JPMorgan cuts Tesla target to remove 'premature' go-private assumptions
Shares of Tesla (TSLA) are under pressure again this morning as JPMorgan analyst Ryan Brinkman lowered his price target on the stock to $195 from $308 as he reverts back to valuing the shares on the basis of fundamentals alone. Meanwhile, Vertical Research analyst Gordon Johnson told investors that he "strongly" believes a Tesla go-private transaction has a "very low probability." BACK TO FUNDAMENTALS-BASED VALUATION: In a research note to investors this morning, JPMorgan's Brinkman lowered his price target for Tesla to $195 from $308 as he is reverting to valuing the stock on the basis of fundamentals alone given that funding for any type of deal appears to not have been secured. While the analyst acknowledged that Tesla does appear to be exploring a going private transaction, he now believes that such a process appears much less developed than he had earlier presumed, suggesting formal incorporation into his valuation analysis seems premature at this time. As such, Brinkman feels it is appropriate to remove the 50% weighting he had briefly assigned to a going private transaction and instead return to his previous fundamentals-based valuation approach. The analyst reiterated an Underweight rating on Tesla shares. FULLY DEBT-FUNDED DEAL 'NEARLY IMPOSSIBLE": After his back-of-the envelope analysis and given his understanding of Tesla's business, Vertical Research's Johnson "strongly" believes that a go-private transaction has a "very low probability" of reaching the "finish line." He feels that a go-private deal for Tesla would require about $49B in funding, or more than two times the amount Elon Musk projected. The analyst sees a fully debt-funded deal as likely "nearly impossible" to garner interest at present. Despite Musk's claims, Johnson pointed out that he believes retail investors will be restricted from participating in any potential Tesla go-private deal, noting that as a result of the JOBS Act, "private vehicles are limited to 2,000 investors, no more than 500 of whom may be unqualified investors." In the analyst's view, for a deal to be realistic, Tesla would need to reduce its debt by roughly half, or $5B, and would need another approximately $5B in equity financing to make it through the next 10-12 month "theoretical" deal process. Given existing shareholders who decide to roll their position into a private equity will not be able to exit shares if they "don't like what they see," the analyst highlighted that institutional participation is predicted on "several, large, credible buyers coming forward soon to give their 'blessing' to the deal." This has not happened yet, he said, adding that with roughly $800M in annual stock-based compensation, the deal would likely need to be upsized by $4B-$5B to cover new cash expenses. Overall, Johnson sees the probability of Tesla being taken private at less than 10%. WHAT'S NOTABLE: Saudi Arabian sovereign wealth fund PIF is in talks to invest in aspiring Tesla rival Lucid Motors, according to Reuters, citing people familiar with the matter. It has been speculated previously that PIF, which has built a stake in the electric carmaker, could be asked to help Musk fund a deal to take the company private. PRICE ACTION: In morning trading, shares of Tesla have come off their lows to be down fractionally at $304.78.