Tesla (NASDAQ:TSLA) stock wafted 17% on Monday thanks to a settlement between the Securities and Exchange Commission and Tesla CEO Elon Musk. But the news — for many reasons — isn’t as good as the gains in Tesla stock suggest. For one, TSLA plunged 14% on Friday, after the SEC announced its lawsuit against Musk. Monday’s seemingly bad gains get shares of Tesla Inc back to … about a dollar higher than it was on Thursday. Monday’s move seems like the textbook definition of a “relief rally” — but it’s hardly a sign that the worst is over for Elon Musk & Co.
Secondly, the market’s attention now moves to third-quarter earnings. It appears that, continuing a multi-year trend, Musk has overpromised. Tesla was supposed to have ramped Model 3 production to profitable levels. However, sympathetic leaks, another end-of-quarter rush (similar to that made to hit the 5,000 per week target at the end of Q2), and financial engineering may not get the company there. It would leave the company needing a capital raise that observers long have argued will happen, and that Musk has insisted will not.
More broadly, the story here isn’t over — not by a long shot. Musk may have settled with the SEC but investors will have their say in the coming quarters.
Is the SEC Settlement a Boon for Tesla?
From a short-term standpoint, the SEC settlement admittedly is good news for Tesla – and for TSLA stock. A drawn-out process would no doubt hang over Tesla stock. Tesla would have had trouble raising capital — should it need to — with its CEO under SEC and potentially DoJ (Department of Justice) investigation.
But taking a step back, it’s worth considering what actually happened here. Musk, at best, stretched the truth. Perhaps not with the infamous “funding secured” tweet (some bulls have questioned the definition of “secured”), but with the claim that the “only reason why this is not certain is that it’s contingent on a shareholder vote.” And the CEO recklessly put his company, and his shareholders, at risk with that claim.
Bulls have defended Musk for various reasons, including ruminating on whether Tesla’s good outweighs Musk’s error; claiming the SEC is in league with short sellers … seriously; and believing Musk’s statements didn’t really count (although Tesla as a company has noted in filings that Musk’s account is part of the company’s official communications apparatus).
Tesla’s $40 million fine (half paid by Musk and half paid by Tesla, i.e., TSLA shareholders) suggests that even Tesla realizes that’s the case. And the requirement to add two directors and remove Musk from his chairmanship shows that the SEC does not want that situation repeating.
What it leaves Tesla shareholders with, however, is a CEO who is so reckless as to have the federal government monitor his communications. And for all the hype about Tesla’s potential, that CEO has to lead a company doing the very difficult, very mundane, and very technical work of building quality cars. I wouldn’t want a CEO who needs metaphorical babysitters running that type of business.
Tesla’s Q3 Earnings
Meanwhile, Musk went and violated the spirit, if not the letter, of his agreement the very next day. On Sunday, he wrote an email to employees — the majority of whom are shareholders — saying the company was “very close to achieving profitability.” (Worth noting: the company raced to put that email in an 8-K filed with the SEC, a noted change from previous disclosures.)
On Monday, EV website Electrek reported that the company had produced about 80,000 cars in the quarter — with an estimate of 53,000 Model 3s. Electrek appears to be a favored outlet for Tesla and a logical place to “leak” good news.
The question is whether even that good news will be good enough. After all, on both counts, Tesla appears to have again missed Musk’s guidance from just three months ago, on the Q2 conference call. At the time, Musk cited a production target of 7,000 a week, but even the Electrek numbers suggest a pace closer to 6,000. And Tesla long has maintained it would be “sustainably profitable” by Q3 — not “very close”, as the memo put it.
Even that “very close” seems to rely on a series of efforts to manage the quarter. Tesla laid off employees. It asked suppliers for cash back, according to the Wall Street Journal. And while Q3 production looks strong, deliveries appear to be a nightmare. And Twitter (NYSE:TWTR), among many other outlets, is full of stories about lost VINs, poorly constructed vehicles, and poor service.
Where TSLA Stock Goes From Here
To Tesla bulls, all of the above is just noise (or FUD to the more conspiracy-minded). Tesla is disrupting the global automotive industry, after all. To make an omelet, one has to break a few eggs — and the initial missteps are just those metaphorical eggs.
From here, the problem remains that Tesla hasn’t proven anything yet. It hasn’t proven that it’s sustainably profitable. The $35,000 Model 3 appears to be nothing more than a memory at this point. Musk has shown that he can’t be trusted. In all, myriad questions remain.
Does Tesla really not need capital? How will it raise it, with pretty much all of its assets pledged to secure existing debt? How bad is the performance at SolarCity? Where are the supposedly transformative roof tiles?
Why is Musk citing an extreme shortage of car carrier trailers when the industry itself sees no such shortage? How are the trailers that Musk is building supposed to be vetted by regulators in the amount of time needed to manage the supposed Q3 delivery crunch? Why is Tesla offering free charging and dropping its reservation system if it has 420,000 Model 3 deposit holders and is producing 53,000 (per Electrek) Model 3s this quarter?
All those questions — and then some — need to be answered, and they likely will be over the next couple of quarters. To go long Tesla stock here, even after the SEC settlement, requires that investors trust Musk to have the answers. I see no reason why any investor should trust him. I’d keep that in mind when considering Tesla stock at $300-plus.
As of this writing, Vince Martin has an out-of-the-money bearish option positions in Tesla, and no positions in any other securities mentioned.
