An institutional investor with a $164 million stake in Tesla (TSLA), held through 158,000 of the electric car manufacturer’s Nasdaq-listed shares, has publically pleaded with CEO Elon Musk to re-think his move to privatise the company. Representatives of ARK Investment Management, the investor in question, have urged the reassessment through an open letter to Musk, on the grounds that they believe that Tesla’s stock price has the potential to reach $4000 within 5 years. On that basis, ARK argues that Musk’s stated intent to take the company private at a valuation of $420 a share (investors can currently buy Tesla shares (TSLA) at $320 a share), significantly undervalues the company.
Why Does Musk Want to Take Tesla Private?
Elon Musk has grown frustrated in recent months with what he considers the short-termism of capital markets. The entrepreneur, who first rose to prominence as co-founder of the online payments platform PayPal, has never quite fitted the mould of a Wall Street CEO. Breaking that mould has been a huge part of his success in managing to sell his grand vision for Tesla to investors and achieving a capitalisation and resources far beyond what the company’s revenue would suggest should be possible.
Tesla’s lofty valuation, higher than both traditional auto manufacturers Ford and GM with a fraction of their revenues and none of their profits, has been achieved to a large extent through the force of Musk’s personality and his ability to sell a long-term vision. However, despite the fact that the Tesla stock price (TSLA) has for years marched to a different tune than that of companies many analysts argue should be considered its peers (auto manufacturers rather than tech companies), capital markets still have their demands. Patience with Tesla continuingly missing Musk’s usually overambitious targets and timelines, and the amount of cash the company burns through, has recently grown thin. Tensions recently surfaced when Musk refused to answer fairly standard financial questions put to him by an analyst at a recent quarterly earnings report, dismissing them as ‘boring’.
While subsequently apologising for what Wall Street media described as a ‘meltdown’, the event seems to have crystallised Musk’s growing suspicion that being a public company might not be the most conducive way for Tesla to reach its goals. Capital markets demand quarterly improvement in specific growth metrics and Musk’s argument for taking the company private is that this creates a short-term mentality that is hindering achieving longer term ambitions.
The Argument Against Tesla (TSLA) Going Private
ARK’s representatives argue that being a public company provides Tesla with more advantages than disadvantages. The public letter signed by the investment firm’s founder and chief executive, Cathie Wood lists these as:
- More ‘rapid’ ability to capitalise on competitive advantages – argued as key to network effects and natural geographic monopolies that will characterise autonomous taxi and truck networks.
- Increased public profile – argued as key to launching an autonomous taxi network.
The investor also believes that the proposed buy-back of Tesla (TSLA) stock at $420, with a $100 a share premium on current price, denies investors who have backed the company the opportunity of realising huge future returns. The ambitious $4000 a share target ARK argues Tesla can achieve within 5 years, is built on the high-margin future business model of Tesla offering driverless taxi and truck services.
At present, it appears unlikely that Trump will be swayed. It has been reported that he has already hired Morgan Stanley to manage the reprivatisation process of Tesla. Doubts remain around Musk’s ability to raise the huge amount of capital required to delist Tesla, and also to provide the growth capital it will subsequently require, but he has himself stated that he has the funds in place. Saudi Arabia’s sovereign wealth fund is mooted as the likely lead investor.
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