'He doesn't seem to want to build any confidence': Wall Street's starting to ask questions of Elon Musk

Joshua Lott/Getty ImagesElon Musk.

  • Wall Street is quickly losing confidence in Elon Musk.
  • Tesla issued $US920 million of convertible bonds which give holders the option to convert those instruments for Tesla stock at $US360 per share on March 1, 2019. If the stock is trading below that level, Tesla will potentially have to repay that $US920 million.
  • Elon Musk’s “funding secured” tweet got the stock above the critical threshold, but the subsequent fallout has sent the stock even lower than before the announcement – to $US280 currently.
  • Elon Musk was recorded smoking marijuana while being interviewed on the “Joe Rogan Experience” podcast on Thursday. And on Friday, it was announced Tesla’s chief accountant had quit after one month on the job.
  • Analysts and investors are looking to the billionaire to get Tesla back on track for growth.
  • Follow Tesla’s stock price in real-time here.

Elon Musk sent shockwaves through the financial world in August when he attempted to take Tesla private at $US420 per share.

Now, with the effort to take Tesla private having passed, the focus is shifting back to the company’s fundamentals and Musk’s performance as CEO, the Model 3, and a $US360 stock price trigger on $US920 million in convertible bonds.

Back to the fundamentals

For a brief period during Musk’s failed bid to take the company private (and thus avoid the scrutiny and disclosures that come with being a public company), the car company’s stock soared. It was cents from setting a new record high following the billionaire’s proclamation that funding for a buyout was “secured.”

Nearly a month later, and with it clear that the funding was anything but secure, Musk’s antics have left investors unhappy and Wall Street analysts scratching their heads. The company’s facing an investigation by the Securities and Exchange Commission, numerous investor lawsuits, and a number of high-profile departures.

Musk was recorded taking a drag on a marijuana joint while being interviewed on the “Joe Rogan Experience” podcast on Thursday. On the same podcast, he said it was “wrong” and “dangerous” for people to buy the flamethrowers that he made and put on sale, and that The Boring Company “started out as a joke.”

And on Friday, it was announced Tesla’s chief accountant had quit after one month on the job. And Bloomberg reported that Tesla’s human-resources chief, Gaby Toledano, would not return from a leave of absence that began in August.

The stock dropped sharply in early trading, falling to $US260 – 38% below the $US420 proposed deal price.

“He’s lost a lot of confidence in some of his core investment community and that’s what we’re seeing in the stock right now,” Ross Gerber, whose firm, Gerber Kawasaki, owns roughly $US10.5 million worth of Tesla stock, told Business Insider. “He doesn’t seem to want to build any confidence or care.”

“Elon seems to be falling on his own sword right now, for whatever reason,” he continued. “There’s no reason why the stock shouldn’t be at $US360 today. The only reason it’s not is because of Elon.”

The concern over Tesla’s prospects can also be seen in the bond market. Credit default swaps, a measure of how much traders are paying to protect against a bond default, have surged 25% in less than a month to a near record high of $US609. The swaps’ underlying bonds, on the other hand, plunged to a record low $US85.79 on Wednesday.

“We believe concerns about possible SEC penalties are weighing on Tesla debt,” Oppenheimer analyst Colin Rusch told clients in a note.

It’s all about the Model 3

The ramping of Model 3 production is crucial to Tesla’s success, says Rusch, who has a $US385 price target for the stock. By the company’s own measures, producing 350,000 vehicles per year, “should enable Tesla to become sustainably profitable for the first time in [its] history,” itsaid on August 1.The company produced a total of 53,339 vehicles in the three months ended June 30, it most recent update on total deliveries.

“We believe … concerns will be at least partially allayed if Tesla successfully generates cash from its Model 3 production. We believe if TSLA reaches its Model 3 guidance, it will generate positive operating cash flow.”

But even with an infusion of at least $US49,000 in cash for each Model 3 it delivers off its recently upgraded production line in Fremont, California, some analysts are worried Tesla could still find itself needing to tap capital markets for a cash infusion before it reaches profitability.

“Model 3 production/deliveries could drive positive free cash flow (FCF) in 2H18, but we believe this will likely not be sustained as working capital tailwinds abate and as spending ramps back up after a period of cash conservation,” David Tamberrino, an analyst at Goldman Sachs, said this week.

Tamberrino, who has a $US210 price target for the stock, is also worried about demand drying up as Tesla loses a federal electric vehicle subsidy from the US government that its used as a selling point for years.

“We believe this could lead to a more challenging demand environment and ultimately profitability trajectory for Tesla especially as the new models are launching across vehicle segments and price points – while Tesla has a slower launch cadence planned,” said Tamberrino. “We believe the higher price point buyers for the Model 3 could be exhausted for Tesla by year-end.”

Complex convertibles

Tesla issued $US920 million of convertible bonds which give holders the option to convert those instruments for Tesla stock at $US360 per share on March 1, 2019. If the stock is trading below that level, Tesla will potentially have to repay that $US920 million.

With just $US2.24 billion in cash (or cash equivalents) on hand, that’s money that Tesla can seemingly ill afford right now. If push comes to shove, Musk could have to do what he pledged not to, and return to raising money.

“With looming maturities on convertible debt, we believe the company would likely need to come back to the capital markets in 1H19,” Tamberrino said.

Returning to the convertible bond markets could attract the attention of one group Musk seems to hate above all others: short-sellers. Issuing more convertible debt, “drives more short sellers to your stock,” Cowen analyst Jeff Osborne said last week,according to Reuters. “And Musk does not want that.”

It’s common for investors in convertible bonds to hedge their positions through short-selling, or betting against, the underlying stock. Musk has railed against this practice, telling the New York Times in August that he was gearing up for“months of extreme torture” from them. “These guys want us to die so bad they can taste it,” he tweeted back in 2017.

Reached for comment, a Tesla spokesperson referred to comments in Tesla’s second-quarter letter to shareholders.

“We still expect to achieve GAAP profitability in Q3 and Q4. Going forward, we believe Tesla can achieve sustained quarterly profits, absent a severe force majeure or economic downturn, while continuing to grow at a rapid pace,” it reads. “We expect to generate positive cash including operating cash flows and capital expenditures, as well as the normal inflow of cash received from non-recourse financing activities on leased vehicles and solar products.”

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