Unfortunately Elon Musk’s “funding secured” comment last week was not as secure as previously hoped.
Now the board has selected a special committee which, for one protects Tesla (NASDAQ:TSLA) from any more Musk tweets about going private. The Tesla press release today said, “no Going Private Transaction will be consummated without the approval of the special committee.” That protects the company from future tweets.
It looks like today’s company release poses as clean up to avoid this situation getting any worse as a legal liability.
$420 Too Cheap
Our hope is that there is no deal. $420 is peanuts compared to our price target of nicely over $1000. The Street’s at $2.89 for 2019 earnings per share. We’re now at over $20.00 per share after going form GAAP to non-GAAP to align with the Street estimates who are all at non-GAAP.
Not As Secured
After seeing Elon Musk’s blog post yesterday it appeared his funding was not as secured as he originally stated. We wrote in chat yesterday morning there was risk to the shares.
Will Other Investors Allow $420
There are now many potential buyers named; a new one each day. But this only springing last week on Board members, a decision process could take time. $420 seems incredibly low especially if it forces out non-accredited investors. We’d guess the board is looking into that so to avoid any further legal risks.
If there are final bidders agreed by Musk and the special committee then you have to wonder if other investors or private equity people looked through the Tesla numbers. Did they notice the jump in gross margins in Q2? Did they run the math what that means for Q3. If they did we’d think they can get EPS numbers closer to our $20.00+ than the Street’s $2.00+ for next year.
Did they do the math? We think they did and who isn’t interested in capturing that differential. We’d guess that’s the driving force in Musk’s desire to go private, not the shorts. We’d guess the 10X EPS upside that’s around the corner is why he’s so antsy to take this company back at a 20% premium. Can that happen? Being a public stock, a public market, we’d guess others come in.
But Can Activists Do Anything?
But can activists really do anything?
$420 is way too cheap but could get done anyway. Musk managed to get Solar City approved that time without a special committee of the board. This time Tesla was more careful to elect such a committee to show more objectivity in this important going private decision.
Musk has proven to be able to sway his board and we’d guess he can sway this special committee.
If funds are finally secured and the board agrees then it comes down to a shareholders vote.
Tesla has a super-majority rule needing 66% of the shareholders approval to pass major changes. Between Musk and those close to him he may hold 25-26%. To pass a vote he’d need another 41%. He can probably do it seeing that he had 85% of outside shareholders approve Solar City.
Those invested with Musk believe in him. Those on his board also believe in him. He can probably manage to pull this off.
There is still room to say that the price is too cheap and other profit minded activist investors can try to come in and swing the vote. If that were to happy you could get a bidding up of shares as activist investors would need to buy up shares to enhance their voting position.
As this go private decision process likely can take time we’d guess the stock can be weak. The longer it takes the more investors can lose patience. Expect more short stories about issues with the “Funding secured” comment which can drag the stock.
We hope in the end this earnings story plays out.
I would guess $420 is too low. Hopefully any snap back from a drop would mean some investors see a way to achieve more than that $420.
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Updated August 19, 2018, 4:46 PM EDT, spelling