Tesla is one of those companies that investors either love – huge perceived potential – or simply don’t get – it burns through a lot of cash and has never turned a profit. Nonetheless, despite the love/hate relationship between Elon Musk, the company’s controversial and outspoken founder, and the public markets moving distinctly closer to the ‘hate’ side of the seesaw over recent months, yesterday’s announcement that he is looking into taking Tesla back into private ownership has sent shockwaves through markets.
Tesla, which makes electric cars, batteries and solar panels, is valued at close to $64 billion after a recent spike in share price on Musk’s ambitions to go private, which would mean buying out any shareholders who did not wish to hold onto shares not traded publically. The company posted 2017 revenues of $11.8 billion. The comparison often made is with Ford, with the historic auto manufacturing giant valued at just under $40 billion on 2017 revenues of $156.7 billion. In early May Musk’s fractious relationship with Wall Street reached a new low when he refused to answer analyst and investor questions during the Q&A section of Tesla’s Q1 conference call and insulted one particular analysts. Markets are also not overly enamoured by Musk’s habit of being overambitious with production targets.
On his side, Musk feels like markets should not hold Tesla to the same standards as might be considered normal and buy into his longer term vision for the company. While his stellar career, and great wealth, has been built upon an uncanny ability to set his own rules and convince investors to eschew their usual frameworks, this hasn’t always sat easily with the wider stock market. Tesla does have a huge valuation, largely anchored on faith in Musk succeeding in following through on promises rather than tangible fundamentals. But the pay-off for access to the capital of public markets has been sometimes volatile swings in Tesla’s valuation as sentiment ebbs and flows as well as Musk being forced into some concessions on his approach to avoid pushing patience and trust too far. The company’s stock is also the most shorted in the history of the stock market – evidence that while many have been convinced by Musk many others view him as something of a snake oil salesman.
One of the reasons provided by Musk for seeking to de-list Tesla is that the short positions on the company means ‘large numbers people who have the incentive to attack the company’. He also focused on the quarterly earnings reports that Wall Street ebbs and flows on meaning that it is difficult for Tesla to take decisions that might be in the best long term interests of the company’s development but don’t look good on paper during quarterly earnings calls.
Many current investors see the logic in Tesla going private and would be willing to back such a move. However, if the proposed buyout, which has been intimated would value the company at $82 billion including debt, is launched Musk will have to come up with tens of billions of dollars. It is far from clear where he will find the money for what would amount to the largest corporate buyout in history. Musk yesterday tweeted he had ‘financing secured’ for a buyout but analysts have some questions where it would come from. Saudi Arabia’s sovereign wealth fund has built a 3.5% stake and previously expressed an interest in more significant involvement but Tesla did not follow up at the time. U.S. President Donald Trump’s campaign of new trade tariffs are also likely to make securing significant overseas investment more problematic than it might have been.
With Tesla a staple of the heavily invested FANG+ index and other major benchmarks, tracker funds would have no choice but to sell of any shares if the company went private. There would also be a huge question market over the continued involvement of Rowe Price, Fidelity and Baillie Gifford, the company’s three largest institutional investors, accounting for 25% of all shares between them. That capital would have to be raised on the private market. There is also the belief that Musk will have to raise billions more to fund future expansion plans.
The positive for those investing online who own shares in Tesla is that should they decide they do not wish to convert them into private equivalents, the company will be obliged to make a strong offer, which has been suggested as $420 a share. Even with the recent spike in share price their current value still sits at a little over $375 and would represent a strong profit even for those who may have bought at the company’s June 2017 valuation peak of $383.45.Risk Warning:
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