Electric car manufacturer Tesla (NASDAQ: TSLA) has been at the forefront of the transition away from internal combustion engines to electric cars.
CEO and largest shareholder Elon Musk initially pursued a strategy of producing luxury vehicles before more recently moving down market and concentrating on producing a cheaper vehicle for the masses.
While Tesla’s Model S and Model X have been great successes – helped by tax incentives at both the Federal and State level in the US – the company has been struggling to produce its mass market Model 3 in large enough numbers at a low enough cost to make money.
Despite never posting an annual profit and losing around US$2bn in 2017 – its performance has only worsened so far in 2018 – Tesla’s market capitalisation is around US$50bn.
By contrast, General Motors (NYSE: GM), which made US$9.9bn in underlying profit in 2017, also has a market capitalisation of around US$50bn.
Short sellers attack
Tesla’s absurdly high valuation despite making no profits, let alone free cash flow, has sparked the interest of short sellers.
Especially as Musk has repeatedly promised that Tesla won’t need to raise more capital despite its US$8.7bn in net debt – a significant amount of which is due to be refinanced over the next year – and large capital investment requirements in coming years.
And competition in the electric car space is only increasing as traditional car manufacturers such as BMW and Volkswagen, who were caught a little flat-footed by Tesla’s rise, rapidly catch up and start releasing competitors to the Model 3.
To say that short sellers have irritated Musk is an understatement.
This is the context in which Musk recently tweeted: “Am considering taking [Tesla] private at [US}$420. Funding secured”.
Short sellers were immediately sceptical: Tesla’s rich valuation, already high debt burden and lack of cash flow make it an unlikely target to be taken private by any rational purchaser.
Unfortunately for Musk, this tweet also caught the eye of regulators and the SEC last night filed suit alleging Musk has committed securities fraud. The allegations essentially boil down to the fact that, contrary to Musk’s assertion, funding really wasn’t secured.
The SEC is trying to get Musk removed as CEO of Tesla and banned from managing any US public company.
As Musk and Tesla are highly intertwined in the eyes of investors, a win by the SEC in court could put further pressure on Tesla shares. They have already fallen from highs of US$379 In the wake of Musk’s tweet to US$277 per share in after hours trading in New York overnight.
Either way, with the company still burning through oodles of cash, it looks like Tesla shareholders’ wild ride in recent months is set to continue.