Last night was very eventful for Tesla as CEO Elon Musk sent a letter to all of the shareholders about the fact that he was “considering” taking the company private at $420 a share. The main reason for this was to avoid the distraction of having a stock public which is subject to quarterly scrutiny, which according to Musk is very damaging especially for the company which is the most ‘shorted’ stock in the history of the market.
If this operation is successful it would be the largest leverage buy out in history.
Earlier during the day, the shares got the first boost from news that Saudi Arabia’s sovereign-wealth fund has taken a significant stake in the company. The stock closed with a gain of c. 11% for the day. Below you can find Tesla’s crazy day in one chart showing all the swings and events that unfolded as the day went by…
In our latest article about Tesla, we had suggested a short term buy trade with a resistance level at $370. The share price is now at $376 so what to do now?
The company will turn private if the price hits $420, subject to approval, and therefore with the current price as is we are still far off from that level. This suggests that the markets did not really believe the fact that all will be rosy once the stock is delisted.
There is obviously high risk in buying the stock now. We know that there are many market participants who are shorting the stock. Therefore, there is a risk of a short squeeze, which means that short-sellers would cover their positions by buying the stock. This will eventually result in a rapid increase of the price towards $420 long before anyone would have made any transactions.
Personally speaking, I would prefer taking the profits now and move on the something else since this can get very messy…