Citi Downgrades Tesla To Sell, Faces 'Risk Of A Spiral'

The bearish case for Tesla Inc TSLA is now appropriate in reaction to the SEC's action against CEO Elon Musk, according to Citi.

The Analyst

Citi's Itay Michaeli downgraded Tesla from Neutral to Sell with a price target lowered from $356 to $225.

The Thesis

The SEC's complaint against Musk could result in his removal from the company as a public director, Michaeli said in a note. If this were to happen, the Tesla brand will certainly suffer along with its reputation with stakeholders. The company could also face fundraising problems that increases the risk of "triggering a downward confidence spiral" given the concerning state of the balance sheet today.

Naturally, Tesla would want to avoid this outcome and the company's board could step in at the first sign of a "spiral" and install a new leadership team, the analyst wrote. While some bulls would see a new leadership as a positive move, even a smooth transition would send Tesla's stock lower.

On the other hand, Musk could survive the SEC action and hold on to his job and prevail, Michaeli said. But even under this outcome, the executive's "reputational harm" would limit upside potential for the stock.

The outcome of any SEC action is unknown at this time, but the analyst says there's a 50 percent chance of the outcome being "bad" and 50 percent being "Ok/good." Given what appears to be the absence of any favorable outcome, the risk-reward profile for Tesla's stock is now "titled negatively."

Price Action

Shares of Tesla were trading lower by 12.5 percent to $269.48 early Friday morning.

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