CEOs know a lot about their companies. That’s true for good or bad CEOs and it is the reason the Securities and Exchange Commission (SEC) requires CEOs and other corporate insiders to follow special rules.
For example, you or I could send a tweet saying we expect a company to be taken private at $420 a share. Taking a company private means the company or other investors buy the shares of existing share holders and remove the company from the stock exchange.
But, if the CEO makes that same tweet, it becomes a public statement that could move the stock price. That’s one reason many CEOs avoid using Twitter. Their remarks can be misconstrued, or their remarks could move the stock price.
But, at least one CEO does enjoy spending time on Twitter. And, Elon Musk, the CEO of Tesla (Nasdaq: TSLA) does move the stock price with his tweets sometimes.
The Tweet That Shook the Market
It almost seems to be a random event. But, it occurs fairly frequently. Elon Musk uses Twitter to disclose information to investors. One of the most important tweets may be the one that came on August 7 and informed the world that Tesla could go private.
This is big news, especially when a stock is trading at about $360. Traders initially reacted with some confusion and the stock price jumped and fell in seconds. About an hour and a half after the tweet, Nasdaq exchange officials halted trading in the stock. When trading resumed, the price jumped.
Source: The Wall Street Journal
This was all odd behavior. Musk’s tweet, particularly the words “funding secured” raised speculation about what could be going on at the company. Exchange officials usually respond promptly, not ninety minutes after an event. And. Going private usually pegs the stock price near the deal level.
The response of traders, leaving the price of the stock well below the level of the deal, shows the level of skepticism.
Skeptics Raise Valid Concerns
By the end of the day, analysts were questioning whether a deal was even possible. The Wall Street Journal noted,
“But what would seem like great news for its shareholders comes with plenty of unanswered questions. This would be twice the size of the biggest buyout in history, one that ended in bankruptcy.
And Tesla is the exact opposite of the type of company buyout firms want: It burns rather than generates cash and it is already neck deep in liabilities.
If Mr. Musk hasn’t lined up the financing he claimed, he could be accused of trying to drive up Tesla’s stock to make the company’s many naysayers suffer. Tesla didn’t respond to questions about the nature of this committed financing.”
Before the day was done, skeptics had zeroed in on what exactly Musk meant when he said, “funding secured,”
Two words on Twitter may haunt Elon Musk : “Funding secured.”
That is what the Tesla TSLA Inc. chief executive said in announcing an audacious plan to take his $60-billion-plus auto maker private. But the company has given no details of how such a buyout would work, or if funding is indeed in place.
If Tesla doesn’t move ahead with a deal, or if the funding isn’t set, regulators could probe whether Mr. Musk made a false statement that caused the price of his company’s stock to skyrocket about 11%.
Mr. Musk made the disclosure on his Twitter account, where he has over 22 million followers and has lashed out at short sellers, reporters and other critics of his company. Mr. Musk even joked earlier this year on Twitter about Tesla going into bankruptcy, at a time when his company’s cash position was under scrutiny.”
The Stock Retreat Could Indicate the Problems Are Long Term
By the end of the week, traders were selling the stock. They had pushed the stock below the level it was trading at before the company announced a positive earnings report.
This demonstrates the problems Tesla faces. Investors are not convinced Musk is a credible CEO and the lack of credibility in a CEO could hurt a stock. That’s because many traders expect the CEO to reflect the stability of a company and the mercurial nature of Elon Musk raises concerns about stability.
Musk’s stability was front and center in a New York Times article that featured his volatile state of mind
Elon Musk was at home in Los Angeles, struggling to maintain his composure. “This past year has been the most difficult and painful year of my career,” he said. “It was excruciating.”
The year has only gotten more intense for Mr. Musk, the chairman and chief executive of the electric-car maker Tesla, since he abruptly declared on Twitter last week that he hoped to convert the publicly traded company into a private one.
The episode kicked off a furor in the markets and within Tesla itself, and he acknowledged on Thursday that he was fraying.
In an hourlong interview with The New York Times, he choked up multiple times, noting that he nearly missed his brother’s wedding this summer and spent his birthday holed up in Tesla’s offices as the company raced to meet elusive production targets on a crucial new model.”
In another sign that Musk is a different kind of CEO, the weekend includes news that “In a two-week drama for Tesla, there has been a bizarre subplot, mostly played out on social media. It features the rapper Azealia Banks and the company’s chief executive, Elon Musk.”
“I waited around all weekend while grimes coddled her boyfriend for being too stupid to know not to go on twitter while on acid,” Ms. Banks wrote, referring to Mr. Musk’s girlfriend, the musician known as Grimes.”
Now, the question is where does all this leave investors? Well, it might not be bullish for a stock when the CEO is “too stupid to know not to go on twitter while on acid” and there are plenty of companies where the CEO knows that.
Yes, if Tesla gets its business right, there are big profits to be made. To benefit from that outlook, a call option could be considered. But, until there is a sign that the company is in the business of making cars rather than headlines, there could be better opportunities elsewhere.