Short Tesla: The Only Thing That Was Blindingly Obvious

06/22/2016 9:07 am EST


Michael Berger

President & Founder,

Tesla Motors is down more than 10% during pre-market trading and Michael Berger, Associate Editor of highlighted Tesla as a short target after Goldman Sachs upgraded the shares to a Buy in May.

Tesla Motors (TSLA) plunged more than 10% after the electric car maker announced a $2.8 billion bid to buy SolarCity (SCTY).

Although Tesla considered the deal to be blindingly obvious for a while, the market’s reaction showed that it did not agree with the offer.

SolarCity has seen a favorable reaction from the market as the shares were up more than 15% at one point.

Expect Thorough Due Diligence

We expect the transaction to undergo a lengthy due diligence process, as Tesla CEO Elon Musk is also the controlling shareholder of SolarCity.

Musk has big plans for the combined companies. He believes that the combination of the two businesses improves the efficiency of the setup, as it lowers the cost of sales and implementation.

Tesla said the merger would allow its customers to use solar power in an end-to-end clean energy product as soon as next year. The acquisition builds off of an existing partnership where SolarCity uses Tesla battery packs as part of its solar projects.

Remain Cautious as the Deal is Not Blindingly Obvious

Although the deal may make sense to Musk, the market does not seem to agree with him and we remain cautious on the shares.

Last month, we recommended shorting the electric carmaker in this article and we see further downside risk from current levels.

We became increasingly bearish on Tesla after the shares soared following the release of unrealistic production expectations. Analysts blasted the company’s projections and Mad Money host Jim Cramer even said that CEO Musk is getting away with financial murder.

A Story to Watch

We continue to remain cautious with TSLA and plan to exit our short position following today’s decline.  
Although increased global market volatility may serve as a headwind to the shares, we believe the easy money has been made on this trade and would move to the sidelines for now.

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