Author: CNBC Online news

Citi downgrades embattled Tesla to sell, says the stock is too risky to buy even after big pullback

Citi downgrades Tesla
7:58 AM ET Fri, 28 Sept 2018 | 01:55

Citigroup downgraded Tesla's stock to a sell rating from neutral Friday, a day after the Securities and Exchange Commission filed a fraud lawsuit against CEO Elon Musk.

The brokerage detailed two paths forward for the electric car maker, one with Musk and one without. And both options aren't great for stakeholders.

“There's little question that Mr. Musk's departure would likely cause harm to Tesla's brand, stakeholder confidence and fundraising,” the note said. “If Mr. Musk ends up staying on, the reputational harm from this might still prevent the stock from immediately returning to 'normal.'”

“Ultimately it's a risk/reward call we approach from a 50/50 chance of 'bad' or 'Ok/good' outcomes; we think even after the post-close stock pullback (to $274), risk/reward is still tilted negatively,” state the note.

Citi also cut its price target on Tesla to $225, implying more than 25 percent downside from Thursday's close. Shares fell 13.9 percent Friday, posting their worst day since 2013.

The Securities and Exchange Commission filing in Manhattan federal court alleges that the CEO mislead shareholders on Aug. 7 when he announced he had secured funding for what might have been a corporate buyout.

Specifically, the government holds that Musk issued “false and misleading” statements and failed to notify regulators of material changes at the company.

Musk later explained that he had spoken to representatives of the Saudi Arabian sovereign wealth fund and felt confident that the funding take to the company private was assured at his proposed price of $420 per share.

Musk called the SEC's allegations “unjustified” and said he “never compromised” his integrity.

“This unjustified action by the SEC leaves me deeply saddened and disappointed,” Musk said in a statement. “I have always taken action in the best interests of truth, transparency and investors.

The SEC is seeking to forbid Musk from serving as an officer or director at any publicly traded company.

The lawsuit, which did not name Tesla as a defendant, comes as the company struggles to mass produce its Model 3 sedan. Since the company started to ramp up production last July, its already-slim cash hoard as dwindled, sparking concerns on Wall Street over whether Musk will need to raise additional capital.

For his part, Musk has repeatedly said Tesla won't need to seek new cash and guaranteed to keep Model 3 production at a steady clip in an effort to help the company turn cash-flow positive and profitable this quarter.

Disclaimer

Elon Musk tells Tesla staff to ‘ignore the distractions,’ hints at being profitable

Beck Diefenbach | Reuters
Elon Musk, CEO of Tesla.

Elon Musk believes Tesla is “very close” to turning a profit after years of burning through cash, but warned that Sunday would prove pivotal to the car marker achieving an “epic victory” on its production goals.

On the heels of a turbulent last few weeks that culminated in Tesla reaching a settlement with securities regulators, the company is expected to report third quarter production numbers this week.

In two emails obtained by CNBC, Musk exhorted staffers to “ignore the distractions” and that the company was close to “proving naysayers wrong.” With Sunday being the end of the quarter, Musk said that Tesla must go “all out” on production in order to “achieve a victory beyond all expectations.”

A report in Electrek suggested Tesla has already met an ambitious benchmark for its Model 3, after setting a production record in the second quarter. The publication reported that Tesla has already broken its record ahead of the third quarter's close, suggesting it would exceed guidance of 50,000 – 55,000 Model 3s.

Meanwhile, investors on Monday will also digest Tesla's settlement with the Securities and Exchange Commission over the company's brief flirtation with going private. On Saturday, regulators announced that both Musk and the company would be fined $20 million each, and the billionaire would be forced to give up his role as chairman of the board while remaining CEO.

Below are the two emails Musk sent to staff:

Friday, September 28:
Ignore all distractions. One more hardcore weekend and we will all be victorious.
Thanks for being amazing.
Elon

Sunday, September 30:
We are very close to achieving profitability and proving the naysayers wrong, but to be certain, we must execute really well tomorrow (Sunday).
If we go all out tomorrow, we will achieve an epic victory beyond all expectations.
Go Tesla!!
Thanks for all your hard work,
Elon

Musk is ‘gambling’ with nearly a third of Tesla’s value and should settle: Columbia law professor

Can Elon Musk fight the SEC and win? Experts debate
9 Hours Ago | 04:59

Tesla CEO Elon Musk is gambling not only with his job but with the electric auto maker's stock market value by not settling with the Securities and Exchange Commission, Columbia Law School professor John Coffee told CNBC on Friday.

