Tesla’s stock price plummeted on Friday morning following the SEC’s lawsuit against Elon Musk for allegedly misleading investors.
On August 7, Musk announced via Twitter that he had secured the funding to take Tesla private at a price of $420 per share. Generally, when a company announces a buyout price, stocks tend to reflect that valuation as investors anticipate the completion of the deal.
Nevertheless, many investors were skeptical of Musk’s claims, leading to Tesla’s stock not reaching the $420 price point. It peaked at $387.46 on August 7 but has been in decline since then.
The skepticism was justified: According to the SEC, Musk never secured the necessary funding and ultimately dropped the privatization plan three weeks after the initial tweet.
Following the announcement, the stock fell to as low as $265 after hours on Thursday, marking a 14% decrease from Tesla’s closing price. Including this drop, the stock has declined over 29% since Musk’s controversial tweet.
The dwindling price of Tesla (TSLA) may pose significant challenges for the company. Tesla is rapidly depleting its cash reserves to finance costly factories and vehicles, and it needs sufficient funds to repay about $1 billion in debt by February 2019. If the stock price remains above $360, most of that debt could convert to stock—something that now seems increasingly unlikely.
If Tesla has to repay its debt in cash and lacks the liquidity to do so, the company might resort to raising funds through additional debt or equity issuance. However, this could lead to a further decline in its stock value, which would negatively impact the capital available for investment in new infrastructure for vehicle production.
Musk has insisted that the company is not facing a liquidity crisis, claiming that strong Model 3 sales will generate enough revenue to ensure Tesla’s profitability in the latter half of 2018.
However, the SEC’s lawsuit may introduce additional complications for Tesla.
The agency is requesting a federal court to bar Musk from holding any officer or director position at a public company, among other potential penalties.
This is a major concern for Tesla, the company Musk has built from the ground up into a multibillion-dollar enterprise, where he serves as both chairman and CEO.
CNNMoney (New York) First published September 27, 2018: 5:52 PM ET
