steve Pomeranz: Okay.
Rick Newman: That’s gotten a lot of attention because, at that level, Tesla is worth more than Ford Motor Company.
Steve Pomeranz: Yeah.
Rick Newman: …which has been around for over 100 years and sells many, many times the number of cars that Tesla sells.
Steve Pomeranz: I do want to get into that. Now at 420, what did that bring it up to, about 70 billion?
Rick Newman: Yeah, it’d be around 70. It depends how much of the shares would actually have to be purchased.
Steve Pomeranz: I see.
Rick Newman: But the number is somewhere between 70 and 80 billion. And by the way, just because Musk says the purchase price is 420 does not mean it would. Let’s say, if this were to go through, it’s possible the purchase price might actually have to be a little bit higher than that to get shareholders to sign-off. So between 70 and $80 billion.
Steve Pomeranz: You have to entice shareholders, you have to kind of pull forward their earnings, right?
Rick Newman: Yeah.
Steve Pomeranz: If they say, well, it’s at 340, I hope it gets to 420 or 450 in three years, you’re actually pulling those earnings forward today. And it’s got to be enticing enough for someone to say, well, I’m gonna give up this future growth. I’ll do something else with my money because this deal is so good. Now does Tesla make any money or do they lose money and then they spend all of this capital they raised?
Rick Newman: [LAUGH] That’s a rather important question, I’m glad you asked.
Steve Pomeranz: Thank you.
Rick Newman: Tesla loses money. I think they have had a couple of profitable quarters, but they have never turned a profit on an annual basis. Elon Musk says they will become profitable on an ongoing basis within the next year or two, but he has said that before. And Tesla’s profitability target date has slipped. But these are very forgiving shareholders. I mean, the people who own Tesla are so excited about the company, and they really are so enthusiastic about its visionary CEO Elon Musk. They’ve been willing to forgive all kinds of missed targets and other sorts of things. But Tesla really is going to face a point where it’s going to have to turn a profit or it’s going to face a cash crunch that’s going to make it hard to raise money to keep going. And this is a risky venture.
Steve Pomeranz: So you have those who view it as a religious experience.
Rick Newman: [LAUGH]
Steve Pomeranz: It’s loved beyond any reason, some would say. And then you have those that really, really, really don’t like it at all because they believe the numbers are setting investors up for a big fall. And a lot of those people who are critics have actually shorted the stock.
Now when you’re short of stock, you’re betting that it’s going to go down. When you sell the stock, to short it, you have to deliver stock to somebody, so you borrow the stock, deliver the borrowed stock. And you have this open transaction now that you hope to cover sometime in the future by buying it back at a cheaper price. So I looked at some numbers. Had you shorted, looking at all the Tesla shorts who are betting that the market for Tesla was going to decrease, since 2016 to 2018, would’ve lost almost 60% of their capital.
Rick Newman: Hm.
Steve Pomeranz: So the shorts make up, I think, about 20% of the actual amount of shares that are traded. What did theoretically happen to these shorts, when Tesla made that announcement?
Rick Newman: Well, this is an integral question that gets to why did Elon Musk do this? Based on what we can tell, and it’s hard to know everything about short interest, especially in real time. But from what we can tell, short sellers are fine, based on what’s happened with Tesla during the last week and a half, let’s say.
It looks as if there was really not much of a change in short positions, which means, most of them did not get called, and they just maintained their positions. So it appears that the short interest that you mentioned, about 20% of outstanding shares remains at about 20% of outstanding shares, and that nobody got burned in that regard.
If anybody did get burned, it would probably be very small, short sellers who just didn’t have the capital to continue their borrowed shares, or they panicked or something like that. But by and large, the short position remains the same. And as I mentioned a moment ago, the stock is now below where it was before-
Steve Pomeranz: Yeah, so they’re actually better off.
Rick Newman: Before Musk’s tweet, so they’re actually fine.
Steve Pomeranz: Yeah, there’s pressure on a short seller because if the stock goes against them, they’re required to put up more capital against that short and it can get pretty hairy. If you think about shorting, you have unlimited losses-
Rick Newman: Right [LAUGH].
Steve Pomeranz: Infinite losses and a limited gain because the best it could do is go to zero. So the risk-reward is very tricky. You have to be very smart and very talented, I think, to be a successful short seller. And fortunes are made and lost on this kind of investing.
All right, why is it so important, do you think, that Elon Musk wants to take this company private?
Rick Newman: It’s important to Elon Musk. I’m not sure it’s really important to Tesla as a company. But like some other CEOs, he complains about the short interest and he calls this the most heavily shorted company in history.
I know that in terms of the percentage of shares that are shorted, it’s certainly not the most shorted stock on the street at the moment. Snap is another well-known name. The short interest in Snap—I looked that up recently—it’s around 23 or 24% of the outstanding shares.
So it’s a bit higher than it is with Tesla. But Musk has said, look, all the shorts—he calls them Tesla haters who are trying to kill his company—and he says this is just a giant distraction for everybody here, I’m tired of having to talk about when we’re going to become profitable.
And he sort of makes it sound as if going private is this magic bullet solution and he’ll never have to answer pesky questions about profitability if the company’s privately owned.
Steve Pomeranz: Yeah.
Rick Newman: And that’s not true. It’s not as if private owners—and we’re talking about, it could be lots of hedge funds, big sovereign wealth funds, Silicon Valley venture funds—it’s not as if they’re content to just sit around and lose money or watch their investment go south for an indefinite period of time. There would still be pressure to be profitable, and there would also be pressure on the bonds. Tesla has a fair amount of debt out there.
And that debt is struggling at the moment. Trades in the secondary market, and there would be pressure from that source as well.
Steve Pomeranz: Some say that looking at the bonds is a better way to evaluate what the market really thinks of the financial…
Rick Newman: That’s right.
Steve Pomeranz: …prospects of this.
Rick Newman: And I think by that regard, I’m not an expert on bonds, but I think the market is pretty skeptical of Tesla.
Steve Pomeranz: One final question here. So Musk has had difficulty with the questions asked at a recent shareholder meeting. And he was actually yelling and calling people names. And he seems to be showing some erratic behavior. As a matter of fact, there was an article in the New York Times last week, kind of spelling that out, and Jim Cramer talked about it as well. Do you see anything like this or do you just think that it comes with the territory of being an entrepreneur?
Rick Newman: It does not come with the territory of being an entrepreneur, especially the CEO of a publicly traded company. And if this were anybody except Elon Musk, the guy would be gone. And even at a private company, somebody as mercurial and erratic as Elon Musk would probably be gone because mostly what happens is people lose confidence in the company when the CEO doesn’t seem like he knows what he’s doing. I think Elon Musk is an exception because of the product he has produced and the vision that you can see in the product. And for anybody who’s driven a Tesla, they really are different.
I’ve covered the auto industry for a long time, and he has really pulled something off. It’s really hard to manufacture an automobile that complies with all the regulations in the United States and the safety rules and the environmental rules and everything, and that people actually love. That is extraordinarily hard to do.
And the fact that he’s been able to do that, even do it at a loss, has just earned him bragging rights and a loyalty from millions of fans including many who are the company shareholders. So shareholders are very forgiving of Elon Musk. I don’t know how long it will continue, but he’s riding it for now, man.
Steve Pomeranz: Rick Newman is following the story for us on Yahoo Finance. Rick, hey, thank you so much for joining us today.
Rick Newman: Enjoyed it; thanks for having me.
Steve Pomeranz: If you have a question or opinion about what we just discussed, ask us. Go to StevePomeranz.com, ask anything you’d like.