Tesla Under Pressure As Analysts Debate If Musk Should Take Carmaker Private

Shares of Tesla (TSLA) jumped yesterday after CEO Elon Musk said he would like to see the company go private, but have since stepped into negative territory as analysts debate the idea. While Jefferies analyst Philippe Houchois believes going private “feels like the right thing to do”, his peer at Morgan Stanley questions the feasibility of Musk actually being able to achieve that goal.

TAKING TESLA PRIVATE: Yesterday, Tesla CEO Elon Musk tweeted that he is considering taking the electric carmaker private. In an email to the company’s employees, the executive explained: “Earlier today, I announced that I’m considering taking Tesla private at a price of $420/share. […] 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. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. Finally, 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”. Meanwhile, members of Tesla’s board said on Wednesday that they have “met several times over the last week” and are “taking the appropriate next steps to evaluate” Musk’s desire to take the company private. Their talks with Musk, which started last week, included “discussions as to how being private could better serve Tesla’s long-term interests, and also addressed the funding for this to occur,” the board members stated in a press release.

‘RIGHT THING TO DO’: Commenting on the news, Jefferies’ Houchois told investors in a research note that the move “feels right” even if Musk is downplaying how supportive public markets have been. With Tesla unable to take on more debt, the analyst wonders who may fund the potential deal and end up as a new large shareholder. While the second quarter de-stressed the near-term outlook, Houchois pointed out that Tesla did not reassure about sustained demand for Model 3 at high prices and that profitability can support organic funding of investments in future products and manufacturing capacity. He continues to think Tesla will need additional capital to fund these or risk being caught with a narrow and aging product range within 2 years. Noting that his discounted cash flow fair value points to $300 per share, the analyst raised his price target on the stock to $360 from $250, “bridging the gap” to the $420 potential going private bid. The analyst reiterated a Hold rating on Tesla.