By Daniel Baum
If Goldman Sachs was a kid in your class, it would be the bright kid who seemingly cheats on every test, but somehow didn’t quite break the rules. Everyone in the class is somehow both angry and envious of the act. The kid ends up defending himself even though no rules were technically broken. It is clearly an uncomfortable position to be in.
A position Goldman is very used to.
As a market maker, Goldman Sachs is in a confusing and sometimes backwards-looking role. They are caught saying and doing things that seem to contradict reason. Such is the situation of a global bank.
Yesterday morning, a Goldman Sachs analyst upgraded Goldman’s official position on Tesla Motors Inc (NASDAQ:TSLA) stock from neutral to buy. The reason: the market was failing to “fully [capture] the company’s disruptive potential.”
Due to the surprising vote of confidence, Tesla stock went up by 4%.
Yesterday afternoon, Tesla announced it was issuing a public offering of $2 billion worth of stock. The main banks carrying out this transaction? Morgan Stanley … and … Goldman Sachs.
Goldman – supposedly as an independent source- suggested buying the stock. Then they happened to be selling it. What a coincidence!
Now this seems questionable. However, it’s too blatant to truly be intentional. If this was a purposeful tactic by Goldman, wouldn’t they at least spread the news out by a day or two?
All banks must keep a “Chinese wall” between their research division (which upgraded Tesla’s position) and their investment banking division (which runs Tesla’s sale). Therefore, it was unlikely the research division even knew of the investment banking division’s plan.
The likely truth behind all of this? Contrary to the headlines, Goldman isn’t conspiring against the American public in broad daylight. Just a case of unfortunate timing.
There is a certain confidence, occasionally misconstrued as arrogrance, that Goldman has historically carried through their practices. Sometimes, their attitude is what makes them excel. Other times, it’s the root cause of their downfall.
This attitude proved costly during the 2007 financial crisis. Goldman took on excess risk, believing they were on the right side of every bet. And for a while, it seemed they were. Then the chickens came home to roost: From October 26, 2007 to November 21st, 2008, Goldman Sachs’ stock plummeted from $235 to $53. They were ultimately rescued by a US bailout.
Although Goldman’s stock has rebounded to a current price of $154, their period of unquestioning trust from the public is long gone. As the saying goes; “trust is the hardest thing to gain and the easiest to lose”.
For Tesla and its fans, a new public offering should be welcome news. A public offering is the opposite of a buyback; the company releases more stock to the market in order to raise capital. Although current shares will be diluted, many advisors believed that Tesla needed additional capital to take the next step forward. After announcing the new Model 3 – their cheapest offering by far (starting at $35,000) – demand for the product took off. Within a week, Tesla had received 325,000 preorders!
For Tesla to meet their potential as a truly disruptive force in the automotive industry, they need their cars to be available. The current goal is to manufacture 500,000 Model 3’s yearly by 2018. If this goal is met, it may propel Tesla into elite global company status. To do this, more capital is needed.
So what does all this mean for you?
Don’t let headlines dictate actions. Far too often, people make decisions based off of the noise of a company, and not its value. Do your research, check the numbers, and make sure you understand what the company actually does.
* TipRanks aggregates sell-side analyst ratings that have been published online and ranks these analysts based on their financial advice history so investors know who to trust.