In this segment from MarketFoolery, host Chris Hill is joined by analysts David Kretzmann and Aaron Bush to discuss their first reactions to Elon Musk's remarkable Twitter revelation that he is considering taking Tesla (NASDAQ:TSLA) private, with funding secured.
Is it a joke? Apparently not. Is it going to happen? Unclear. Is it going to get Musk in hot water with the Securities and Exchange Commission? Possibly. But for a CEO who wants to play the long game, getting away from the short-term thinking of Wall Street isn't a bad idea.
A full transcript follows the video.
This video was recorded on Aug. 8, 2018.
Chris Hill: For those who may have missed it, Elon Musk went on Twitter on Tuesday afternoon and posted a tweet saying that he was thinking about taking the company private. At a market cap of $420 billion --
David Kretzmann: Funding secured.
Hill: Funding secured. That's the direct quote. Funding secured.
Aaron Bush: $420 a share, not a market cap of $420 billion.
Hill: Oh. Thank you. Phew. See? This is what happens when I drink water in the studio and not coffee. $420 a share.
Kretzmann: We got you.
Hill: At the time, it was trading around $355 per share, something like that.
Kretzmann: Now it's around $370.
Hill: There are a few things to get to here. First, Aaron, I'll start with you. When you saw this yesterday, what was the first thing that you thought? What was your in the moment reaction when you saw that he posted this?
Bush: I thought it was a joke. [laughs]
Kretzmann: A very illegal joke.
Bush: Yeah. This is not really the type of thing that you see many CEOs tweet about. Normally, this is the type of thing that goes through more formal channels. But, Elon's tweet game has been strong lately, so it's not totally surprising. I think it's still a question of how much of this is shenanigans and how much of it can investors really count on. The price isn't $420 now, even though he stated that he would like to take the company private at $420. We're still $50 away from that. So, the market is definitely pricing in a lot of skepticism, which I think is fair.
Hill: David, what was your thought when you saw it?
Kretzmann: The same thing, I wasn't sure if it was serious or a joke. Some people were thinking, the price, $420, it must be a weed joke. I've been delving into cannabis a lot lately, so I appreciated the subtle nuances of that, if it was a joke.
Hill: For any brand-new listeners, he's referring to cannabis stocks that he's been dabbling in. Not that there's anything wrong with ...
Kretzmann: Right. Yes. Thank you for that, Chris, I appreciate it.
Hill: Just wanted to clear that up.
Kretzmann: That's why you are the host! It was also a matter of, like Aaron mentioned, we really haven't seen any executive make an announcement like this on Twitter. And it wasn't even an announcement, it seemed more like speculation or, "Oh, this is a possibility, I'm thinking about it. By the way, we have funding for it."
It moved the stock dramatically. At one point it was up over 10% before shares were halted for 45 minutes or an hour. Then, we started to get more statements from the company. Elon had written a letter to employees, walking through his rationale.
It'll be interesting to see what the SEC does. The idea that a CEO can go on Twitter and make a market-moving announcement like this -- and in this case, burning a lot of people who were selling the stock short, betting against the stock -- the SEC might have some issues with that, particularly if there wasn't actually anything to back up what Elon Musk was saying. The idea that a CEO can just go on Twitter, say something, move the stock 10%, burn the shorts, without having anything to back it up, that's a scary thought.
Bush: Yeah. Funding secured, those two words are powerful. Later in the day, after shares were halted, Tesla came out with a press release, and it said there were no details about funding whatsoever. So, I think it's a big question mark.
Hill: Not that big banks on Wall Street are the only place that companies can secure funding, but, CNBC tweeted out later in the day that they had worked their network of contacts at all the big banks. Every one of the big banks said, "No, it's not us." That's not he hasn't gone elsewhere, potentially, to find this funding.
But I want to go back to the legality you raised, David. This is something that we have seen before. I know there were some people on Twitter saying, "What's the big deal? It's a free public forum, anyone can get it." But we have seen this precedent before, back in 2012, when Reed Hastings went on Facebook and posted material information, essentially sharing his thinking about Facebook. The SEC investigated that, ultimately cleared Hastings, but made it very clear that if CEOs of public companies are going to use social media to share material information, they need to make sure that shareholders know ahead of time that it's coming. So, I think the SEC will probably have some questions about this, and they may end up making the exact same point. Ultimately, saying, "It's fine if you want to go ahead and do this, but you have to give everyone a heads up that you're going to do this."