“Mr. Musk is gambling with the shareholders' money. Probably 30 percent or more of the value of Tesla depends upon his presence as CEO,” Coffee said on CNBC's “Closing Bell.”

“I can't imagine a CEO doing anything more dangerous than rolling the dice with possibly as much as a third of the value of the company at stake,” he added.

Neither Musk nor Tesla were immediately available for comment.

Musk is being sued by the SEC for fraud, according to court documents filed Thursday, in relation to an Aug. 7 tweet in which Musk said he was considering taking Tesla private, adding: “Funding secured.”

The take-private idea was abandoned on Aug. 24.

Shares of Tesla closed down 13.9 percent Friday, their worst session since November 2013.

Tesla and the SEC were close to a no-guilt settlement, but Musk pulled out at the last minute, according to reporting by CNBC's Andrew Ross Sorkin.

Under the deal, Musk and Tesla would have had to pay a nominal fine and the CEO would not have had to admit any guilt, said CNBC's David Faber, citing sources. But those sources said Musk would have been barred from being chairman for two years and Tesla would have to appoint two new independent directors.

Many experts have said the settlement the SEC offered seems reasonable.

Coffee, who served as a member of an SEC advisory committee, agreed: “All it means is giving up the post as chairman; he's still in control.”

Coffee said the board needs to push Musk to accept it.

“They've sat on the sidelines as a passive bystander over the last six months, but they should be sitting down with Mr. Musk and telling him it's time for him to be mature and settle with the SEC,” Coffee added.

Jeffrey Sonnenfeld, a senior associate dean at the Yale School of Management, agreed Musk is “critical to the valuation” of the company. For the sake of Tesla, he urged the board to devise a plan to keep Musk there but rein him in.

Sonnenfeld called the board's decision to pass up the SEC's “generous” deal as “completely as self-destructive as Musk is.” He added, “What it tells us is this board, as a strategic plan, must be using the Jim Jones Jonestown suicide pact. They are drinking the Kool-Aid of the founder.”

If he were to give in and settle with the government, Musk would guarantee Tesla a stable future, said Coffee. If not, Musk is making a bet he's almost guaranteed to lose, he added.

“[Musk] is insisting on rolling the dice on whether he can beat the SEC in the Southern District of New York, where the SEC almost never loses,” Coffee said.

In a statement, the board said, “Tesla and the board of directors are fully confident in Elon, his integrity, and his leadership of the company, which has resulted in the most successful U.S. auto company in over a century. Our focus remains on the continued ramp of Model 3 production and delivering for our customers, shareholders and employees.”

Tesla shares plunge as Wall Street throws in towel, saying Musk departure could cost stock $130

Bobby Yip | Reuters
Elon Musk

Wall Street is buzzing over SEC's civil action against Tesla CEO Elon Musk, predicting significant negative ramifications for the electric car market due to the action.

Shares of the automaker were down 12 percent in Friday's premarket session.

The Securities and Exchange Commission sued Musk on Thursday, alleging for fraud. The complaint says Musk issued “false and misleading” statements and failed to properly notify regulators of material company events. Musk called the SEC's allegations “unjustified” and said he “never compromised” his integrity.

Barclays believes if Musk is forced to leave because of the SEC action, it will be weigh on Tesla's stock.

“The SEC civil action may lead to Musk's exit from Tesla (either permanently or temporarily) and the Musk premium in the shares dissipating,” analyst Brian Johnson said in a note to clients Friday. “Tesla shares have ~$130 of Musk premium for future success that might dissipate.”

Tesla's stock closed at $307.52 Thursday.

Johnson reiterated his underweight rating and $210 price target for Tesla shares.

One Wall Street firm is concerned the controversy about the lawsuit will hurt demand for Tesla's cars.

“We see the potential for negative sentiment to impact demand and employee morale,” Morgan Stanley analyst Adam Jonas said in an investor note. “In our view, this is particularly a risk if the situation is not resolved relatively quickly.”

