Vertical Group Turns More Bearish On Tesla, Doesn't Expect Company To Go Private

Tesla, Inc. TSLA and CEO Elon Musk’s surprise offer to take the company private at $420 per share has been the most controversial story on Wall Street in the past week, but another analyst threw shade on Musk’s proposal.

The Analyst

Vertical Group analyst Gordon Johnson on Wednesday reiterated his Sell rating and lowered his price target for Tesla from $93 to $88 per share.

The Thesis

According to Johnson, a decline in Model 3 demand, a drop in investor trust for Musk and the potential for steep losses from Tesla in the third and fourth quarters suggest a deal to go private is extremely unlikely.

Johnson said there are thousands of Model 3s being stored in parking lots in California and that data from Second Measure suggests Model 3 demand has crashed since late June.

Assuming Tesla sells 45,000 Model 3s in the third quarter at 15 percent profit margins, Johnson said the company still won't be able to hit Musk’s target and achieve positive cash flow and profitability for the first time. Johnson’s 45,000-vehicle estimate is based on Inside EVs estimate that 14,250 Model 3s were sold in July.

Johnson also said Musk’s plan to take Tesla private is reminiscent of Lehman Brothers exploring a go-private deal back in 2008. At the time, Korea Development Bank confirmed it was in talks with Lehman Brothers, but the company ultimately passed on the opportunity after taking a closer look at Lehman’s financials.

“We believe similar to KDB’s experience w/ Lehman, once any potential buyer gets into TSLA’s books, the prospect of a $40bn-$50bn investment will evaporate,” Johnson said.

Price Action

After Wednesday’s 2.5-percent decline, Tesla's stock is now down more than 8 percent in the past week and is trading below the level it was when Musk first tweeted about going private. The stock was set to close around the $338.67 area.

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