Wall Street analysts see Musk's SEC battle weighing on Tesla shares, but CEO unlikely to be removed

  • Wall Street analysts say Tesla shares will remain under pressure amid CEO Elon Musk's battle with the SEC.
  • But most agree he's unlikely to be removed.
Tesla founder Elon Musk speaks at the unveiling event by "The Boring Company" for the test tunnel of a proposed underground transportation network across Los Angeles County, in Hawthorne, California, December 18, 2018.
Robyn Beck | Pool | Reuters
Tesla founder Elon Musk speaks at the unveiling event by "The Boring Company" for the test tunnel of a proposed underground transportation network across Los Angeles County, in Hawthorne, California, December 18, 2018.

Wall Street analysts say Tesla shares will remain under pressure amid CEO Elon Musk's battle with the SEC, but most agree he's unlikely to be removed.

On Monday, the SEC had asked a judge to hold Musk in contempt for violating an agreement related to previous tweets in which the regulator said he gave incorrect Tesla production numbers. Musk also took to Twitter once again on Tuesday morning and responded to another tweet saying, "This has now happened several times. Something is broken with SEC oversight."

Tesla shares opened down over 1 percent to $294.44 in early trading.

"The current allegations seem much less serious than falsely indicating during market hours funding had been secured for an offer to take the company private at $420 per share," wrote J.P. Morgan analyst Ryan Brinkman. "If the SEC were to seek Mr. Musk's removal ... we believe the shares may approach the mid-$200 levels seen in the aftermath of the earlier SEC suit, although perhaps not retest these lows, given the firm's intervening better than expected free cash flow and substantially improved liquidity position,"

Analysts at Citi also think this is a negative for the stock and to "expect Tesla shares to come under pressure at least until some clarity is achieved." They added: "The longer this new escalation drags out the greater the likelihood of negative consequences to Tesla's fundamental position."

"While the jury is still out around the direction this SEC court action could have on Musk's activities going forward, it will be a near-term overhang on shares until investors can better gauge the impact," wrote Dan Ives at Wedbush. "At this point we are more concerned around this issue being another distraction for Musk & Co. as the company navigates one of its most challenging periods in its history and certainty did not need this news."

Cowen's Jeffrey Osborne pointed out that, "While we expect the company's cult like following will likely not be deterred by the prospect of another battle ... we continue to see major risks due to the company['s] fundamental valuation, high growth multiple, and cash needs."

Tesla shares may remain under pressure near term, but analysts at Macquarie say they don't expect any changes in the top spot. "We do not think there may be material risk of a change to Mr Musk's role at Tesla," they wrote.

Here's what analysts are saying:

JP Morgan - Underweight rating

"In particular, it has not requested to set aside the earlier settlement which led to the withdrawal of securities fraud charges and its request Mr. Musk be barred from serving as an officer of any public company, including Tesla... It is difficult to judge the likelihood of the reappearance of this worst case scenario,given that on the one hand our reading of the SEC's motion makes clear it regards Mr. Musk's behavior as brazen (complaining he "has not made a diligent or good faith effort to comply" and "publicly indicated that he was not serious about compliance with this provision,") but on the other hand the current allegations seem much less serious than falsely indicating during market hours funding had been secured for an offer to take the company private at $420 per share, subject only to a shareholder vote... If the SEC were to seek Mr. Musk's removal (perhaps subject to yet another settlement), we believe the shares may approach the mid-$200 levels seen in the aftermath of the earlier SEC suit, although perhaps not retest these lows, given the firm's intervening better than expected free cash flow and substantially improved liquidity position..."

Macquarie- Overweight rating

"Our understanding is the SEC is asking the Court to enforce compliance of the Oct 2018 judgement by holding Mr Musk in civil contempt... According to FindLaw, punishment can include imprisonment and/or a fine though "sanctions typically end when the party in contempt complies with the court order"... Based on our understanding, we do not think there may be material risk of a change to Mr Musk's role at Tesla..."

Citi- Sell/High Risk rating

"We view this escalation as a negative and expect Tesla shares to come under pressure at least until some clarity is achieved... Though it's difficult at this stage to predict an outcome (which can plausibly range from nothing material/additional fines to, at the extreme, a CEO removal), this escalation comes at a more delicate time for the company after recent management departures (including CFO), the ongoing Model 3 international expansion and looming debt maturities... Time is a factor too... Recall that last year Tesla and the SEC settled very quickly (over a weekend), which was a clear positive for Tesla at that time in helping mitigate the risk of a confidence spiral. In our view, the longer this new escalation drags out the greater the likelihood of negative consequences to Tesla's fundamental position..."

Cowen - Underperform rating

"Regardless of the outcome of this new legal headache for both Elon Musk and Tesla, we view it as a negative distraction for a company that needs to execute at this critical juncture... We note that when the SEC first charged Elon Musk with violations after he rejected their initial deal, potential penalties included ordering that Musk be prohibited from acting as an officer or director of any issue that has a class of securities registered... While we expect the company's cult like following will likely not be deterred by the prospect of another battle between Musk and the SEC, who he has previously dubbed "the Shortseller Enrichment Commission", we continue to see major risks due to the company fundamental valuation, high growth multiple, and cash needs..."

Wedbush - Outperform rating

"In our opinion another boxing match with the SEC is the last thing investors wanted to see last night as Tesla is already in such a pivotal period with Musk & Co. trying to ramp up Model 3 production/demand for China/Europe, and thread the needle to profitability with roughly $1.5 billion of debt to be paid this year... While the jury is still out around the direction this SEC court action could have on Musk's activities going forward, it will be a near-term overhang on shares until investors can better gauge the impact... With Tesla/Musk settling with the SEC in October this black cloud was in the rear view mirror for the company (and investors) and now this latest tweet (which most investors shrugged off at the time) represents a wild card that could potentially bring this tornado of uncertainty back into the Tesla story until resolved... At this point we are more concerned around this issue being another distraction for Musk & Co. as the company navigates one of its most challenging periods in its history and certainty did not need this news..."

Evercore ISI- Inline rating

"We remain on the side lines... While growth may continue with increased China focus and the Model Y reveal, the launch of very competitive VW EV product will more likely take away some of the exclusiveness of the TSLA valuation multiple which we see as the largest headwind for the equity story..."