Tesla’s current fundamentals don’t support a valuation ‘anywhere close’ to $420, one bear says

Tesla’s sceptics still aren’t convinced.

In a note to clients Wednesday, Jeffrey Osborne, an analyst at Cowen, said Tesla’s current fundamentals don’t support a valuation anywhere near the $US420 buyout price CEO Elon Musk tweeted on Tuesday.

“His method of using Twitter was very atypical for historic go private offers. We don’t believe the current fundamentals of Tesla support a valuation anywhere close to $US420 per share,” said Osborne, who has a $US200 price target for shares of Tesla. “This deal would imply an ~$US81 billion enterprise value for the company.”

While the company confirmed nothing has been set in stone, Musk said on Twitter that financing had been secured for the buyout.

“The outcome largely hinges on what ‘funding is secured’ means,” said Osborne. “What are the plans for capital funding plans for going forward post the potential transaction? We continue to see the company’s capital needs as much higher than the company is able to generate from operations under optimistic scenarios.”

In a letter to shareholders, Tesla laid out how the process of going private might work, comparing it to Musk’s other company, SpaceX.

“I would like to structure this so that all shareholders have a choice,” said Musk. “Either they can stay investors in a private Tesla or they can be bought out at $US420 per share. My hope is for all shareholders to remain, but if they prefer to be bought out, then this would enable that to happen at a nice premium.”

The move enticed investors to bid up Tesla’s stock price more than 10% – nearing an all-time high – on Tuesday. Shortly before Musk’s tweet, the Financial Times reported that Saudi Arabia’s $US250 billion public investment fund had bought a 3-5% stake in the company, which also boosted the stock.

Still, the odd method of proposing the move left Cowen with more questions than answers.

“Tesla is in a box as it needs cash to fund its aspirational growth initiatives and ultimate mission while at the same time needing to gear up to deal with rapidly maturing debt loads,” said Osborne. “The expectation of future growth coupled with long-term profits has kept the valuation lofty in recent years, and the story has always been able to raise capital when needed.”

“Market dynamics are changing, competition is coming, the company has over-promised and under delivered consistently, which has heightened investor anxiety leading to the heavy short interest,” he continued. “While we could be proven wrong with our cautious view on shares should the company successfully raise the capital needed to go private, we continue to have numerous concerns about the company’s mid to long term positioning and see the current valuation divorced from fundamentals.”

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