When most investors think of Tesla (NASDAQ:TSLA), they immediately think of Elon Musk. There are not many companies that have a CEO whose name is so directly related to the company which they are running. This can pose several issues, including what has recently happened to Elon Musk.
First, Musk received much criticism from investors about his interview with Jim Rogan show Musk smoking marijuana. While legal in the state of California, it led to questions about his wisdom in doing so as the CEO of a major corporation. When this happened on September 6th, 2018, the price of TSLA closed at $280.95, the next morning the price opened at $260.26, a drop of more than $20. Something that seemed like a small thing at the time caused investors to question what might happen in the future.
Second, on September 29, 2018, the SEC (Securities and Exchange Commission) settled the fraud charges they brought against him the week prior. The SEC brought a complaint against him when he tweeted back on August 7, 2018 that he would be able to take Tesla private at $420 per share, which was significantly higher than the opening price of $343.84 on the morning of the tweet. The SEC felt that Elon Musk knew about the uncertainty of the potential transaction and that it had not been properly disclosed prior to the tweet. Because of what he said, it caused the price of Tesla to jump more than 6% and led to a disruption in the markets.
In the settlement, Musk agreed to step down as the chairman of the board as well as pay $20 million dollars in penalties. In addition, Tesla will appoint two new independent directors to the board, establish a committee of independent directors to oversee Musk’s communications, plus Tesla will pay an additional $20 million dollars in penalties.
So, with all this “excitement” surrounding Tesla and Musk recently, what does it mean for the company? Will Tesla be able to recover, or will we see prices drop even more as a result? This could be an opportunity to purchase Tesla at a lower price, or it could be time to short Tesla as it continues to move down. Time will tell, but for now we need to look at what the price is telling us.
Tesla hit a high of $389.61 back on September 18, 2017 and once again moved close to that ($387.46) the day Elon Musk released his Tweet. Since then, price has been unstable and gapping up and down as news of what was going to happen with the SEC was released. On October 8th, 2018 (2 months after the Tweet) the price of Tesla closed at $249.00.This means price dropped about 35% in those 2 months. So, does this mean it’s time to buy Tesla? Well, there are analyst who are looking at the current price range as buying opportunities, but, if you are looking to buy, make sure you are watching what the price is actually doing. Buying as price is dropping is usually not the best idea. While Tesla looks tempting at this price level, you will want to see some price confirmation before getting too aggressive in buying.
The third thing we need to mention is the issue they are currently going through with the amount of debt they are trying to repay. During the next 6 months, Tesla is going to be paying of about $1 billion back to their creditors. While this is not a problem for a company that has the cash, for Tesla, this is an issue because they don’t have it. They will need to find a way to raise this money in order to stay current with their payments. In addition to this short-term debt issue, Tesla still has $11 billion in longer term debt that they will need to pay back. We know companies have debt, the problem is we have yet to see Tesla turn a profit. With no profit and big debt there could be some issues coming up down the road.
Currently we see that Tesla looks to be sitting near an area of support, and as of October 16, 2018 is beginning to show a bounce higher and currently trading at $271.20. Just keep an eye on these recent lows in case we get more news which could push prices back down below these areas of support. A break of the current price level could push prices down into the low $200’s or even lower. On the other hand, if positive new emerges, this area would be a reasonable place to see prices bounce up off of and move higher.
Elon Musk is the heart of Tesla and his commitment and desire to see it succeed is very strong. In addition to the technical aspect of Tesla, we will want to see what happens in the future with earnings and profitability. Up to this point, there has just been talk about when Tesla will be profitable, which we haven't seen quite yet. When they do turn a profit, that is when we could really see another strong rally up. Until then, use caution and make sure you use the appropriate amount of risk, looking to enter as price confirms the move higher.