Tesla investors should consider how much of the company’s value is tied to Chief Executive Elon Musk. Photo: John Raoux/Associated Press
The moment of truth has come for Elon Musk and Tesla . TSLA -0.67%
The Securities and Exchange Commission sued the company’s chief executive, chairman and largest shareholder for securities fraud on Thursday. The complaint alleges that Mr. Musk claimed falsely on social media that funding was “secured” for a Tesla buyout yet “knew that he had never discussed a going-private transaction at $420 [a share] with any potential funding source.” Tesla announced it had decided to remain public less than three weeks later.
Both fans and foes should have seen this coming. There is a fine line between hyperbole and falsehood and Mr. Musk’s ambitious guidance for vehicle production skirted very close to it. To cite just one example, Mr. Musk told investors in May 2016 that he expected Tesla to produce between 100,000 and 200,000 Model 3 sedans in the second half of 2017; Tesla wound up making about 4,000 of the cars that year.
Mr. Musk issued a statement Thursday afternoon calling the SEC’s move unjustified. “Integrity is the most important value in my life and the facts will show I never compromised this in any way.”
Investor belief that Mr. Musk is capable of nearly superhuman feats helped push Tesla’s valuation far beyond what seems justified. It is the most valuable American car company despite relatively modest production levels and cash-bleeding operations.
Since a possible remedy for the SEC lawsuit is removal of Mr. Musk as CEO, investors should consider how much of that value is tied to his person. Valuing Tesla on its fundamentals alone is an unappetizing prospect: The company’s finances are weak and current operations are unprofitable. The chief accounting officer left the company after just one month on the job earlier this month. Fresh competition is looming from manufacturers with much stronger balance sheets. Moody’s Investors Service rates Tesla’s largest bond issue at a deeply speculative Caa1.
Tesla shares sold off 10% in late trading Thursday. With the stock still near $275 a share, investors might want to consider how much suspension of disbelief is still baked into that price.
Elon Musk's market-moving tweet about possibly taking Tesla private is just the latest erratic move in a tumultuous year for the CEO. Photo illustration: Heather Seidel/The Wall Street Journal