Over the past week, we’ve seen a ton of discussion about how far Tesla (NASDAQ:TSLA) stock could realistically fall. This was set off following two major investment banks setting extremely low “bear case” price targets for TSLA stock. Morgan Stanley cut its low-end target to $10, and Citi wasn’t far behind with its $36 outlook. The shares closed down Thursday at $188.22.
It seems that a large portion of the investing community doesn’t view these as serious concerns. Bank analysts can certainly make a name for themselves with outlandish calls. Say that TSLA stock could go to $30 or whatever, and the media will give you a ton of attention. But they don’t really think TSLA stock could crash that far, do they?
In Defense Of TSLA Stock
Two InvestorPlace authors have suggested that these bear case scenarios are quite unrealistic. Luke Lango focused on the outlook for EV demand when late last week he wrote that “Although a case could be made for a TSLA stock price below $50, it’s an unlikely scenario.” While the American market has stalled out, he’s certainly right that this demand can return in a hurry.
Meanwhile, Tesla’s low international sales may well be due to logistical issues rather than a fundamental lack of buying interest. Lango suggests that while there is a “very very slim chance that the doomsday scenario plays out.” that in all likelihood the bullish case will prevail and TSLA stock will return to $300.
Meanwhile, in an article headlined, “No One Really Believes That Tesla Stock Is Going to $0,” Wayne Duggan said that the company’s shares “will always have value” even if they continue dropping in the short run. Duggan wrote that: “Elon Musk is so beloved and is such a good marketer that he will likely always be able to raise more money. In addition, Musk could also take Tesla private (for real this time) at the right price.” He rightly states that Musk won’t stand by idly while TSLA stock keeps careening lower.
It’s Not Up To Musk Anymore
These are reassuring arguments for TSLA stock bulls. However, I’d argue that there still is a scenario where TSLA stock plummets to $100 or even farther. The first thing to consider is that Elon Musk is losing control of the situation. Ever since the funding secured tweet, Musk has lost credibility with the market. It’s no coincidence that TSLA stock has been trending lower since then.
Musk is increasingly constrained in what he can do to defend Tesla’s share price. For one thing, the SEC has made it harder for him to be a cheerleader for TSLA stock on Twitter. He’s taken to other measures, such as sending optimistic emails which have been leaked to the public. But even these seem to be losing their impact on TSLA stock.
Meanwhile, Musk appears to have a growing liquidity problem. Musk is a major shareholder in TSLA stock. And he has borrowed heavily against his Tesla holdings. This puts him at risk of a margin call.
A recent Realmoney article noted several worrying facts about Musk’s financial situation. For one, he has something like $1 billion on TSLA stock on borrowed money. He has started showing signs of financial stress, such as mortgaging his real estate holdings. This has led to speculation that Musk is near the point where he has to put up more money or have his TSLA stock sold. Additionally, influential NYU professor Scott Galloway suggested this week that Musk may become a forced TSLA stock seller if the price drops farther. Numerous companies in the past, such as Chesapeake Energy (NYSE:CHK) have seen their stocks collapse after their CEOs were forced to dump their shares to cover margin calls.
Tesla’s Troublesome Financial Situation
Another key point is to distinguish between the value of a brand and of a stock. I agree with Duggan that Tesla’s brand will always have value. Musk has done a great job marketing the Tesla image. But that doesn’t necessarily mean that TSLA stock will retain value.
Keep in mind that creditors always get paid first. At this time, Tesla has roughly $16 billion in debt. That’s not all. It also owes more than $11 billion to Panasonic in the form of purchase commitments for battery cells. Realistically, this means that in a scenario where Tesla was sold to the highest bidder, it could fetch as much as $30 billion and leave next to nothing for stockholders. Every dime that would be raised from selling Tesla’s brand, hard assets, and so on goes to the creditors until they are fully paid off.
Tesla’s bonds are in a downward spiral, and just hit fresh all-time lows. Meanwhile, the SolarCity bonds that it took on in the merger are now yielding a jaw-dropping 18%. The market clearly thinks there is a good chance that Tesla reneges on its SolarCity obligations and a reasonable chance that the company as a whole goes bust.
With the company burning mountains of cash and not having much in the treasury, it’s a real question where they will get cash to keep funding operations in the short run. The credit market is closed to Tesla. And issuing stock to raise money gets increasingly painful as the share price keeps tanking. Tesla is in a downward spiral, and if it doesn’t pull out soon, the plunging share price by itself can help trigger other regrettable events for the company.
TSLA Stock Verdict
On social media, I see a lot of people touting that they’re buying more TSLA stock, averaging down, going on margin and so on. There’s this high level of confidence that Tesla stock will bounce back, and like the other InvestorPlace writers demonstrated, there is decent reason to think TSLA stock can recover. I’d also add that when short interest is this high, it creates an idea situation for a stock to bounce back.
But there’s no guarantee that TSLA stock will stop dropping. Musk has lost control of the situation. The company is short on cash and the losses will continue for at least a few more quarters. This creates a highly volatile situation where things can spiral downward far faster than anyone would expect.
The bear case scenarios of $10 or $36 for Tesla stock may not be likely to play out in 2019. But they’re far from impossible. If you have a major investment in TSLA stock, you need to think about risk management and prepare for a situation in which TSLA stock continues to dive.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
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