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Musk Settles and Tesla Rallies, What's Next?

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Last Thursday, the SEC announced that I was charging Tesla (TSLA - Free Report) CEO Elon Musk with fraud in connection with his August tweet about taking the company private and having “funding secured.” The SEC suit called that communication “false and misleading.”

Subsequently it was reported that Musk and the SEC had been close to a deal that would have allowed him to pay a fine, neither admit nor deny guilt and be barred from acting as chairman of the board at Tesla for a period of two years. Musk apparently decided against taking the deal at the 11th hour, prompting the SEC’s filing of the lawsuit.

The shares plunged 13% in overnight trading Thursday and throughout the day on Friday, closing at $264.77.

Though the specific nature of the negotiations has not been made public, over the weekend Musk reached a deal with the SEC in which he will personally pay a fine of $20 million, resign his role as chairman of the board within 45 days and not seek reelection for 3 years. The company will also pay a $20M fine – for failing to control Musk’s communications with the investing public – and Musk will remain CEO.

On Monday the shares rallied 16%, basically wiping out the Thursday/Friday selloff. Tesla bonds also rallied on Monday, reducing the yield on the company’s convertible notes due in 2025 by more than 50 basis points.

Despite the temporary distraction of the suit and settlement, the result leaves investors more confident about the future direction of the company. With Musk leaving the board but remaining CEO, Tesla will still benefit from his creative vision, but he will also be somewhat constrained by having to answer to a board that will require accountability.

Production and Deliveries

With the SEC suit apparently behind Tesla, all eyes are again focused on the company’s ability to produce and deliver the mass-market Model 3 vehicles in the third quarter of 2018 and beyond. Tesla has set a goal of producing 50,000 – 55,000 Model 3s in the third quarter which would be an important step on the way to sustained profitability.

Tesla does not report production numbers monthly and Q3 financial results are still more than a month away, but the company has lately been reporting quarterly production figures during the first couple of days into a new quarter, so hopefully we can expect a look into how many cars they have been able to produce and deliver Monday or Tuesday.

The electric auto blog Electrek, citing unnamed sources now predicts that Tesla will have produced approximately 53,000 Model 3s in Q3 and 80,000 vehicles overall. Deliveries may actually exceed those numbers as Tesla had thousands of finished autos in inventory at the end of Q2.

Though it would be unwise for the company to official announce that it had “gamed” federal regulations, it is speculated that Tesla avoided delivering it’s 200,000th vehicle until after June 30th, a move which would have the effect of preserving the full federal tax credit of $7,500/vehicle through the remainder of 2018 and saving it’s customers somewhere in the area of $300 million - assuming 80,000 cars per month. (The credit is reduced to $3,750 two quarters after 200,000 cars have been delivered.)

Musk told employees in an internal communication over the weekend that the company was close to achieving profitability and imploring them to “execute really well” in production and deliveries in the final days of the quarter. “If we go all out tomorrow (Sunday),” Musk wrote, “we will achieve an epic victory beyond all expectations.”

Though investors will still have to wait until early November for audited financials that breakdown the all important gross margin and net profit figures, the production numbers early this week will offer important insight into Tesla’s ability to finally deliver on its audacious goals.

Stay tuned…

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