Tesla backflip dents Musk credibility, say analysts

Tesla shares slipped and analysts pondered the damage to Elon Musk after he dropped plans to take the carmaker private.

Tesla’s production efforts have taken a personal toll on Elon Musk. Pic: AFP

It’s back to “manufacturing hell” for Elon Musk.

Now that Mr Musk has squashed efforts to take Tesla private, the spotlight will turn back to the automaker’s operational challenges, namely whether it can maintain its gruelling production pace for the Model 3 to meet customer demand and generate cash to stave off fundraising.

Tesla’s shares fell 1.1 per cent to $US319.27 as investors digested the 17-day drama that began on August 7 with a shocking tweet from Mr Musk saying he was considering taking the company private at $US420 a share.

As details emerged, however, it became clear that a deal was far from finalised as he and Tesla directors raced to put in place financial and legal teams required to put one in place.

Mr Musk pulled the plug on the suggestion last week in a meeting with his board at the automaker’s Fremont, California, factory, and then announced the decision on Saturday (AEST) after the market closed. Staying public means Mr Musk will need to continue answering to shareholders about periodic goals, while fending off investors who are shorting the company’s stock.

Analysts were quick to question Mr Musk’s credibility and Tesla’s financial prospects now that the automaker isn’t tapping investors for more money.

“His credibility has taken a hit — there’s no question about it,” Gene Munster, managing partner at investment and research firm Loup Ventures, said. “The more important question is: will it recover?”

Ryan Brinkman at JP Morgan had already cut his estimate for Tesla’s share price to $US195 a share ahead of Mr Musk’s announcement on the revelations that a deal wasn’t as close to completion as it initially appeared.

Following Saturday’s announcement, Philippe Houchois, an analyst for Jefferies, warned clients to expect a hit to shares overnight, noting “more erratic corporate behaviour” by Tesla.

“We wonder if the ‘going private’ tweet has effectively put Tesla in play and may lead to additional discussions with other investors, mainly corporates, that value Tesla’s vision and can help bridge gaps in growth and execution skills,” he wrote in a note.

Among those who are scrutinising Mr Musk’s August 7 tweets are the Securities and Exchange Commission, which is examining Mr Musk’s claim to have “funding secured” for a deal.

Some analysts and investors were sanguine about Tesla’s decision to stay public. ARK Invest, a Tesla shareholder, said it was “delighted” because it believes Tesla’s stock could be worth far more as a public company.

“We are not surprised that the bid failed, as there were many hurdles to leap,” Efraim Levy, an analyst for CFRA Research, said in a note. “We believe that there are more benefits for (Tesla) by staying public than by going private and adding additional debt to a leveraged balance sheet.”

In his late night posting on Saturday (AEST), Mr Musk noted the distraction that proposal had become, something unwelcome as he tries to focus the company on building the Model 3.

“I knew the process of going private would be challenging, but it’s clear that it would be even more time-consuming and distracting than initially anticipated,” Mr. Musk wrote. “This is a problem because we absolutely must stay focused on ramping Model 3 and becoming profitable.”

For months, Tesla struggled to reach its much-delayed goal of making 5000 Model 3s in a single week, finally meeting the milestone at the end of June. But Tesla had to build a general assembly line under a tent outside the factory to do it, and the grind included Tesla employees to work overtime and on the weekends, with Mr Musk sleeping in the factory.

The struggle also ate away at Tesla’s limited cash, fanning concerns about the company’s finances. Some suppliers have worried about Tesla’s financial strength and about getting paid, The Wall Street Journal recently reported.

A Tesla showroom in New York. Pic: AFP

Mr Musk has repeated that Tesla is on track to generate cash this quarter and turn a profit. Tesla’s cash and cash equivalents fell to $US1.69 billion as of August 12 from $US2.24 billion on June 30, according to internal records reviewed by the Journal.

The drop was largely because it repaid $US500 million of a revolving credit line in July. Tesla plans to tap that same amount again later this quarter, according to the records. That, plus additional cash flow that Tesla anticipates from an increase in vehicle deliveries in the second half of the quarter, is expected to leave it with several hundred million dollars more in cash at the end of September compared with three months earlier, according to the records.

On Friday, board members, in a statement, expressed support for the Mr Musk, who has admitted that the pace to ramp up Model 3 production took a personal toll. He indicated last year it would be a difficult process, warning of a coming “manufacturing hell” but has said he didn’t expect it to be this hard.

Part of the problems have revolved around Mr Musk’s desire to rely on automation at the assembly factory, an effort he admitted was a mistake because it overly complicated the effort.

Tesla’s next test: Mr. Musk set a goal to increase its Model 3 output to 6000 vehicles a week by late August. The automaker has one week to go.

Dow Jones Newswires