Elon Musk is losing some of his Wall Street cheerleaders just when he needs them the most. Goldman Sachs Group Inc., one of Musk’s top bankers, has reversed course and cut its recommendation on the entrepreneur’s flagship Tesla Motors Inc., following a similar move by another big booster, Morgan Stanley.
Goldman’s decision, announced Thursday, comes as Musk is under growing pressure to rally investors for a new fundraising round. While the banks are subject to strict rules designed to separate their research and underwriting, the downgrade underscores how Musk’s Wall Street enablers have played multiple, even conflicting roles as he’s chased ambitions -- from electric cars to solar power -- where profits are hard to come by.
“I am sensing that some Tesla cult members think he’s not as brilliant as they thought he was,” said Barclays Plc analyst Brian Johnson, who has advised selling the shares for the past year. “He will be able to raise money but maybe they have to do it at a discount.”
Both Goldman and Morgan Stanley have been big owners of the stock. Their analysts have, on occasion, recommended the shares right around the time that the firm’s underwriters were lead managers on a new round of funding.
In addition to underwriting Tesla stock offerings, Goldman and Morgan Stanley have loaned Musk $275 million, and $200 million respectively, according to regulatory filings. Some of the loans were used to buy Tesla stock, the filings said.
Tesla representatives didn’t respond to requests for comment.
In August of last year, the company hired Morgan Stanley as one of the managers of a $783 million offering, priced at $242 a share. Three days after the announcement, Morgan Stanley analyst Adam Jonas raised his estimated future price for the stock to $465 from $280.
Major player
His rationale: Tesla’s self-driving electric cars could help create a ride-sharing business that would make the company a major player in the industry. He has since downgraded the stock and cut his price target to $245, citing Tesla’s proposed merger with SolarCity Corp. as a risk and saying that Tesla’s emergence as a ride-sharing leader could take a long time.
Morgan Stanley spokeswoman Lauren Bellmare declined to comment.
Similarly, Goldman analyst Patrick Archambault upgraded Tesla on May 18 -- the same morning that Tesla launched a $1.4 billion secondary stock offering. Goldman and Morgan Stanley were lead managers on the deal, and Goldman said at the time that the call was made independently of the underwriting team.
Thursday, Goldman analyst David Tamberrino cut Tesla to “neutral” from a “buy,” saying that the SolarCity deal makes Tesla a riskier bet. The bank lowered its price target to $185 from $240, helping send Tesla shares down as much as 4 percent, the biggest intraday drop since Sept. 1. With Thursday’s drop, shares are off 16 percent this year. They closed at $201, down 3.6 percent for the day.
Dumping shares
“We now see incremental risk to the business related to management’s willingness to deploy capital for M&A, and we believe that any delay in the company’s timeline to launch its new Model 3 will be detrimental to the shares,” Tamberrino wrote in the report.
Separately, Goldman’s fund managers were dumping Tesla shares during the second quarter. The New York-based bank cut its ownership in half to 1.4 million shares in the period ended June 30, regulatory filings show. Goldman remains one of Tesla’s 20 largest holders, with just under 1 percent of the stock.
Since he upgraded the stock, Archambault has left Goldman. Tamberrino was on his team at the time.
Precious capital
Goldman spokeswoman Leslie Shribman said in an e-mail that the bank’s research is done independently from its underwriting.
“We followed all of our standard policies and procedures with respect to our research publication today,” she said.
Downgrades from Tesla’s two lead underwriters could impede Musk’s ability to get precious capital at a crucial time.
He may be looking to raise as much as $2 billion, according to Dougherty & Co. Tesla showed better-than-expected sales in the third quarter, which could translate into better earnings and cash flow. In August, Musk sent an e-mail to employees urging them to cut costs and pressed them to sell more cars. He wants to show investors that the company can make money right before he goes looking for more of it.
If Tesla can show a profit or positive cash flow, it “would be really awesome to throw a pie in the face of all the naysayers on Wall Street who keep insisting that Tesla will always be a money loser,” Musk wrote in the e-mail.
Elusive profits
The proposed SolarCity merger has bedeviled Musk. Shares fell more than 10 percent on June 22, the first trading day after Tesla announced the proposed merger. The two companies combined to burn $2 billion in the first half of the year.
For SolarCity, profits look particularly elusive, and Tesla has continually had to ask for more funding. Even before the proposal was announced, Musk needed to raise money to get the much-anticipated Model 3 sedan to market.
Tesla gained a high-profile naysayer last month when investor Jim Chanos said on CNBC that the merged company is a “walking insolvency” and that he has a short position in the shares. Chanos famously bet early that Enron would fail and was later proven right.
