Tesla short circuit intact

Summary

Tesla sceptics are winning the argument for now, as investors weigh chances of a buyout.

How secure is “Secured”?

Tesla shares slipped 2% at the time of writing as the market took a closer look at a sudden announcement by CEO Elon Musk that he was considering taking the company private. The news looks to be a good example of a go-private bid motivated more by embarrassment than demonstrable strategic logic. And that is the least reason for scepticism. More to the point, CEO Elon Musk’s tweeted assertion: “Funding secured” has a ring of falsity. Consider the source. Tesla routinely misses production, profitability and sales targets. Furthermore, the visionary founder of the world’s best-known electric vehicle maker, SpaceX and other high-profile ventures, is becoming increasingly infamous for flaky antics and tweets. How can we be sure Tesla’s long-suffering (some say over-tolerant) board won’t soon walk back Musk’s latest stunt?

Anything’s possible

A successful leveraged buyout, like many things, is possible in theory. The $420 a share price Musk floated equates to a valuation around $72bn, about $7.5bn above current market price. Assume banks are happy to lend enough to maintain net debt equating to four times core earnings (Ebitda), the average for a large carmaker. Apply that to 2020 core earnings forecast at about $5bn, according to Thomson Reuters data. Tesla would probably pay down total debt of almost $11bn, leaving only $9bn. Not enough to buy back all the stock. Remember though, Musk owns 20%. Plus, many larger shareholders (who make up another 50%) might stay on board, and perhaps add to holdings. Large potential backers include Saudi Arabia’s Public Investment Fund which was revealed this week to have bought almost 5%. Softbank Group’s multibillion dollar Vision Fund is another possible underwriter.

First, evaluate

That’s the theory. So far though, the board says it’s just “evaluating” the idea of taking Tesla private. That’s far less done and dusted than ‘secured funding’. Participating in such an exercise with a notorious incinerator of cash like Tesla would involve such huge risks that it is unlikely credible parties have formally agreed to do so just yet. Lawsuits are possible if the statement proves demonstrably inaccurate. Either way, the most sensible guess for what happens next is that the board will announce that it has completed its evaluation and decided against the idea. After Tuesday’s 11% Tesla surge, at least the news provides better levels from which to short. The stock is unlikely to lose its status the most heavily shorted U.S. large cap any time soon.

On that basis, we expect short-term traders are mostly looking for further opportunities to sell. Tuesday’s $387.46 high is now a useful reference point. Note it is just shy of the record high of $389.61 on 18^th September 2017 – a double top if we take prior intraday peak some 30 cents lower into account. $380 also stands out. It was the peak on Friday 15^th September 2017 and near Tuesday’s close. Failure by TSLA to get close to any of these peaks in the near term will speak far louder than bombastic commentary by Musk or acolytes. The recent technical backdrop is a massive and spectacular triangle breakout culminating in this week’s impulsive spike. Closest strong support might be former corroborated resistance at $360.5. But the correction of this week’s heedless move could be just as volatile, breaking $360.5. The most visible support below that is around $292.60.