Tesla Securities Fraud Case – Motion to Dismiss Filed

This is not investment advice. The author has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ethics policy.

Another day, another Tesla (NASDAQ:TSLA) headline. Perhaps unsurprisingly, the company has filed a Motion to Dismiss against the lawsuit alleging securities fraud against it. Part of the difficulty is the somewhat… unclear messaging that has emanated from the company historically and this is where things may become slightly tricky to judge.

Let’s rewind a bit. Last October, several lawsuits were filed against Tesla seeking classification as a class action which would allow a mass grouping together of shareholders unhappy with what they perceive as misleading information being given that influenced their decision making process on whether or not to invest in Tesla. The lawsuits generally cited a Wall Street Journal piece (paywall) which cited numerous unnamed sources within Tesla saying the problem was that large parts of the Model 3 were still being built by hand, rather than machine assembly lines.

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The Model 3, lest anyone forget is the saviour car for Tesla’s bottom line. The company has been burning cash over the years (still yet to turn a profit other than once from selling emissions tokens, never from actually producing a vehicle) and is still heavily subsidised by governments around the world. Its share price has still soared and given short sellers (investors who bet against a company by selling stock they don’t own) a nightmare position because even though the fundamentals of the company are terrible, the stock price has kept on rising, particularly if you look at the period from the end of 2016 until the weekend I wrote my piece questioning whether the Tesla short play was finally about to start paying off in June 2017 (here).

Car? Very nice. Financials? Not so nice...

Since then however, fortunes have been mixed. Tesla’s stock hasn’t exactly fallen through the floor, but at the same time it really wasn’t generating the kinds of returns investors expected it to given that the Model 3 was promised to be the breakout car which would turn the fortunes of the company around and allow it to start printing money from customers rather than from investors going from a peak of $389.61 to the current $278.85.

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FactSet recently published an interesting list of companies with a market cap of more than $5 billion that Wall Street is most confused about. It’s a somewhat scientific ranking comparing the price targets of analysts for these companies and Tesla is in 3rd place with a mean price target of $312.72 (not terribly far away from its current price and certainly well below its highest), but the important piece is that price target comes in with a stonking 32.3% coefficient of variation, which is effectively a method of calculating the dispersion of price targets around the average. The lower the number, the more consistency you will find talking to analyst one vs. analyst two. The higher the number, the less consistency.

What this comes down to then is that the financial services community is really unsure what the company is actually worth. Where there is that much uncertainty, there is a lot of money that could be made, particularly given that for Tesla, there is unlikely to be much middle ground given that the feeling is the company will either takeover the car world or implode in spectacular fashion. Where this much confusion reigns, you can bet that the lawyers will soon follow and sure enough, that’s where we are today.

Tesla Cites “Production Hell” as Disclosure

Fundamentally, the investors are saying that they were misled by statements from Tesla and its executives about the facts on the ground and anyone who bought Tesla stock between the 4th of May 2016 to the 6th of October 2017, did so at prices which were “artificially inflated” due to the misleading statements. Tesla in its response requesting that the lawsuit be dismissed is effectively saying that the problems it faced in its bid to ramp up Model 3 production were explained in frank and plain language, mentioning that Elon Musk himself had repeatedly claimed Tesla was in “production hell”.

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The Tesla Semi may have grabbed headlines but the Model 3 is what the company needs...

Investors on the other hand cite Tesla statements that Model 3 production was “on track” several times in 2017. Additionally it’s clear that the company has a slightly contradictory message nature given its past statements that it wouldn’t need to seek new capital, just before seeking new capital. A pattern which many analysts think we are in the midst of again with Elon saying that the company won’t need to raise additional capital while still not making money and not meeting Model 3 production targets with large bonds coming due later this year and early in 2019.

What we’re facing then is the kind of barrage of mixed messages which lawyers thrive on, particularly given the money at stake which investors feel they have lost out on. Securities fraud sounds quite simple but can be a relatively complex subject and it’s unclear who will come out as a winner from this (apart from the lawyers!) It may be that the outspoken CEO has given one false impression too many and will be taught a lesson or that investors will be told that they bear the risks of the investment decisions they make. It's not exactly like Tesla hasn't exaggerated its position in the past and at the same time, the company isn't claiming it has cured cancer or anything as ridiculous as that. A hearing is expected in August to move things further along. We’ll be watching and covering as usual and updating on the Model 3 production which is so critical to the future of the company in the meantime.