Tesla and Goldman in Cahoots? Looks Like It

05/19/2016 9:07 am EST


Michael Berger

President & Founder, Technical420.com

After Goldman Sachs upgraded Tesla Motors to a Buy, the electric carmaker announced a $2 billion capital raise; Michael Berger, Associate Editor of MoneyShow.com highlights Tesla as a short target and finds the upgrade by Goldman interesting since the bank is one of the leading underwriters on the secondary offering.

After Tesla Motors (TSLA) announced earnings in early May, CEO Elon Musk said the company will likely require additional capital in order to meet its preposterous 2018 production goal of 500,000 cars.

When this was announced, we thought the use of the word likely was unnecessary especially after Musk noted that 2016 capital expenditures will likely be 50% higher than the previous guidance of $1.5 billion.

Raising $2 Billion to Ramp Production

Less than two weeks after this announcement, Tesla announced an underwritten registered public offering of about $2 billion shares of its common stock to accelerate the production of the Model 3.

Of this $2 billion, Tesla will offer approximately $1.4 billion, while Musk will sell the remaining shares to "cover tax obligations associated with his concurrent exercise of more than 5.5 million stock options."

The amount raised is twice as much as what Goldman Sachs (GS) expected. Following the announcement, Goldman released a note to its clients stating that the electric automaker only needed to raise $1 billion to accelerate production.

Shares Move Higher on Upgrade

Tesla rallied more than 3% yesterday after the company received an upgrade from Goldman Sachs. The Wall Street firm upgraded TSLA to a buy from neutral and issued a $250 price target on the shares.  The headline on the note said Goldman is "putting in our reservation for the Model 3."

We find a few things interesting about this upgrade. First of all, in a separate report, Goldman cut its outlook on global equities to "neutral" for the next 12 months, citing valuation and growth concerns. We believe that Tesla – trading at a p/e of 62.4 -- possesses both of those concerns.

Goldman is also one of the leading underwriters on Tesla’s $2 billion registered public offering so it was interesting to note that the bank upgraded the company only hours before the capital raise was announced.

Continue to View Tesla as a Short Target

After Tesla reported its first quarter earnings, many analysts blasted the company for its outrageous projections. Mad Money host Jim Cramer even said that Musk is getting away with financial murder. Cramer said that Musk’s forecast was simply to raise money on Wall Street and get people to send deposits for new orders.

Since January, Tesla has lost five vice presidents. Their team is shrinking and the company is losing key company executives like Greg Reichow, who was the vice president of production. Reichow had been with Tesla for more than five years and led the production team for the past three years.

We expect to see TSLA trade lower over the next few months and view the company as a profitable short target due to: 1) its high expectations, 2) its production and manufacturing issues, and 3) its lofty expectations and valuation.

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