I have mentioned my days as a sell-side auto analyst many times in prior RM columns. I learned an immense amount from the managements of the companies I followed as well as from the legion of my (mostly) friendly competitors. One of those competitors was Nick Colas, now at DataTrek Research. I read his stuff religiously, and one of his recent reports coined the phrase of the summer in the markets: The Tesla Top.
Nick was an ace auto analyst at what was then CSFB when I was at DLJ and UBS, and he and I have both written extensively about Tesla's (TSLA) valuation--fair or otherwise. The fact that Tesla happens to make cars is not necessarily germane to Nick's point, though.
Really he's making the call that a go-private move for Tesla would be this generation's signature M&A event. He mentioned RJR/Nabisco and AOL/TimeWarner as previous generations' highlight moments. Both deals presaged major market corrections.
So, that's the fear underlying the Tesla Top call. The former RJ Reynolds had no reason to buy a biscuit company, and AOL and Time Warner proved to be a disastrous fit. In Tesla's case, the worry is that Elon Musk could actually find financing for a transaction that only benefits himself. Will Saudi really fund this???
Tesla is in no way, shape or form better as a private company. Musk has financed Tesla's immense cash burn through offerings of both equity and convertible notes, which carry ridiculously low coupons owing to the promise of increases in the value of the underlying equity. Removing both those funding levers hurts Tesla's financial resilience, it doesn't help. Saving Elon from the hassle of quarterly earnings calls is not worth a 20% premium to an already wildly overvalued share price.
But it could happen. There is enough crazy money chasing global equities to pull off such a deal. If it does, post that date on your calendar and wait for a reversal.
If you want to know what happens when stocks reverse, check out Chinese internet stocks. KraneShares' KWEB China internet ETF crashed through a 52-week low this week as those stocks are just getting punished. Higher beta names like (HUYA) , its parent (YY) and iQIYI (IQ) have been crushed in the last week. More established names like IQ's parent Baidu (BIDU) , Alibaba (BABA) and Tencent (TCEHY) are also being sold off furiously, and I can't attribute all of that to trade war mania.
No, sentiment has shifted, and that is when fund managers throw out the good stocks with the bad. So, will that happen with our own FAANG stocks and finally kill off this incredibly durable bull rally?
It would take a shift in perception catalyzed by one crazy deal. A Tesla Top?
So, I will keep following Elon Musk's Twitter (TWTR) account for clues and you should, too.
