Elon Musk, the celebrity CEO of electric vehicle manufacturer Tesla (NASDAQ:TSLA), is in big trouble with the SEC. On Thursday, Sept. 27, the SEC filed a lawsuit against Musk regarding his now infamous “funding secured” tweet. In the suit, the SEC claims that Musk manipulated the Tesla stock price based on false and misleading statements, and the SEC claims that those statements caused Tesla’s stock price to pop, and then drop, in dramatic fashion.
As part of the penalty, the SEC is seeking to ban Musk from being able to hold officer or director positions at Tesla or any other publicly-traded company. Shares of the electric-vehicle dropped more than 10% on the news.
There are a lot of questions regarding this suit, and a lot of noise surrounding Tesla stock. But, investors would be wise to shut out the noise and focus on three questions when considering whether to buy Tesla stock:
- Will Elon Musk remain with the company, and in what capacity?
- How does this affect Tesla stock today and in the near-term?
- How does this affect Tesla stock in the long-term?
Put simply, the answers to those questions are as follows:
- Elon Musk will likely remain CEO of Tesla.
- Tesla stock will be negatively impacted in the near-term.
- Tesla stock’s long-term growth narrative remains unchanged.
Broadly speaking, the investment takeaway from the SEC lawsuit is simple. The lawsuit makes Tesla stock “un-investable” in the near-term, but sharp drops in TSLA toward $250 or lower should be viewed as medium-to-long-term buying opportunities because the fundamentals are gradually, and substantially, improving.
Elon Musk Will Remain CEO
Despite the big drop in Tesla stock and the plethora of negative headlines, the SEC lawsuit will ultimately turn out to be much ado about nothing.
Why is it much ado about nothing? Because the SEC lawsuit has absolutely nothing to do with the fundamentals. The lawsuit isn’t even against Tesla. It is against Musk. All it says is that he tried to manipulate the stock price, supposedly to burn short sellers. But, those short sellers didn’t get burned, because very few shorts actually covered their positions after the tweet.
Long story short, Musk made a mistake with the tweet. Now, he is paying the price. And, that price likely won’t be that big considering the lack of realized damages that occurred as a result of the tweet.
In all likelihood, the lawsuit will be settled by Musk out of court. It will cost him some money, last no longer than six to twelve months, and will ultimately have little bearing on the stock long term.
Tesla Stock Will Take a Near-Term Hit
Tesla stock is already down 10% on the news. Investors should expect this weakness to persist until technical support provides a bottom, or the next catalyst reverses sentiment.
The SEC lawsuit provides a big hit to investor sentiment. Sentiment has swung from neutral to bearish, and investors will likely adopt the “sell first, ask questions later” mantra. This selling could accelerate quickly considering the amount of unknowns in the lawsuit. As such, Tesla’s 10% drop could very well turn into a 15%-20% drop when all is said and done.
Because the next catalyst doesn’t arrive until next week, and the technicals don’t imply a bottom until $250, Tesla stock could be a “look out below” situation for the next few trading days.
Expect a Bounce Back In October
As stated earlier, the SEC lawsuit has nothing to do with fundamentals.
It has nothing to do with how many Model 3 vehicles were produced and delivered last quarter, or how many will be produced and delivered next quarter. It has nothing to do with the company’s automotive gross margins, overall profitability or cash flows. And, it has nothing to do with capital constraints, because again, the suits are against Musk, not Tesla.
Ultimately, stocks trade based on fundamentals, not optics or sentiment. The fundamentals on Tesla are actually improving, as the company continues to improve Model 3 production and delivery rates. So long as Q3 delivery numbers in early October are good, and Q3 earnings in early November point to gross margin improvement, Tesla stock should be able to bounce back from this sell-off and the end the year on a high note.
Bottom Line on TSLA
Don’t touch TSLA stock now. The market will adopt a “sell first, ask questions later” mantra that will weigh on Tesla stock until a fundamental catalyst gives the market a reason not to sell. That fundamental catalyst will likely arrive in early October, at which point, this stock could sharply reverse course.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities but may initiate a long position in TSLA over the next 72 hours.