Some companies just seem to attract headlines, good or bad. Tesla (TSLA), as an innovative, unorthodox company that inspires love and loathing in almost equal proportions, is one of such company. Oftentimes, the headlines are distortions of a story, such as earlier this year when an analyst laid out a beat and worst case for the stock. The worst case, a collapse to $10, was reported as if it were a prediction. I get the same feeling with this morning’s Tesla related news, that a group of shareholders are suing the company over the buyout of Solar City in 2016.
It is not that the story isn’t true; the court unsealed the documents yesterday, so the lawsuit is very real. It’s just that it is being reported as if it is something unusual and sensational when it really isn’t. Take a look at the Reuters or Bloomberg news feed for a company whenever there is a buyout or merger and you will always see stories of such suits.
I understand that the fact that Solar City was cofounded by Tesla CEO Elon Musk’s cousin gives the appearance of something untoward, but, as Tesla has pointed out, the decision went to a vote of the shareholders at the time and was approved. Unless there is substantial evidence that the company misled shareholders regarding the facts of the purchase, therefore, it is hard to see how the suit can be successful.
Success in court, however, is not always the aim of a lawsuit like this. Most are settled, with the company happy to just make it go away and the lawyers are usually in favor of accepting a big pay day. Something about the character of Elon Musk makes me think that that may not be the case here, so a long, drawn out fight is possible. Even with that in mind though, history suggests that the news should do nothing to deter investors from holding or even buying Tesla stock on any dip that results.
As I said, sensational headlines hinting at doom and gloom are nothing new to Tesla. They appear all the time, but while the stock frequently takes a short-term hit, it tends to bounce back quite quickly. There seem to be buyers at all levels, motivated by the company’s long-term outlook.
The real question is whether that long-term optimism is justified or not, and the answer seems to be yes, it is.
The bear case against TSLA, like everything to do with the company, receives a lot of press, so is probably known to you. The main thrust of it is that they simply don’t make any money, but in some ways, that is a problem because of poor expectation management more than anything.
Musk, ever the optimist, keeps suggesting that they will be very profitable very soon, and the actual results keep disappointing the market. But when you consider where they are in their development, what they are trying to achieve, and how much of a problem negative EPS is for them at this stage, it is no wonder that the stock bounces on the dips that follow the disappointment.
One of the things that often gets overlooked is that Tesla, unlike any other car company, is basically in the process of building out its own infrastructure. Can you imagine what a struggle it would have been for Ford (F) if, in their early days, they had to build gas stations so that their cars could be refueled? That is an absurd notion, but it is the situation faced by Tesla as they expend valuable resources building a network of superchargers for their customers.
However, that expenditure will drop over time in dollar terms, and is already dropping as a percentage of revenue and cash flow. That is because revenue continues to increase at an impressive rate. Total revenue grew by 82.5% from 2017 to 2018, and by 58.7% YoY last quarter. That has led to positive free cash flow, another plus for the stock’s long-term outlook.
A company that bought another company being sued is neither new nor unique to Tesla, no matter how dramatic and extensive the coverage of this lawsuit. It has the potential to be a nuisance for sure, but Tesla still produces a fantastic, and very popular, line of cars that are driving sales ever higher. As long as that continues, there will still be no shortage of buyers of the stock on dips such as will probably see today. Joining them may be a good idea.
Correction: The article originally referred to Elon Musk as founder of Tesla; this has been changed to say that he is the CEO of Tesla.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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