Jonas reiterated his equal-weight rating and $291 price target for Tesla shares.

J.P. Morgan also thinks the news will affect the company's ability to raise financing.

“We are concerned that decreased confidence in Tesla on the part of investors may impact the company's ability to raise capital on amenable terms,” analyst Ryan Brinkman said in a note to clients Friday.

Brinkman reaffirmed his underweight rating and $195 Dec. 2018 price target for the company's shares.

Citigroup also downgraded the stock to a sell rating from neutral.

“There's little question that Mr. Musk's departure would likely cause harm to Tesla's brand, stakeholder confidence and fundraising,” the note said. “If Mr. Musk ends up staying on, the reputational harm from this might still prevent the stock from immediately returning to 'normal.'”

Disclaimer

Tesla shares drop as much as 13% after SEC charges CEO Elon Musk with fraud

Musk could still be an important piece of Tesla, he just couldn't run the thing: Stewart
6 Hours Ago | 11:59

Shares of Tesla dropped sharply in after-hours trading Thursday after court documents showed the Securities and Exchange Commission is suing Elon Musk for fraud.

Sources close to the company told CNBC the company was also expecting to be sued, though Tesla was not named as a defendant in the complaint.

Tesla's stock dropped as much as 13 percent, to around $268, down from $307.52 as of the close.

Musk, the company's CEO, tweeted last month he was thinking about taking Tesla private, noting: “Funding secured.”

The Aug. 7 tweet sent Tesla shares flying, and they closed 11 percent higher on the day.

After sending the tweet, Musk claimed he had been in talks with the Saudi Arabian sovereign wealth fund and was confident he'd have the funding to take the company private at $420 a share. Tesla abandoned its plans to go private later in August.

“The SEC is looking at it very seriously. The stock is going to be under pressure while this gets resolved, and obviously these things take time. The SEC obviously has fired the first shot,” said Art Hogan, chief market strategist at B. Riley FBR. “It sounds like the company's first communication was to defend.”

Tesla since Aug. 7

Source: FactSet

In its complaint, the SEC said Musk knew he “had not agreed upon any terms for a going-private transaction with the Fund or any other funding source,” adding Musk had “had no further substantive communications with representatives of the Fund beyond their 30 to 45 minute meeting on July 31.”

Regardless, the stock has been a roller-coaster ride for investors ever since the infamous Aug. 7 tweet. Since popping that day, the stock has dropped 19 percent through Thursday's close.

Colin Rusch, an analyst at Oppenheimer with a buy rating and a $385 price target on Tesla, told CNBC's “Closing Bell” the stock, and the company, can recover from this.

“The potential for this platform is generating an awful lot of cash flow,” Rusch said. If “they implement some fiscal discipline around growth and increment operating margins, we do think there is still an awful lot of capital that is still very bullish on this name and will continue to buy the name even with this sort of overhang.”

— CNBC's
Patti Domm
contributed to this report.

WATCH: Munster thinks there's a 25% chance Musk remains Tesla CEO

I think there's a 25% chance Musk remains Tesla CEO: Munster
6 Hours Ago | 09:06

Musk’s fraud charge will be a force for positive change at Tesla, says tech investor Munster

I think there's a 25% chance Musk remains Tesla CEO: Munster
2 Hours Ago | 09:06

The fraud charge for Tesla founder and CEO Elon Musk could spark positive change at the electric car maker, said Gene Munster, managing partner of technology-focused venture capital firm Loup Ventures.

“I think this is actually, strange as it sounds, may be a positive force for some change at the company. We've been advocating that Elon has a different role — stays at Tesla but different visionary role, non investor-related focus. I think there's an opportunity this will pave the way for some of that,” Munster said Thursday on “Closing Bell.”

Musk has been sued by the Securities and Exchange Commission for fraud, according to court documents filed Thursday. Sources close to Tesla told CNBC that the company was also expecting to be sued, though it was not named as a defendant in the complaint.

In August, Musk tweeted that he was considering taking Tesla private, adding “funding secured.” The tweet spurred a scandal-ridden fall for Tesla and sent the stock seesawing for weeks.

“This unjustified action by the SEC leaves me deeply saddened and disappointed. I have always taken action in the best interests of truth, transparency and investors. Integrity is the most important value in my life and the facts will show I never compromised this in any way,” Musk said Thursday in a statement.

