Saudi Arabia has reportedly slashed its exposure to Tesla. Part of the SEC’s complaint against Tesla and Elon Musk last year was related to Musk’s claims that Saudi Arabia was backing him in taking the company private. The SEC fined Tesla and Musk separately for $20 million each in the debacle.
According to the Financial Times, the Saudi Public Investment Fund made a move on January 17th to hedge its investments against expected damage to TSLA stock. They retain their 4.9% holdings in TSLA, but they will not actually lose any money if things go south for TSLA. The arrangement was new and “marks the latest twist in the relationship between Mr Musk and the Saudi state fund overseen by the powerful Crown Prince Mohammed bin Salman.” Elon Musk was quoted by FT as saying via e-mail:
To the best of my knowledge, there has been no communication with PIF for months. I thought they had probably sold their shares. We don’t know if they own any at all.
Shares have already dropped over $50 in the days since the Saudis made their hedge.
Wall Street isn’t thrilled about the prospects of Tesla these days. Elon Musk has reportedly warned of a “very difficult” road ahead for the electric auto manufacturer. The company’s woes have been myriad, with thousands of job cuts and disappointing sales.
The company’s problems are compounded by the “erratic” behavior of Musk himself, who incurred fines for Telsa last year in relation his Twitter activity. Musk purchased an additional $20 million in stock with his personal fortune to offset the fines imposed by the SEC. They charged he had committed securities fraud when he Tweeted he was considering taking Tesla private at $420 per share. He and Tesla were separately fined $20 million. Musk paid his own fine and bought $20 million in stock directly from Tesla.
While Musk is projecting a “tiny profit,” analysts believe the quarter will be reported as a loss on Wednesday. If that weren’t enough, executive departures have increased over the past two years, furtherthe decreasing confidence of investors.
Greenlight Capital went public with concerns about Tesla last year, writing in a letter to shareholders:
In thinking through TSLA more, it brings us back to Lehman, which went bankrupt 10 years ago. […] Lehman threatened short sellers, refused to raise capital (it even bought back stock), and management publicly suggested it would go private. […] There are many parallels to TSLA. In 2013, TSLA was on the brink of failure as customers who had paid deposits weren’t taking delivery of the Model S. TSLA’s cash reserves fell to a dangerously low level and CEO Elon Musk secretly and desperately tried to sell the company to Google. Rather than communicating the truth to shareholders, Mr. Musk bluffed his way through the crisis. There were no regulatory, legal or market consequences for failing to own up to reality. The business survived, and Mr. Musk was celebrated for his successful bluffing.
Greenlight’s David Einhorn more recently characterized the situation with Musk and Tesla as “bizarre.”
There are many ways Tesla could turn things around. They could release more economy-class models and pursue other prospects such as marketing their battery product to other manufacturers. The idea of Tesla going belly-up as Lehmann Brothers did is probably overblown when measured against reality.
Still, other auto manufacturers are aggressively working to eat Tesla’s electric car lunch. Ford, for one, has stepped up its electric vehicle prospects, planning a zero-emissions version of its flagship F-150 vehicle.
Tesla maintains several prospects beyond electric vehicles. However, sales in Europe were down 63% at the beginning of last year and things haven’t improved much. Model 3 sales were down in the US later in the year. The Model 3 is their only economy-class vehicle, the others falling more into the luxury price range.
Expert analysts predict a $2.5 million sum loss for Tesla’s Q1 2019. The company was having a chaotic trading day at time of writing, at one point losing nearly 3% (more than $5 per share).
Around 10AM CST, the stock was as low as $288. By press time, it had rebounded $7. The symbol is performing more like a high-volatility crypto-asset than a veteran auto manufacturer at this point. Later-week trading will probably be more extreme as news of the company’s recent performance saturates.
With a $50 billion market capitalization, the idea of a quick death for Tesla is unlikely. If anything, the company will have to suffer several more quarters without a solid plan for growth to actually recede. Despite being the most nascent of makers in its field, it dominates in some categories and enjoys high customer loyalty. This rather puts the onus on its competitors to punish it than it does on Tesla investors to worry too much.
Charts from TradingView.com.
Elon Musk image from REUTERS/Kyle Grillot.