Kretzmann: Yeah, and that's really what didn't happen. The announcement came on Twitter, and it was a couple of hours later that the letter he had written to employees came out. Then he started to expand on his thoughts on Twitter, replying to different people, going through his thinking. This morning, we got an announcement from a few members of the board saying, "Yeah, Elon had brought this up last week, and now we're looking into it."
Chris, you mentioned, you didn't think all members of the board were on that announcement, which is interesting. Maybe there's a split on the board of directors. I don't know what's going on there. There are still so many question marks here. Like Aaron mentioned, the fact that the stock is still trading at a discount to the $420 potential buyout price shows there's still skepticism that this will actually go through.
Bush: I don't have an issue with news breaking on Twitter. I think it's increasingly going to happen, and probably should be embraced. It was more how casually he went about it, and then shares were halted, then a press release came out. That's just not how it should be done.
Hill: Let's bring it back to the stock. The question we are left with is, how serious do we think he is about taking this company private? Keep in mind, on the most recent earnings conference call, he talked about how profitability is just around the corner, and presumably, everything is going to be sunshine and rainbows after that, at least in terms of the actual money-making part of this business. Do we think he's serious about this?
If so, don't we think he could get to $420? Don't you think there's someone out there who would give him the money to help make this work? And if that's the case -- I realize I'm loading in a couple of ifs here, which is always a dangerous thing, when your investing thesis involves more than one if. If that's the case, why shouldn't I pick up a couple of shares, figuring I'm going to make 10-15% here? How serious do we think he is about this?
Kretzmann: I think he's very serious. I would recommend anyone who hasn't already, take a look at the letter he wrote to employees. Towards the bottom of it, he basically said that he's trying to accomplish an outcome where Tesla can operate at its best, be free of the short-term thinking -- which, let's be frank, so much of the conversation about Tesla is dominated by where they'll be in a week from now, a month from now, a quarter from now. That's probably not the way for Tesla to operate at its best. Obviously, Elon Musk is someone who thinks ultra-long-term compared to virtually every other CEO or leader out there. He also highlighted the fact that SpaceX has been private all these years has been to their benefit, and that operationally, SpaceX is in a much better place than Tesla. He thinks being private is at least some sort of contributor there. I think, going forward, for Tesla to maximize its long-term potential, he sees being private, bringing the company there, making that more likely than remaining public.
I think it's likely. The company has already raised a lot of debt from various providers. They have over $11 billion in net debt. Companies haven't been shy to lend Tesla money up to this point. For a deal of this size, I think you're looking at over $80 billion. You're talking about a substantial load of debt if you're doing some sort of buyout. But I think it's likely. Yesterday, Saudi Arabia invested $2 billion or so into Tesla. I think Elon is the type of person who would be able to convince people to raise that amount of money.
Bush: I think that could be true. I do think that's a lot of money. I do think there's maybe more risk there of not being able to raise all of it, which also could pose issues to what price you get taken private at. I do think it's incredibly important for Elon to continue maintaining the narrative. I think being public has made that very difficult. Through maintaining the narrative, that's how you get better terms for debt, the interest rates and that type of thing.
Going private could ease some of that concern and spark more focus, but I do think there are still big question marks. Even if Tesla were to go private, would it be at the terms that were first thrown out? I'm not convinced that's going to be the case.
Kretzmann: One thing that's also interesting here is, Elon mentioned that if they do indeed go this route of being private, he would want to enable it where people could either sell their shares at whatever premium the buyout happens at -- he thinks it's $420, but I agree with Aaron, that's certainly not a done deal -- but he also wants to enable existing Tesla shareholders to remain shareholders in the private company. That's an interesting twist. If you wanted to, you could hold your Tesla shares. They obviously wouldn't be as liquid. You'd probably be able to sell or buy every six or 12 months. Just something to think about if you're a Tesla shareholder and this does actually play out.