October 20, 2018

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Musk’s Itchy Twitter Finger Looks Like Bigger Problem For Tesla Shares Than Shorts

Musk’s Itchy Twitter Finger Looks Like Bigger Problem For Tesla Shares Than Shorts
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Elon Musk at the 2018 SXSW Conference and Festivals in Austin, Texas.2018 Amy E. Price

Elon Musk suggested this week on Twitter that a key reason he’d like to take the publicly traded company private is to minimize share price volatility, a move that could cost more than $80 billion. Here’s a cheaper and easier option: Stop tweeting or at a minimum do it more judiciously.

The tech billionaire who leads the electric car and solar power company is now contending with a U.S. Securities and Exchange Commission review sparked by his bombshell announcement that he’s “considering taking Tesla private at $420. Funding secured.” That he made such a material announcement while the stock was trading on Nasdaq, and provided no supporting evidence of who might fund the leveraged buyout, didn’t go unnoticed.

Tesla shares jumped 10% on Aug. 7 to $379.57 following his tweets before trading in it was halted. The stock shed $9 of that gain on Aug. 8 and fell about 5% on Thursday to close at $352.45, giving back nearly all of the tweet-driven increase.

Tesla's share price performance from July 31 through Aug. 9.

Tesla’s share price performance from July 31 through Aug. 9.Yahoo Finance

SEC investigators have reached out to Musk to verify that he indeed has secured backers to fund his plan and also to understand why he chose to announce the possibility in the way he did, according to Bloomberg and The Wall Street Journal. An SEC spokesman reached by Forbes declined to comment on the matter, and Tesla hasn’t responded to a request for information.

If it turns out that he doesn’t have the funding secured, Musk could face civil and criminal penalties, former SEC Chairman Harvey Pitt told CNBC.

“If you make a false statement in connection with the trading of securities, you run the risk of both having to pay for the damages you caused and also you run the risk of a criminal prosecution,” he told the financial news channel.

Given the vast amount of funding required to buy Tesla, many analysts and market watchers, including Forbes contributor Jim Collins, find it odd that the identity of Musk’s backers hasn’t been revealed.

“We live in a world of leaks and tweets, so why haven’t any hit the tape?” Collins, a long-time auto analyst and fund manager, said in an Aug. 8 article. “There is no way any person, even with the force of will of Musk, could raise $66 billion (the total enterprise value minus the value of his stake) in secret. It just does not happen that way in 2018.”

Last week Musk excited investors with an upbeat message about the improving production of Model 3 electric cars and sustainable profitability ahead for Tesla, which in eight years as a public company has only had two profitable quarters. That sparked a $51.14 gain for the stock from its July 31 close, the day before Tesla reported second-quarter results, to $349.54 on Aug. 2, the day after Musk’s sunny forecast.

This makes the privatization comments look particularly surprising, UBS equity analyst Colin Langan said in a research note.

“We find the timing of the tweet (& the method itself) interesting given less than a week ago the company said it would be profitable with positive cash flow in Q3/Q4,” Langan said. “In our view, this may be another way for Musk to change the conversation around the company; however, we note that the fundamentals have in no way changed.”

Tesla’s board, which confirmed it was briefed by Musk on his plan last week, may meet next week with financial advisors to begin considering the idea, CNBC reported. They may also ask Musk, who is both CEO and chairman, to recuse himself from that process.

In an Aug. 7 note to Tesla employees, Musk pointed out his frustration with the company’s share price volatility.

“As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders,” Musk wrote. What’s more, “as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.”

He’s right on both points. But this week, as has been the case before, the primary trigger for Tesla’s fluctuation is Musk himself. 



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