Tesla's investors need to ask themselves how they'd feel if Elon Musk resigned

Tesla shares are getting crushed on Thursday.

Following a fourth quarter earnings report that disappointed, shares of the electric carmaker were down more than 7% as earnings and car deliveries disappointed in the final quarter of 2014.

In a note to clients following the report, analysts at Bank of America Merrill Lynch, who have an underperform rating and a price target of $US70 on Tesla shares (Tesla shares were trading just below $US200 early Thursday), outlined a number of risks surrounding the company.

One of the risks highlighted by BofA is the “key-man” risk posed by the belief that a company helmed by Elon Musk is in good hands, almost regardless of what the financial performance says.

“In our view, many bulls view Elon Musk’s leadership and business acumen as the crux of their investment thesis in Tesla shares,” the firm writes.

“In fact, we have been told on more than one occasion that betting against Musk is unwise. While we certainly cannot argue with the successes, both past and present, of Tesla’s charismatic CEO, we do recognise the existence of key-man risk. In other words, investors should perhaps ask themselves how comfortable they would be with their investment if Elon Musk resigned from Tesla.”

According to data from Bloomberg, BofA’s $US70 price target on Tesla is the lowest among major Wall Street firms covering the stock.

BofA adds that there are “many fundamental reasons” why it believes the stock is overvalued and while there are litany of views arguing in favour of the company’s current valuation, BofA writes that, “we have a hard time believing anyone would argue that the Tesla story would not change dramatically without musk in the picture.”

As for fourth-quarter-specific problems, BofA had this to say:

  • Deliveries, revenue, and earnings were big misses.
  • Tesla burned $US455 million of free cash flow during the quarter.
  • Operating expenses, capt ial expenditures, and cash burn were all higher than forecast and there isn’t much relief in sight.
  • It could be hard to Tesla bulls to maintain their lofty expectations.

At the time BofA published their note, Tesla shares were only down slightly in after hours trade on Wednesday, and the firm wrote that “there is likely much more ahead,” in terms of downside movement for the stock.

So far, that is playing out on Thursday.

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