The Tesla (NASDAQ:TSLA) share price has taken a bit of a tumble recently. It seems that its celebrity CEO, Elon Musk, is once again in the headlines following a lawsuit filed against the US company. Musk appeared in court this week to testify regarding the firm’s acquisition of SolarCity back in 2016. So, what’s going on? And is this recent volatility an opportunity to buy some Tesla shares at a discount for my portfolio? Let’s take a look.
The battle for SolarCity
Union pension funds and several asset managers have come together to file a lawsuit against Tesla. The dispute surrounds the legitimacy of the acquisition of SolarCity. It claims Musk forced the board of directors to approve the purchase and misled investors about the poor financial state of the business. Things got more dubious when it was uncovered that Musk had a $460m stake in SolarCity as well as $65m of bonds.
Needless to say, these are pretty serious allegations. Elon Musk denies any wrongdoing and getting any financial gain from the deal. But the trial is ongoing. And if it goes against Musk, the company will likely face severe legal penalties that should affect the Tesla share price.
It’s not the first time the CEO has been in the legal spotlight. A few years ago since he settled another lawsuit by the Securities Exchange Commission for misleading investors on Twitter. As part of that $20m settlement, Musk had to step down as chairman for a minimum of three years. Given this sets a precedent, if found guilty, Musk could lose his managerial position (although I’m speculating here).
What does this mean for the Tesla share price?
The trial has added a notable level of uncertainty. However, it seems not all investors are concerned by the damage that could be caused. Analysts at Goldman Sachs have recently upped their earnings estimates to $5 per share for 2021. That’s higher than the average consensus of $4.49. Suppose the business can deliver this level of profitability? In that case, I think it’s likely that the recent decline in Tesla’s share price will quickly reverse.
What’s more, these earnings should be more than capable of covering the $2.6bn paid for SolarCity, should the lawsuit end with an unfavourable outcome. However, there are still plenty of disruptions that could prevent the firm from meeting these expectations. The most obvious is the current semiconductor shortage that has significantly impacted nearly all car manufacturers worldwide.
The bottom line
While the recent drop in the Tesla share price has made the valuation a bit cheaper, it still looks exceptionally expensive, in my opinion. The company is currently trading at a price-to-earnings ratio of over 650. In other words, it seems that the Tesla share price is being ultimately inflated by investor expectations rather than underlying fundamentals.
If the company can eventually deliver on these expectations, then the elevated stock price could be justified. But personally, that’s not a risk I’m willing to take, especially when this business is embroiled in a multi-billion-dollar lawsuit that could spark a mass sell-off. Therefore, I’m keeping Tesla on my watchlist for now.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.