Musk-SEC 'boxing match' is the last thing Tesla investors need

Tesla shares dropped in Tuesday’s pre-market after the US Securities and Exchange Commission asked a judge to hold Elon Musk in contempt for violating a settlement agreement.

The stock is falling about 3%, as analysts say that regulators might come down hard on Musk, given the settlement is less than five months old, and in light of Musk’s disparaging comments about the SEC. For his part, Musk isn’t changing tack, tweeting on Tuesday morning that “something is broken with SEC oversight”.

With concerns mounting about the strength of Tesla’s demand and profit margins, and a debt payment milestone also hanging over the stock, the latest regulatory tussle comes at an inopportune time for Tesla investors. Analysts expect the overhang to remain.

Here’s what analysts had to say on the latest SEC action.

Wedbush, Daniel Ives

“Another boxing match with the SEC is the last thing investors wanted to see last night as Tesla is already in such a pivotal period with Musk & Co. trying to ramp up Model 3 production/demand for China/Europe, and thread the needle to profitability with roughly $1.5bn of debt to be paid this year.

“While the jury is still out around the direction this SEC court action could have on Musk’s activities going forward, it will be a near-term overhang on shares until investors can better gauge the impact.

“Right now for Tesla (and investors) the demand story for Model 3 in Europe and ramping in China remains the major task at hand for first half 2019 success, with our view that the company can successfully transition from a production story to a demand story in 2019 despite the speed bumps and growing noise on the horizon.”

Rates outperform, price target $390.

RBC, Joseph Spak

“Given that the SEC arguably let Musk off lightly for his first settlement, and given that he has taunted the SEC (see the 60 Minutes interview [December 9, 2018] during which he stated, ‘I don’t respect the SEC’), we believe the SEC will seek a harsher penalty/settlement.

“However, the fact that he issued a follow-up, correcting tweet (written with Tesla’s securities counsel, which itself implies that counsel may have thought the first tweet inaccurate or problematic) may take the harshest potential outcome off the table.

“Once again, we are reminded of the seemingly inadequate corporate governance at Tesla in this regard,” and the SEC’s action could further pressure the board “to rein in and control Musk”.

Rates underperform.

Evercore ISI, Arndt Ellinghorst

“It’s certainly unhelpful that Musk expressed his contempt for the SEC last year by saying, ‘I want to be clear, I do not respect the SEC. I do not respect them'.

“While growth may continue with increased China focus and the Model Y reveal, the launch of [a] very competitive VW electric vehicle product will more likely take away some of the exclusiveness of the Tesla valuation multiple which we see as the largest headwind for the equity story.”

Rates in line.

Cowen, Jeffrey Osborne

Tesla’s business challenges don’t hinge on any legal action.

Carmaker’s “major risks” include fundamental valuation, high growth multiple, cash needs; “we don’t think Tesla needed this additional distraction to underperform.”

Lineup issues include Model S and Model X starting to face luxury-segment competition from European producers, Model 3 seeming to have “largely exhausted the customer base” in the US for more expensive versions, with lack of infrastructure and tariffs hampering rollouts in Europe and China.

The $920m in convertible bonds coming due March 1 are unlikely to convert given current share price vs strike price of $359.87.

Rates Tesla underperform, price target $200.

Loup Ventures, Gene Munster

“Musk’s behaviour remains careless. In this case, the tweet wasn’t as careless as the disrespect for the process he agreed to in the October settlement.

“He should expect to be under an unforgiving microscope not only because of his prior settlement with the SEC, but also because he publicly stated he didn’t respect the organisation after the settlement.

“Given the stock is down ~5% in the after hours, it seems investors still view Musk as a net positive as part of the company, although we expect the debate [over] whether Tesla is better off without Musk will return.”

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