Elon Musk may be about to suffer another nervous meltdown on Twitter.
After Friday's plunge in Tesla shares following the publication of a bizarre interview in the NYT with CEO Elon Musk which revealed the state of his emotional breakdown, Tesla shares are down another 3% this morning, trading below $300 in the pre market…
…. after JPM published a scathing research report, in which it cut its TSLA price target by a whopping $113 from $308 to $195, after JPM analyst Ryan Brinkman said he was "reverting to valuing TSLA shares on fundamentals alone given funding appears to not have been secured."
We are reverting to valuing Tesla shares on the basis of fundamentals alone, which entails a $113 reduction in our price target back to the $195 level where it stood prior to our August 8 note in which we newly weighted 50% in our valuation analysis a go-private scenario for which funding was at that time said to have been secured to take the company private at $420 per share.
Commenting previously on Musk's Twitter statements, JPM had said that "As surprising to us as these developments are, and as lacking as the statements are in any details regarding whom is expected to provide the required amount of financing and on what terms, they are nevertheless declarative statements from the CEO of a public company which we feel should be considered seriously. Either funding is secured or it is not secured, and Tesla’s CEO says funding is secured.” The bank added that “Our price target could move up or down based upon further developments affecting the likelihood the transaction will or will not go through.”
Fast forward to today, when for at least one bank, the going private deal is now dead. We publish the key highlights from the report, which are self-explanatory and may result in the latest meltdown from the erratic Tesla CEO:
Our interpretation of subsequent events leads us to believe that funding was not secured for a going private transaction, nor was there any formal proposal. On August 13, Mr. Musk posted a statement to Tesla’s website in which he explained that the comment relative to funding being secured was based upon a July 31 meeting with the Saudi Arabian sovereign wealth fund in which its representative expressed support for funding a transaction to go private. However, it was also stated, “Following the August 7th announcement, I have continued to communicate with the Managing Director of the Saudi fund. He has expressed support for proceeding subject to financial and other due diligence and their internal review process for obtaining approvals. He has also asked for additional details on how the company would be taken private, including any required percentages and any regulatory requirements.” We had imagined following the surprise August 7 announcement that another party (e.g., the Saudi fund) had already firmly decided (including having completed any internal review process) to fund a going private transaction. The revelation the Saudi fund is subsequently asking Tesla for details of how the company would be taken private suggests to us that any deal is potentially far from even being formally proposed, which is different from our understanding on August 8 which was based on Mr. Musk’s statement on Twitter that, “Only reason why this is not certain is that it’s contingent on a shareholder vote”.
Tesla does appear to be exploring a going private transaction, but we now believe that such a process appears much less developed than we had earlier presumed (more along the lines of high level intention), suggesting formal incorporation into our valuation analysis seems premature at this time. Mr. Musk has announced the hiring of financial and legal advisors in support of exploring a going private transaction (this appears to have been done after the August 7 announcement), and has stated conversations with the Saudi fund continue and also that he is having discussions with a number of other investors. Tesla’s Board of Directors has also announced a special committee comprised of three independent directors to evaluate any transaction (the Board stated it has not yet received a formal proposal). This to us suggests a going private transaction is clearly possible, which could potentially provide upside risk to the shares, but that such a process appears much less developed than we had earlier presumed. When Mr. Musk tweeted on August 7 that, “Only reason why this is not certain is that it's contingent on a shareholder vote,” we had presumed that a formal proposal had been received from another party, that funding had been secured for that formal proposal, and that the Board was at least informally supportive of the formal proposal. Given our updated interpretation that none of these three presumptions are currently the case, we feel it is appropriate at this time to remove the 50% weighting we had briefly assigned to a going private transaction, and instead return to our previous fundamentals-based valuation approach (i.e., a 50/50 blend of DCF and 2020-based multiples analysis — itself consisting of a blend of P/E, EV/EBITDA, and Price-to- Sales) that values TSLA shares at $195.
Shorter JPM: Musk lied, although at least JPM did not judge him for doing so and taking shareholders for what appears to have been a fraudulent, manipulated ride; that job belongs to the regulators. As such, we now await the SEC's verdict if it agrees with the largest US bank, and what that would mean for the embattled Tesla CEO.