A somewhat surreal interaction between Tesla CEO Elon Musk and Wall Street analysts and investors on Wednesday has raised some serious questions for many around the company’s future prospects. Should investors be concerned at Musk’s seeming increasing inclination to ignore finances in the pursuit of his grand vision? Many investing online both in the USA and US have been wooed by the charismatic Musk’s sales pitch for a near future where electric and driverless cars are standard and Tesla models lead the new high tech, environmentally friendly market. Some, however, may be starting to wonder if a Veil of Maya has been cast around Tesla by the force of Musk’s personality and is starting to slip.
Tesla has never operated according to the same rules as most other publically listed companies. One ratio perfectly encapsulates the alternative set of stock market rules emblematic CEO Elon Musk has somehow succeeded in writing for Tesla. Ford Motor Company posted 2017 revenues of $156.7 billion and has a market capitalisation of just under $44 billion. Tesla’s revenues for the same period were $11.8 billion and the company’s market capitalisation stands at $49.3 billion. It was $51 billion before the Q&A will Wall Street analysts that followed Wednesday’s Q1 results report.
Tesla keeps burning money, keeps under-delivering on promises and keeps missing targets. But the company is still being assigned a higher value by financial markets than a profitable company that has been one of the biggest car manufacturers in the world for over a century now. The somewhat bizarre divergence in investor logic has been achieved through the force of Musk’s personality and ability to sell a long term vision. Tesla’s market valuation has always been built on the foundation of hope than financial reality. The company is, though its SolarCity solar energy panels unit is not insignificant, basically an auto manufacturer with comparatively low sales figures in what is still a niche market for electric cars. The company has also consistently demonstrated that it’s not a very good manufacturer, and has always struggled with major supply chain and production line failures.
However, Musk has succeeding in selling Tesla to the markets as a high growth tech company. Its valuation is based on the same hope as Facebook’s was before the social media giant learned how to properly monetise. However, there’s one crucial difference. Facebook had a huge, captured audience of engaged users which wasn’t going anywhere. Tesla can’t even say that. The company is not selling large volumes of cars at a poor profit margin that can obviously be improved with tweaking. It’s not even selling large volumes of cars at a loss. The company is developing electric vehicle technology and selling small volumes of its early models. Its valuation is entirely based on the hope that tech will, in the future, translate into a strong market position in an electric and autonomous car market that might become a large market in a decade. That electric and self-driving cars will become the market norm in coming years is a relatively safe, if not certain, bet. Exactly what the pace of that transition proves to be is far less certain.
Within that context, it might be expected that Musk would take an approach of sweet talking the financial world, keeping it onside. However, as the focus on the company’s actual financials grows and hard questions start to be ask, Musk has become increasingly defensive. With Tesla’s Q1 capital spending a giddy $1.1 billion, depleting reserves by $700 million, Musk tetchily refused to answer analyst questions around the need for a further capital raise, brushing it off as unnecessary. Despite the fact the company’s cash buffer is being rapidly depleted, he insisted, without going into details, that increased production and sales of its new Model 3 mass market sedan would mean that wouldn’t be necessary. Further questions in a similar vein being put to Tesla CFO Deepak Ahuja saw Musk interrupt with “Next. Next. Next. Boring bonehead questions are not cool. Next.”
Musk then switched the focus of the Q&A to a video feed with a little known YouTube investment channel leaving the room full of Wall Street analysts baffled at the snub. Musk also recently responded to a Tweet by The Economist that suggested that Tesla would need to raise further capital, dismissing the publication as ‘boring’.
Musk is bored with equity markets’ financial experts asking boring financial questions. However, those are the markets and experts his company is relying on for liquidity. They have repeatedly come through for Tesla and shown far more tolerance than would be the case for almost any other manufacturing company or their CEOs. Disparaging their questions on the company’s finances while repeatedly failing to deliver on forward guidance manufacturing targets might be a sign that Musk is starting to take his own hype a little too seriously.
He, and Tesla, are not bullet proof. Rather, they are nearing a make or break moment for the company when promises and vision are no longer enough and attention will increasingly focus on finances and the more traditional metrics used to value an auto manufacturer. Following Wednesday’s event, Tesla’s share price dropped 7% on Thursday before closing to a final 5.5% loss. The company’s bonds also suffered and several analysts cut their price targets on the stock. Should Tesla subsequently have to go back to capital markets to raise more money, either later this year or next, many on Wall Street are now openly wondering how much it will cost the company. Wednesday’s performance by Musk has been labelled by many as ‘biting the hand that feeds him’.
So what next for Musk and Tesla? As still owning 22% of Tesla, co-founder Musk’s position is far stronger than that of the average Wall Street CEO. The top four investors, including Musk, hold 40%. Perhaps it is that strength of position which means Musk feels secure in thumbing his nose at the ‘dry’ and ‘bonehead’ concerns of the wider market. Musk has made a career, and a spectacularly successful one at that, from ignoring and being seeming impervious to conventional wisdom.
Tesla’s share price has always been volatile and yesterday’s drop is not unprecedented. However, the reason for it was. Tesla’s figures were actually reasonably solid and strong answers to legitimate questions on the potential need for more capital may have even boosted the company’s share price. Musk chose, rather, to go on the attack against his investors and did so in a surprisingly puerile way, acting the spoilt child. As Wired’s Alex Davies puts it:
“It seems that while investors don’t mind Musk making wildly optimistic predictions or mocking competitors, they’re troubled by having their own valid, relevant financial questions derided during a finance-focused call. Now, they are not just concerned about Tesla’s financial health. Some, at least, are concerned about the man leading the company they jointly own”.
The cult of personality around Musk is what has made Tesla succeeding in goals that would be unrealistic for almost any other new company coming to this industry impossible. The big boys usually eat them up and spit them out. However, there are now growing concerns that if Musk carries on down his present path, he is in danger of turning the tables on himself and becoming a liability to Tesla when once he was its messiah. He might do well to reconsider his approach over the coming months.