Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter
You’ve got to hand it to Tesla’s CEO Elon Musk.
After his August 8 claim during trading hours that he’d take the company private, “funding secured” – a blatant lie that caused market cap to surge by over $6 billion – and after Musk admitted late Friday night, rather than during trading hours, that this had been a blatant lie all along, all kinds of things didn’t happen on Monday.
1. Shares neither crashed nor soared. Over the weekend, expectations ran all over the place about whether shares would plunge on Monday or – given how Musk had been able to twist things in the past – soar on new hopes of some sort or other.
But they did neither. By end of the day, shares (TSLA) were down just 1.1%, after dip buyers rescued them. They’d been down as much as 3.4% in morning trading. But that too was just a minor squiggle, after what had just passed.
At $319.27, shares ended regular trading down just $3.55. That said, they’re $100 below the $420 buyout price Musk had proffered – a sign that Wall Street had exactly zero confidence in the deal even before the Friday-night deal massacre.
2. The bonds didn’t crash. The $1.8 billion in 5.3% bonds due August 2025 that the company had issued just a year ago were essentially flat on Monday. OK, so they closed at 87.32 cents on the dollar, down just a minuscule bit from Friday, but near their record low at the end of May, and down 12.7% from the issue price. Bondholders haven’t been enthusiastic for a while.
3. Musk didn’t get fired. In their statement Friday night, six members of the nine-member board said that they had met with Musk on Thursday, and that they agreed with Musk on everything, and that they prayed to him on a daily basis as their personal demi-god – well note quite, but just about – and they added this:
“The Board and the entire company remain focused on ensuring Tesla’s operational success, and we fully support Elon as he continues to lead the company moving forward.”
They could have changed their mind on Monday and fire him anyway, but no. The three members of the board that didn’t sign off on the statement were Elon Musk, his brother Kimbal Musk, and Steve Jurvetson.
4. Musk can’t get fired because shares would collapse. That’s now the fear. Automotive News cited Tesla booster Ross Gerber, CEO of wealth management firm Gerber Kawasaki, who explained the thinking that is widespread among Tesla fans:
“Why would you invest in Tesla without Elon Musk? It doesn’t make sense.”
If Musk is gone, those fan investors would dump the shares. They’re investing in a dream and in a demi-god, and not in a real company with sustainable business model. From that point of view, it makes sense to not ever fire Musk, no matter what. If reality were allowed to take over, Tesla’s shares would just unceremoniously collapse, and the company would go bankrupt because, after the collapse of its shares, it won’t be able to raise the funds needed to feed its cash-burn machine.
5. It doesn’t matter that Musk is a loose cannon. Last week, Bob Lutz, an ancient hand in the car business with top executive jobs at Ford, GM, and Chrysler, and having served on their boards, including as vice chairman at the latter two – and having to his credit, among other things, as head of Chrysler’s Global Product Development, the Dodge Viper – said this on CNBC:
“I think Elon is tired. He’s worn out. He’s obviously got some emotional problems. He’s self-medicating. He has shown some disturbing signs of being somewhat volatile and unstable. I think the right solution for Tesla at this point is to move him aside from day-to-day operations.”
But Lutz was too merciful, and at the same time, he was wrong: Musk cannot be shuffled aside; Tesla shares would collapse. Lutz just doesn’t get that.
6. The first shareholder lawsuit failed. On Monday, US District Judge Charles Breyer in San Francisco dismissed a securities fraud lawsuit filed by shareholders. They had alleged that Musk had misled them about the production progress of the Model 3. Yes, Musk had set fake targets, and had used those targets to push up the share price, but “federal securities laws do not punish companies for failing to achieve their targets,” Breyer said.
The aggrieved shareholders, who apparently had believed the fake targets were real promises, saw share prices crater in mid-September from $385 a share, as production problems were coming to light.
“Plaintiffs are correct that defendants’ qualifications would not have been meaningful if defendants had known that it was impossible for Tesla to meet its stated production goals, not merely highly unlikely,” Breyer wrote. “The facts plaintiffs have put forth do not tend to establish that this was the case.”
The shareholders have till September 28 to amend their complaint, the judge said. The lawsuit preceded the lawsuits filed after the “funding secured” fiasco, which are still going to hound Tesla for a while.
7. Musk hasn’t shown remorse, and it fires up the SEC, which already served Tesla with a subpoena and is looking into whether Musk violated securities laws. Former attorney in the Office of the General Counsel at the SEC Teresa Goody explained it on CNBC on Monday:
“What I think the SEC is going to find alarming – as I did when I read the New York Times article, his interview – is the fact that he says, ‘Well, I don’t regret any of my tweets. Why would I?’ Because a lot of people believed you and lost a lot of money.”
“I think it is good that we have clarity, and now this whole going private is kind of now blown out of the water. So there is clarity. And the confusion to the market has now ended. But questions from the SEC are going to continue.”
Institutional investors, which hold a large part of Tesla’s shares, have their own problems. Some of them have been holding Tesla since the beginning and have huge gains and lots of money tied up in it, and they want to hang on to those gains, and ironically, the only way they can hang on to those gains is by not selling because trying to get out of their large positions quickly would ruin the party for them, and everyone else. But perhaps jointly buying the dip a little during times of need, like on Monday after the morning-selling had abated, would make everyone happy.