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- The Securities and Exchange Commission filed a lawsuit against Tesla CEO Elon Musk on Thursday, alleging the billionaire made "false and misleading statements" about taking the company private.
- Shares plummeted 13% as investors and Wall Street analysts dove into what the suit might mean for the electric-car maker.
- Watch Tesla trade in real time here.
Tesla shares plummeted after the Securities and Exchange Commission filed a lawsuit against CEO Elon Musk, which on Thursday alleged the billionaire made "false and misleading statements" in tweets on August 7 claiming he could take the electric-car maker private at $420 a share.
Early trading Friday has shares down about 12%, as Wall Street analysts begin to digest the possible repressions of such a lawsuit and disseminate that research to their clients. Tesla shares are trading at $269 a share - a full 11% below the Street's pre-lawsuit average price target of $305.
Federal prosecutors are rec commending Musk - who reportedly pulled out of a deal with the SEC to avoid a guilty plea at the last minute -pay a penalty and are seeking to bar him from running a public company in the United States. Here's a taste of what sell-side analyst are saying this morning:
RBC Capital Markets: "Lawsuit Secured"
In a jab at Musk's "funding secured" tweet, RBC Capital Markets says the suit "adds further uncertainty to the Tesla story."
"In our view, this adds more drama to an already volatile stock," writes analyst Joseph Spak.
"Investor questions will likely turn to whether Elon remains CEO over time (he can remain CEO for now). It is difficult to put a probability on that since the issue now needs to be litigated and judgement needs to be determined or a settlement reached. We have no edge on how a legal preceding will play out."
RBC also believes, like most other Wall Street sell-side shops, that Tesla will need a cash infusion. That could be complicated after this lawsuit.
"Uncertainty around the future leadership at Tesla may impact its ability to raise additional capital," Spak wrote.
"To be clear, near-term if Tesla is able to ramp the Model 3 over the coming quarters, we believe cash flow should improve. But, we think the cash level (or stock price) needs to improve to be able to handle the $920mm convertible bonds due in Feb 2019 (conversion price is ~$360)."
He added: "Having Elon Musk as CEO has undoubtedly made that easier in the past. Securing attractive funding in the future could be more difficult."
UBS: "Will the Department of Justice be next?"
After the initial "funding secured" tweets that sent Wall Street into hysteria, UBS says it hosted a conference call with a former SEC executive. Based on that conversation, the bank says "the DOJ's involvement depends on proving the Musk tweet was intended to manipulate the stock."
Even without further action by another regulator, UBS says it will pose clear challenges to Tesla in the immediate future - including the possibility of a new boss.
"While the outcome of the case is uncertain, if the SEC prevails Tesla may have to find a new CEO," analyst Colin Langan said in a note.
"A new CEO would have to deal with manufacturing issues, liquidity concerns, and a marginally profitable flagship product. Regardless of the outcome of the lawsuit, we continue to estimate Tesla will need to raise capital in 2019."
"Historically, Tesla has had easy access to capital markets, largely due to the public's perception of Musk as a visionary," continued Langan, who has a $190 price target for the stock. "Without Musk, investors may no longer be willing to continue funding a company that has never reported an annual profit."
JPMorgan: "A number of other risks"
The SEC's lawsuit could "hasten the inevitable transition of Tesla shares toward being valued based upon fundamentals alone (fundamentals which we have long held do not support a value close to the current trading price)," analyst Ryan Brinkman said in a note Friday, according to MarketWatch. He has a $195 price target for the stock.
"Beyond this 'key man risk' concern (which we believe is of vital importance) we also see a number of other risks, including the potential for decreased confidence in the company on the part of investors, consumers, and suppliers," he continued.
Vertical Group: "Clear Manipulation"
"This, in our view, was clear manipulation of the stock higher to hurt the shorts," Gordon Johnson, an analyst at Vertical Group, said on TD Ameritrade Network late Thursday. He's had an ultra-bearish $88 price target for months.
"It was interesting that the number one investor in Tesla, Baillie Gifford, confirmed that they had not heard anyone regarding this go-private idea. So the whole thing, when he said not just funding secured but we needed a shareholder vote, if that was the case everybody would have heard of that and would have approved so this was clear manipulation."
Johnson says the suit only confirms what he's been saying for a while now, and that it will force investors to actually focus on the company's fundamentals.
"The fundamentals of Tesla have been horrendous, I don't think anybody would deny that. But what has kept Tesla's stock hoisted is the perpetual tweets and promises from Elon Musk, promises that he hasn't met," Johnson said.
"The point is, there's always this carrot that Elon Musk is dangling out in the future of something that is going to take this company to Nirvana if you will and he consistently misses it," he continued. "We've counted over 113 mistruths that he's stated, and you had and over 60 executives leave in 2018 alone. Without him constantly putting out comments on twitter to give investors the hope that one day they're going to get to where revenue and earnings to justify this valuation, the stock will come under tremendous pressure because people will be forced to focus on the fundamentals."
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