Tesla is arguably the most divisive and one of the most high profile and hyped stocks in the world today. I have written about Elon Musk and his companies in previous blog posts over the last few years [1]. During that time I was in awe of the projects he was working on. How he has been able to take Tesla from a niche electric car company and scale it to a massive mainstream global company is beyond impressive. Ditto his progress with his other company, Space Exploration Technologies. Although the space industry is still a very nascent industry, he has arguably done more than any other commercial entrepreneur to create the infrastructure to make it possible for space exploration to potentially become a thriving and fast growing industry.
Since Tesla first became a public company, it has always attracted a lot of attention. On one side, there are millions of Tesla supporters and fanatics who worship Elon Musk almost elevating him to the status of a powerful religious figure. In their eyes he and his companies can do no wrong. Then on the other side, you have a group of sceptics. The most extreme contingent of this group are full-on haters who intensely dislike Musk and everything he stands for. Where the most passionate supporters see Musk and his companies as the future – the most powerful narrative being that some see him as the man who will pave the way to make the world an interplanetary species – his most damning critics see him as a fraud and a charlatan – an emperor with no clothes. The most fervent haters are the yang to the yin represented by the most fervent fanboys. However, the more thoughtful doubters are not cut from the same cloth. They draw their own conclusions on Musk and his companies based on facts and rigorous research.
Back in December 2019, I wrote a post on my predictions for the coming decade [2]. One of my predictions was that I stated that it may be unwise to bet against Musk and his companies – basically echoing Peter Thiel’s mantra of “Don’t bet against Elon”. Since I made this prediction the share price of Tesla has been on an epic tear. Although I could see a lot of potential for the share price of Tesla to do well – merely on the prevailing sentiment alone. I could never in a million years have expected the share price to have gone absolutely parabolic in such a short space of time. Back when I made my prediction, the market cap of Tesla was around $50bn. Today, it is just over $1tn.
For the last decade or so, like many others, I had a lot of admiration for Musk and his companies. I was even in awe of him as I couldn’t think of another entrepreneur who was doing what he was doing and had the same breadth of vision as he had. However, today I have very mixed feelings. What has changed? I think in the past I was most definitely swayed by the narrative. But I don’t think it was just that. As I just said, who else is doing what he is doing? Nobody else has a pure EV and energy company on anywhere near the same scale as his. What’s more, no other entrepreneur has a commercial space exploration company at the same level of development as his.
I suppose any scepticism I had of Tesla back then was purely related to the company’s financial statements and how out of whack they were with it’s market cap. Yet, unlike the sceptics of the time, I reasoned to myself that Tesla was not only a high growth company, it was also more than simply just a company selling EVs. It was and had the potential to be much more than that and that at some point in the future it would eventually grow into it’s high market valuation. This was also along the same lines as the Scottish investment firm, Baillie Gifford, who are one of the earliest investors in the company and have seen their stake grow exponentially since then.
Many of the Tesla sceptics operate with the ticker symbol TSLAQ via Twitter. Whilst a section of this group may be hateful and spread lies and misinformation on Tesla, there are a good number who have legitimate concerns about the company based on facts. And I think it’s important that these are not swept under the carpet. One high profile example are those shared by the fund manager David Einhorn back in 2019. Einhorn is known for his bet against Lehman Brothers bank just before it collapsed during the 2008 Financial Crisis. It is easy to dismiss Einhorn today, especially since he (like others) had short positions on Tesla stock at the time and got badly burnt when the stock exploded in value in 2020. Musk also famously sent Einhorn a pair of “short shorts”.
However, I wouldn’t write Einhorn off so fast. One of his major criticisms of Tesla relates to it’s acquisition of Solar City back in 2016. Einhorn went as far as saying that Musk “knowingly orchestrated a significant fraud by arranging the $2.6 billion acquisition at a time when SolarCity was insolvent. Musk and his family had a huge conflict of interest, but rather than properly recusing himself, Musk initiated the transaction and drove the process.”[3] Indeed, this acquisition was controversial. Solar City was a company founded in 2006 by brothers Peter and Lyndon Reve who are both cousins of Musk. Musk himself was the chairman of the company and instrumental in helping to found it. Solar City since it’s inception was, however, quite a cash intensive company. Although it was growing at a fast pace, it was also losing a large amount of money. For example, in Q1 of 2015, the company generated $67.4m in net revenue, yet made a loss of $146.9m with operating expenses alone being $147m. Back in Q1 of 2014 operating expenses were less than $90m [4]. Often such losses are normal for a high growth company since it is often assumed that in the longer term the company may develop a sufficient moat as well as a level of scale and market leading position meaning that over time there is every possibility that it would be generating much higher revenues and solid net income profits. A low interest rate environment has also been very favourable for these kinds of companies since it means that money is cheap and thus it doesn’t matter if they are not making any net profits any time soon. However, in 2016 Solar City desperately needed a bridging loan of $200m [5] to avoid defaulting on it’s debt and it was struggling to raise money for it. It seemed that no one was prepared to lend Solar City the money. Failure to secure this loan would have likely resulted in the company going bankrupt. This would have had significant consequences for Musk and his companies. SpaceX owned 77% of the Solar City bonds [5] and if Solar City were to go bankrupt, this would have affected SpaceX in a huge way and possibly even it’s ability to continue as a going concern. It would have also been a huge financial blow for Musk since he personally owned over 22 million shares of Solar City stock worth nearly half a billion dollars [5]. Thus, Einhorn, whether one may like it or not, is quite correct in his assessment that Musk committed fraud on a grand scale and that there was an enormous conflict of interest. Musk may have dressed the acquisition up as a takeover of a company aligned with Tesla’s own ambition’s as a clean energy company, when the truth is it was a bailout of his cousins’ struggling company not just to save his cousins’ skin but also his own and that of his companies.
