• Investing & Markets

Weekly Market Digest: Musk Considers Taking Tesla Private

August 10, 2018 | Craig Birk, CFP®

CEO Elon Musk made headlines on Tuesday for tweeting that he was considering taking Tesla private. A sell-off on Friday wiped out gains for the week and left US stocks modestly lower for the week. In part due to a strengthening dollar, international stocks fared worse and are now down 4.2% for the year, widening the gap with US stocks to over 11%. The Turkish lira hit an all-time low as leadership resists traditional monetary policy such as raising rates and looks to avoid assistance from the IMF. President Trump added to the decline by doubling steel and aluminum tariffs with Turkey at least partly in response to the detention of an American pastor. European stocks were lower on fears of contagion.

Weekly Returns

S&P 500: 2,833 (-0.3%)
FTSE All-World ex-US (VEU): (-2.1%)
US 10 Year Treasury Yield: 2.87% (-0.08%)
Gold: $1,212 (-0.1%)
EUR/USD: $1.141 (-1.4%)

Major Events

  • Tuesday – Facebook was said to be in talks with major banks to share financial data to boost engagement.
  • Tuesday – Tesla CEO Elon Musk tweeted that the company is considering going private.
  • Wednesday – China released a list of US goods it would hit with tariffs if US plans to tax Chinese imports go into effect on 8/23.
  • Thursday – The Russian ruble dropped 5% after the US imposed sanctions related to an alleged nerve-agent attack on a former Russian spy in the UK.
  • Thursday – Yelp shares rose over 25% on higher than expected revenues.
  • Thursday – Rite Aid and Albertsons terminated their merger plans.
  • Friday – The Turkish lira sank 14% after a defiant speech from President Erdogan in which he resisted traditional monetary responses.
  • Friday – CPI, a measure of inflation, rose 2.9% in June from a year ago while inflation adjusted wages were down 0.2%.

Our Take

On Tuesday, Telsa CEO Elon Musk tweeted that he was considering taking the company private at a price of $420 and added “funding secured”. The stock initially rose about 11% and has since surrendered a little over half of those gains as no details have emerged on where the funding would actually come from. It entered the weekend at a 15% discount to the $420 level, suggesting significant doubt from the investment community.

The method of communication was highly unusual and probably also highly inappropriate for a public company. The SEC is said to be looking into if any securities laws were broken. In any case, the events have created the perfect storm for a financial media frenzy. For whatever reason, Tesla is one of the most polarizing stocks and Musk is one of the most polarizing CEOs. Many people love the company and the CEO and many people really don’t.

Like politics, this creates strong opinions about what “will” happen and there are no shortage of dramatic quotes. In reality, there is a chance the company will be able to move forward with the plan and the stock will be taken private at $420 (or above) and there is a good chance funding will not be secured or the board won’t go for it. In this case, it is reasonable to expect the stock would suffer because it would imply lack of confidence from the private market. For very long term investors and believers in the company, all of this is just noise to some degree. Still, for the coming weeks and months the stock is likely to trade on corporate action news and rumors rather than Model 3 production numbers or cash burn.

For short sellers betting against the company, of whom there are many, it creates an interesting new equation. While it is clear the stock is expensive based on most common valuation metrics, there are many expensive stocks these days. We can see a good case for owning the stock or not owning the stock, but as a general rule it seems risky to us to bet against innovative companies that make products or services people love and are passionate about.

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