Tesla Inc.’s stock price has sunk below $260 for the first time since late October. What does that mean?
Trying to discern meaning in the particular set of numbers next to the TSLA ticker on any given day is often futile. With a little context, however, that $260 level takes on some interesting dimensions. Most notably, it takes the stock close to what has been a floor for the past two years.
The battleground nature of that pricing band around $250 to $270 becomes clear when you look at how much of the stock has turned over on an average day when it’s at those levels, versus others. The only level that competes is the one between $370 and $380 – and that one’s skewed by the frenetic trading that took place immediately after a certain tweet from CEO Elon Musk last August:
The other interesting aspect here is that this is the first time the stock has dropped below $260 since late October, just after Musk had settled with the Securities and Exchange Commission when it sued him and the company for misleading investors with claims he had lined up a buyout deal at $420 a share.
That saga continues to play a role today. The stock rebounded after that settlement, but Musk’s Twitter habit landed him in trouble again earlier this year, with the SEC calling on a judge to find him in contempt for allegedly violating terms. On Monday, the SEC sent a letter to the judge rebutting the filing made by Musk’s lawyers Friday night, which had argued that the SEC’s effort relied on “a radical reinterpretation” of the settlement and disclosed several pieces of communication between the SEC and his lawyers leading up the settlement. The SEC’s latest letter dismisses that argument and, perhaps more ominously, accuses Musk of “selective omission” when it comes to those communications, resulting in a “misleading depiction” of the negotiations.
While it’s tempting to unpick the finer points around the question of whether the settlement empowered Musk to vet his own tweets about stuff relating to Tesla, the important thing to focus on here is just how mind-bogglingly unnecessary the whole affair is. At several decision points in the recent past, Tesla’s CEO could have avoided exposing himself and his company to further potential punishment by not tweeting/calling the SEC names/telling a TV audience he doesn’t respect the agency he had to settle with after being sued. He chose a different path.
It is quite remarkable that since the last time the stock was sub-$260, Tesla has reported two profitable quarters in a row for the first time ever, announced the arrival of the totemic $35,000 Model 3, and teased the Model Y crossover vehicle. And yet the stock is back to the post-”funding secured” hangover. In one respect, little has actually changed. When the stock rebounded back above $300 in late October on the back of unexpectedly strong third-quarter earnings, it was trading at about 50 times forecast adjusted earnings for 2019. Today, despite having dropped by roughly a quarter, it still trades at that multiple. On GAAP forecasts, the multiple has actually gone up, from 167 times to 211 times.
Maybe it’s best to assign about as much meaning to earnings forecasts for Tesla as its stock price on any given day. Yet the final piece of context for today’s level concerns Tesla’s bonds maturing in 2025, where the spread to Treasuries has just topped 600 basis points for the first time ever and is now almost double what it was when they were issued in the summer of 2017:
In the absence of much in the way of free cash flow, Tesla’s bonds have largely been supported by the perceived cushion of the high stock price. Yet, even as Tesla has racked up various milestones and the duration on the bonds has ticked down, the risk premium has marched higher, taking it from lower than the high-yield market average at issuance to considerably higher today. From a bondholder’s point of view, Tesla’s recent sudden moves around the Model 3, the Model Y and the double u-turn on its retail strategy look less like dynamic strategic moves and more like efforts to bolster cash. The CEO’s continued tangling with the SEC only compounds the unease.
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Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker.
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