The other glaring concern for me are the sheer number of lawsuits against Tesla. There are over 1000 lawsuits against the company of which 200 are in China alone [6]. Aside from the Solar City case, perhaps one of the biggest and most unnecessary burdens on the company is Musk’s own erratic and unpredictable behaviour, which have led to lawsuits and fines. Perhaps, the most well known one is from back in August 2018, when Musk stated via Twitter that he was considering taking Tesla private and that he had ‘funding secured’. Not only did he not provide any evidence of having ‘funding secured’, he also violated federal securities laws with his tweet. The plain fact is that if any other CEO had done what Musk had done, they would have been fired on the spot and probably would have faced consequences of a far greater magnitude. I remember that time well and the whole furore that ensued. Yet, at the time I thought it was inconsequential in the grand scheme of things. My mindset was very much, ‘Ah, that’s just Elon being Elon. Fundamentally, he’s a genius and a visionary and this kind of behaviour is just part of his eccentricity.’ But I don’t know whether it is morally right to be so lenient on something so serious and to just shrug it off. This is especially true since this is not the first or the last time when Musk has behaved in an erratic and destructive way on his Twitter account. Sometimes, his tweets have been beyond the realms of bad taste. There is of course that well known incident from 2018 where he called a British diver who saved a group of young boys trapped in a flooded cave in Thailand a ‘pedo’. Then, rather more recently, he sent the following tweet earlier this month to Ron Wyden, a Democratic Senator from Oregon; “Why does ur pp look like u just came?” Wyden was critical of Musk’s decision to sell portions of his Tesla stock to pay taxes in accordance to a poll he proposed on Twitter. Wyden quite rightly stated that Musk paying tax, ”shouldn’t depend on the results of a Twitter poll.” [7]. Just a few days ago on November 13th, US Senator Bernie Sanders tweeted, “We must demand that the extremely wealthy pay their fair share. Period.” Musk responded to Bernie’s tweet with, “I keep forgetting that you’re still alive”. In a perverse kind of way, I find a lot of this quite entertaining. The world of Twitter would most certainly be a duller place without Musk’s tweets. Yet the difference is that Musk is no ordinary Joe. He is currently the richest individual in the world due to the explosive rise of the share price of Tesla. It is also never wise to taunt or provoke prominent people in government positions, especially with that level of power. After all, even if you are the richest person in the world, it is ultimately the government that operates the switch, not you.
There have also been cases regarding the safety and shortcomings of Tesla’s vehicles [8]. These have included battery fires. As early as 2012, there were leaked emails saying that Tesla had knowingly sold Model S vehicles that had design flaws in it’s batteries making them very vulnerable to catch fire. This has been a never ending issue and even involved the National Highway Traffic Safety Administration (NHTSA) intervening in 2014 and 2019. Even as recently as this year, Chinese regulators also stepped in after a number of customers in China reported and complained about the batteries in their Tesla vehicles catching fire. Furthermore, there have been reports of break failures, “whompy wheels” (where the suspension system of the vehicle breaks sometimes resulting in a wheel collapsing or falling off), and cases of sudden unintended acceleration. Perhaps the most high profile safety issue relates to Tesla’s Full Self Driving (FSD) software in it’s vehicles. This is controversial as it’s very misleading. The FSD software is anything but and requires drivers full supervision. However the fact that it is advertised as such is dangerous as it has resulted in multiple accidents where the drivers were under the misapprehension that they had full self driving software in their vehicles. Whether Tesla will ever develop true self driving software is another matter but by falsely selling products advertised in this way is not only misleading it also poses a serious risk to the drivers of it’s vehicles as well other drivers, cyclists and pedestrians.
I could go on but I think I’ll leave it at that. What is quite astonishing is that in spite of all these issues, millions of people continue to worship Elon Musk in an almost blind and blinkered way. On Twitter, he currently has over 60 million followers. When Peter Thiel says, “Don’t bet against Elon” he means don’t bet against a visionary a la Steve Jobs. And I continue to echo Thiel’s words too, but for different reasons this time. For me, betting against Musk implies betting against a universal chosen one with millions of fanatical and devoted fans. All the aforementioned issues and concerns don’t matter and have barely made a dent to his popularity. This is why for many years, short sellers, have lost staggering amounts of money betting against Tesla. And not all these short sellers are fools. Some of them like David Einhorn and Jim Chanos (who famously made a fortune betting against Enron) are highly respected and do tremendous amounts of fundamental analysis on the companies they focus on. They were both right in their analysis on Tesla, but what they forgot to account for was the sheer fandom and worshiping at the Temple of Musk. As a wise bulletin board poster once told me when commenting on the amount of money lost by Tesla short sellers; “Never bet against the great levitator”. Quite.
By Nicholas Peart
16th November 2021
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LINKS
[2] https://latitudepost.com/2019/12/28/the-furore-ing-twenties-my-thoughts-on-the-new-decade-ahead/
[6] https://en.wikipedia.org/wiki/List_of_lawsuits_involving_Tesla,_Inc.
[7] https://news.yahoo.com/elon-musk-made-gross-sex-130902137.html
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