I'm surprised shareholders are shocked Musk was charged: Citron's Left
2 Hours Ago | 03:31

Munster said there's “greater than 50 percent” chance Musk gets removed as an officer, because the SEC, “they want blood here.” Munster said it is unlikely Musk will be ousted from the company completely — a fear he said is fueling Tesla's sharp after-hours decline.

“Investors are jumping to that conclusion … that will be on investors minds' for a long time. But that is only one of four remedies for being found guilty of securities fraud, and keep in mind, he has not been found guilty,” Munster said.

Although he thinks the charge could push Musk into a position that better suits his talents for “product and vision” at Tesla, he admitted the news “plays into the difficulty that Tesla is having,” and will likely keep the company's stock “range-bound for probably the next three months.”

“The most important part is that he remains an important part of the fabric of that company … and he can do that without having a spot on their board or an investor-facing role,” Munster said.

Colin Rusch, senior analyst at Oppenheimer, agreed that there is a need for additional leadership at Tesla. He compared Tesla to Apple, which saw its stock appreciate “pretty significantly” for several years after CEO Steve Jobs left.

“We wouldn't be surprised to see Musk settle this fairly quickly,” he said on “Closing Bell.” “He probably does want to stay involved in the company in an active way and will try to do that.”

Shares of the automaker fell more than 10 percent in extended trading Thursday.

— CNBC's Sara Salinas contributed reporting.

SEC charges Tesla CEO Elon Musk with fraud

Kiichiro Sato | AP
Tesla CEO and founder of the Boring Company Elon Musk.

Tesla CEO Elon Musk has been sued by the Securities and Exchange Commission for fraud, according to court documents filed Thursday. Sources close to the company told CNBC the company was also expecting to be sued, though Tesla was not named as a defendant in the complaint.

Shares of the automaker fell roughly 10 percent in extended trading Thursday.

The SEC complaint alleges that Musk issued “false and misleading” statements and failed to properly notify regulators of material company events. The SEC plans to hold a press conference at 5 pm E.T.

In August, Musk tweeted that he was considering taking Tesla private, adding “funding secured.” The tweet spurred a scandal-ridden fall for Tesla and sent the stock see-sawing for weeks.

Musk later explained that he had been in discussions with the Saudi Arabian sovereign wealth fund and felt confident the funding would come through at his proposed price of $420 per share.

The SEC, in its complaint, alleged:

Musk knew that he (1) had not agreed upon any terms for a going-private transaction with the Fund or any other funding source; (2) had no further substantive communications with representatives of the Fund beyond their 30 to 45 minute meeting on July 31; (3) had never discussed a going-private transaction at a share price of $420 with any potential funding source; (4) had not contacted any additional potential strategic investors to assess their interest in participating in a going-private transaction; (5) had not contacted existing Tesla shareholders to assess their interest in remaining invested in Tesla as a private company; (6) had not formally retained any legal or financial advisors to assist with a going-private transaction; (7) had not determined whether retail investors could remain invested in Tesla as a private company; (8) had not determined whether there were restrictions on illiquid holdings by Tesla's institutional investors; and (9) had not determined what regulatory approvals would be required or whether they could be satisfied.

Musk said in an interview with The New York Times that he calculated a take-private price of $420 by rounding $1 up from what would have been a 20 percent upside at the time.

“According to Musk, he calculated the $420 price per share based on a 20% premium over that day's closing share price because he thought 20% was a 'standard premium' in going-private transaction,” the SEC alleged in its suit. “This calculation resulted in a price of $419, and Musk stated that he rounded the price up to $420 because he had recently learned about the number's significance in marijuana culture and thought his girlfriend 'would find it funny, which admittedly is not a great reason to pick a price.'”

In the hours after the initial tweet, Musk doubled down on the proposal in subsequent tweets. The SEC cited those subsequent tweets in the complaint as additional misleading statements.

Musk also failed to properly notify regulators about his plans to take the company private, the complaint alleges.

Tesla's board of directors initially formed a special committee to evaluate the take-private proposal, but Musk ultimately called off the privatization plans on Aug. 24.

Tesla did not immediately respond to request for comment.

