Ratings agency S&P on Wednesday lowered the management and governance score on EV giant Tesla Inc. TSLA from neutral to moderately negative owing to company CEO Elon Musk‘s singly dominant role within the company.
What Happened: Musk’s role within the company increases key-person risk. This, coupled with the company’s exposure to lawsuits and lack of board effectiveness, spurred the downward revision, S&P said.
To reduce the key-man risk around the company, Tesla will have to increase board independence and nominate new independent directors with no strong ties to Musk, it recommended.
The agency is not the only one to flag concerns about Tesla’s board independence. Earlier this year, the Delaware Court of Chancery judge Kathaleen McCormick nullified the CEO’s 2018 pay package worth $56 billion at the time of grant after deeming it to be an unfathomable sum and the board of the company to be insufficiently independent of its CEO.
The agency, however, affirmed the EV giant’s ‘BBB’ credit rating owing to its solid market share and liquidity among other things despite the underwhelming first-quarter earnings.
S&P expects Tesla’s EBITDA margin to remain strong over the next two years despite the company cutting prices on its vehicles. Tesla has been slashing prices on its vehicles since the start of 2023 to maintain its market share amidst increasing interest rates and waning demand. While this negatively impacted the company’s EBITDA margin in the first quarter, S&P expects the company will stem further declines for the remainder of 2024 with better manufacturing efficiency and cost-cutting efforts including the 10% layoff announced last month.
The EV giant will also reap benefits from allowing rival automakers access to its supercharging network and licensing its full self-driving driver assistance software to others, the agency noted while adding that these will be critical to offset the pricing pressure and higher research and development expenses expected this year.
“To sustain recent strong growth, hold its first-mover advantage, and improve market share, Tesla will need to make the total cost of EV ownership more affordable, including financing, insurance, and service costs. The timing for its goals to improve the affordability of its vehicles will be an important consideration for our market share assumptions and our assessment of its competitive advantage beyond 2024,” S&P wrote.
As the company’s capital expenditure rises this year owing to the production ramp-up of different products including the Cybertruck and the refreshed Model 3 and other investments into autonomous driving and introducing newer products, the company’s strong liquidity will give it sufficient flexibility, the ratings agency said. Tesla ended the first quarter with nearly $27 billion in cash, cash equivalents, and investments.
Price Action: Tesla shares closed down 1.8% on Wednesday at $180, according to data from Benzinga Pro. The stock is down 27.5% year-to-date.
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