The talk around Tesla (NASDAQ:TSLA) has been — go figure — totally insane, and TSLA stock has been wildly volatile as a result. Here’s a quick recap.
Tesla stock missed on earnings, beat on revenue, and didn’t burn as much cash as analysts had thought. While free-cash outflow of $739 million is alarming, it was below the $889 million outflow that was expected.
Further, management kept its outlook steady, saying it expects GAAP profitability and positive cash flow in Q3 and Q4. On the conference call, CEO Elon Musk was much more poised when answering analysts’ questions.
All seemed fine and normal after the second quarter report. Shares ran higher as the next six months for Tesla should be relatively smooth sailing in terms of cash. TSLA stock had pushed through all of its moving averages and was just below key resistance at $360 as a short squeeze seemed imminent.
Then reports surfaced Tuesday that the Saudi Wealth Fund took a 3-5% stake in Tesla for several billion dollars. This got TSLA stock rallying again. But then Musk tweeted that he may take the company private at $420 per share and added, “funding secure.”
The board seemed caught off guard, and the stock exchange was surely unaware of the impending announcement. While TSLA stock finished the day higher by 11%, it has since given up most of those gains.
So what now?
TSLA Stock Going Private?
For full disclosure, I’m not a securities lawyer, but Musk better have some serious proof about his claims. If not, the SEC could make a case for securities fraud. That said, if the disclosure was factual, then doing so over Twitter (NYSE:TWTR) should not be an issue, legally speaking.
At $420, Tesla has enterprise value of roughly $80 billion. Between Musk and the Saudi fund, that leaves about $60 billion unfunded. Tencent (OTCMKTS:TCEHY) also has a 5% stake. It would then depend on outside investors, current investors and institutions to fund the rest, assuming Musk, Tencent and the Saudi fund aren’t doing it alone.
Keep in mind that both Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Fidelity (NYSE:FIS) are investors in Musk’s other privately held company, SpaceX.
These two could be in on the deal, as could SpaceX, technically speaking. The Saudi Wealth Fund, could easily account for several more billion given its size.
While SoftBank (OTCMKTS:SFTBY) talked with Tesla but did not strike a deal, it has many investments in autonomous driving companies (public and private), as well as numerous ride-hailing investments. I would not rule the company out.
Neither would I discount the Silicon Valley elite. The Google founders have a combined net worth of more than $100 billion — even without Alphabet entering the fray. Simply put, there’s a lot of money on the table here.
So is the deal likely? Who can really say, on the record anyway. One thing I do know is that there’s more than enough money to make it happen. While Tesla isn’t in great financial shape, its path is becoming more clear by the quarter. It’s solving its production issues, has a plan for China and can self-fund most of its operation. At least through the rest of the year.
Trading TSLA Stock
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So should investors buy TSLA stock?
Tesla has many emotional investors from both sides. My stance, as one can check on InvestorPlace, is that I like TSLA stock over $360. Most recently, we said that the must-hold level for Tesla is the $315 to $330 range.
I still find that to be true. Ultimately, it really boils down to whether you think Musk & Co. will have the resources and the backing to pull off such a deal and whether Musk has anything to back up his “funding secured” statement.
I do not have a huge bias one way or the other. While Tesla and Musk have said some, shall we say, irresponsible things in the past, I find it hard to believe he would say such a thing without some form of funding in place.
That said, if part of this is based on keeping retail investors onboard through the privatization process, something Musk said he’d like to see, there could be some hurdles. For one, many retail investors do not meet the requirements of an accredited investor. Should they need to — and short of creating an investment fund — that could remove one source of funding.
If it starts to seem likely that a deal can be made, though, it could fuel a run (and short squeeze) higher.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