Read the lawsuit as filed in the Manhattan District Court below, and download the file here:

This is breaking news. Please check back for updates.

—CNBC's
David Faber
contributed to this report.

Most drivers don’t understand limitations of car safety systems, AAA finds

Hxdyl | iStock / 360 | Getty Images

Most drivers don't understand the limitations of advanced safety technology installed on new vehicles, according to a new study by AAA Foundation for Traffic Safety.

The study indicates that drivers overestimate the capabilities of features such as blind-spot monitoring systems, automatic emergency braking and adaptive cruise control.

“A substantial proportion of respondents demonstrated what we believe was a concerning lack of awareness of some of the key limitations of the technologies,” said Brian Tefft, senior researcher for the AAA Foundation.

More from USA Today:
From compact speakers to selfie sticks: Best gadgets you can find at the dollar store
With Sirius behind it, can Pandora now stage a comeback?
T-Mobile's MetroPCS changes name and adds unlimited lure: Amazon Prime and Google One

The findings raise questions about whether Americans are ready to adapt to partially self-driving vehicles, which typically require drivers to remain alert and ready to take over the steering wheel if the car can't handle the conditions it encounters.

Problem spots flagged by AAA:

• Blind-spot monitoring: Nearly 80 percent of drivers don't understand the limitations or thought that the system had greater capability to detect fast-approaching vehicles, bicycles and pedestrians. Relying too much on blind-spot monitoring, about 25 percent don't look for oncoming vehicles when they change lanes.

• Forward-collision warning and automatic emergency braking: Many drivers confuse the two. One is a warning system, while the other takes action. More than 40 percent of drivers don't know these limitations.

• Adaptive cruise control: About 29 percent of drivers who use this system, which accelerates and brakes on its own, are sometimes comfortable “engaging in other activities” while the system is activated, according to the study.

To be sure, the researchers emphasized that advanced driver assistance systems are generally helpful. Such technologies can prevent about 40 percent of crashes and 30 percent of crash deaths, according to federal estimates.

The problem is that technology backfires when people don't understand how it works.

“I think there's a general assumption among members of the public that technologies in vehicles today will do things for us,” said Jake Nelson, director of traffic safety advocacy and research for AAA. “These technologies are not meant to replace us behind the wheel. They're meant to help us out.”

Nelson said that it's important for dealers, automakers and rental-car companies to educate drivers, at the time they take delivery of their vehicle, on how these systems work.

And “we shouldn't be marketing them in a way that could potentially mislead folks,” Nelson added.

GOOGL

—

Tariffs cost Ford $1 billion in profit and hurt sales in China

Luke Sharrett | Bloomberg | Getty Images
An employee works on a Ford Expedition sports utility vehicle on the assembly line at the Ford Kentucky Truck Plant in Louisville, Kentucky.

President Donald Trump's tariffs are hitting Ford's finances hard.

The second-largest U.S. automaker has suffered $1 billion in lost profits from tariffs on metals imported to the United States, said Ford CEO Jim Hackett in an interview with Bloomberg TV on Wednesday.

The U.S. has a 25 percent tariff on steel and a 10 percent tariff on aluminum imported from several countries, an early step in an escalating trade war that threatens to raise prices on goods and deal a blow to firms in a wide range of industries, including autos.

The tariffs come at a time when Ford is trying to improve its financial health, raise its share price and sink money into developing new propulsion technologies, such as electric powertrains, autonomous driving technology, cloud computing technology for transportation and other mobility businesses.

Ford shares were down nearly one percent Wednesday morning.

“From Ford's perspective, the metals tariffs took about $1 billion profit from us,” he added. “The irony is, we source most of that in the U.S. today anyways. So we are in a good place right now, but if it goes on longer there will be more damage.”

The trade war is also creating difficulties for Ford's U.S. factories. Ford exports Lincoln vehicles from a plant in Louisville, Kentucky to China, where Hackett said the brand is popular. China's tit-for-tat 25 percent tariff hike, which raises the total duty to 40 percent on U.S. autos, has raised the price of the Lincoln MKC sport utility vehicle in China.

In July, Ford cut its full-year outlook, citing in part heavy losses in China in the second quarter.

“We have had to move people in that factory to other functions because of that trade problem,” he said.