Just one year ago Elon Musk, the driving force behind Tesla and SpaceX, was being hailed as one of the greatest engineers who has ever lived. By last week he looked like a nervous wreck (or possibly worse). Were the Tesla short-sellers right all along?
A tweet too far
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I suppose it is a sign of our times that financial analysts these days seem to spend more time interpreting runic late-night tweets than crunching financial ratios – but that is where we are.
On 07 August Elon Musk, the founder and CEO of electric car producer Tesla (NASDAQ:TSLA) tweeted to the effect that he had secured funds to take Tesla private at a value of $420 a share. That evening, the shares had closed somewhere around the $341 mark. In the following trading sessions Tesla’s share price was bid up to $379 – until doubt set in that the tweet was based on anything rather than hype. Subsequently, the price fell back substantially to around $308. As I write the stock is trading at about $321.50, with Mr Musk facing possible legal action from the SEC for manipulating the share price – a very serious charge.
What was really behind the tweet? Mr Musk remains adamant that there are interested parties who have considered acquiring the company for about 20 percent over its market price – he then rounded that figure up to $420. Many commentators are not sure what to make of that. In trailer parks across the USA, “420” (also written as “4:20” or “4/20”) is widely understood to mean the time at which chill dudes get out the weed. 20 April (written as 4/20 in the US) is also the international counterculture holiday – a day on which proponents of the legalisation of cannabis get marching. (Though why they chose Hitler’s birthday for that purpose is beyond me.)
Many analysts (and commentators) have therefore concluded that Mr Musk may have been out of his head when he tweeted. He reportedly takes the sedative Ambien and has demonstrated poor judgment – for example with the outrageous tweet concerning the British cave diver who was instrumental in the rescue of the young footballers in Thailand last month. (To be fair, Mr Musk later apologised for that – but the damage was already done.)
And it got even worse. On 16 August Mr Musk gave a lachrymose interview with the New York Times in which he said he was at the end of his tether with overwork – 120 hour weeks being typical. An excruciating year at Tesla, he said, had had a terrible impact on his personal life and health. Tesla’s share price fell further.
Some investors called for the appointment of a new CEO to run the business on a day-to-day basis with Mr Musk (who is the founder and de facto chief engineer) staying on as President. At SpaceX – Mr Musk’s other great gift to the world – Gwynne Shotwell is already both CEO and President.
Hamish Chamberlayne, whose Janus Henderson Global Sustainable Equity Fund is a major investor in Tesla, told the Financial Times that Mr Musk was an “incredible leader”. He added that he would welcome the appointment of a Chief Operating Officer (COO)[i]. Mr Musk revealed in the NYT interview that Tesla had previously approached Facebook COO Sheryl Sandberg to discuss taking on that role at Tesla. Note that Tesla’s board already includes media mogul James Murdoch and venture capitalist Ira Ehrenpreis.
By any criteria, Tesla’s cars are innovative and beautifully designed – and command a premium price, retailing at about £80,000 in the UK. The problem is, however, that Tesla has not been able to scale up production of its Model 3 in order to break into the mass market – even though demand is almost certainly there. Tesla has burnt through an estimated $14.5 billion of investors’ cash in recent years – and yet the share price, hitherto, has defied the predictions of the short-sellers, partly no doubt to Mr Musk’s Superman image. Even given the recent share price drop, Tesla, with a market cap of $54.17 billion is more valuable than General Motors (NYSE:GM) which had a market cap on Wednesday of $53.09 billion.
The real story behind the tweet
Though everyone regards Mr Musk’s tweet as ill-judged, there was almost certainly something behind it. There has been some speculation as to who might want to take Tesla private and it later came out that Tesla had been in talks with the Kingdom of Saudi Arabia’s sovereign wealth fund.
The Riyadh-based Public Investment Fund (PIF), which has about $250 billion of funds under management, already has a minority stake in Tesla. Most of its assets are allocated to Saudi companies and real estate. Its cash pile is likely to grow substantially, however, if the Kingdom succeeds in its aim of selling 5 percent of its stake in Saudi Aramco to the global equity markets. The potentially record-breaking IPO was scheduled to go ahead this year but has met delays again – presumably because of the weak oil price.
The IPO is a pillar of Prince Mohammed Bin Sultan’s plan to re-dynamise the Saudi economy and to diversify it away from oil. Saudi Aramco (assuming oil prices trend up again) is likely to be valued at about $2 trillion; so the 5 percent stake would bring in $100 billion in new cash.
Ironically, then, all Mr Musk needs to take Tesla private is an uptick in the oil price that would give the Saudis the confidence to sell of the proposed 5 percent of Saudi Aramco.
Investing some of that cash into Tesla would be a brilliant diversification strategy. The Prince – MBS as he is known – understands well that countries like France and the UK have a target date of 2040 to transition from the internal combustion engine to electric-powered vehicles. BP predicts that by that date there will be 300 million electric vehicles on the world’s roads. That will mean reduced demand for oil – virtually Saudi Arabia’s sole generator of foreign currency at present. In fact, BP predicts that global demand for oil, as a result of electrification, will plateau at around 18.7 million barrels per day in the next decade before declining thereafter.
Saudi Arabia’s Vision 2030 programme sets the aim that the country will transition from an exporter of oil to a technology hub. The PIF has already invested $45 billion into a technology fund run by Japan’s Softbank Group (TYO:9984) and into technology funds run by Blackstone. As well as a 5 percent stake in Tesla, the PIF has stakes in Uber, VirginGalactic and virtual reality headset maker Magic Leap.
Ironically, then, all Mr Musk needs to take Tesla private is an uptick in the oil price that would give the Saudis the confidence to sell of the proposed 5 percent of Saudi Aramco. Whether the PIF would really be prepared to pay $420 a share is another matter.
An embarrassment to capitalism
Merryn Somerset-Webb of MoneyWeek – who will be familiar to those readers who attend the annual Master Investor Show – recently called Mr Musk an embarrassment to capitalism[ii]. In a letter to his staff discussing the possibility that the electric-car maker might go private, he said it wouldn’t necessarily be forever. He implied that the firm could return to the market once it had entered a “phase of slower, more predictable growth”. That would mean, as Merryn pointed out, that its private backers would make good money out of its growth phase: and then, having extracted all the cash, they could sell it back to ordinary punters at a price based on the trope of indefinite growth.
Unfortunately, this kind of thing is all too common in the current climate. As Merryn argued, the number of exciting growth-oriented companies listed on developed stock markets has been falling. That could partially explain why stock market returns have also been so disappointing in the 21st century.
With the rise of private equity (of which sovereign wealth funds, like the Saudi’s PIF, are a special case), there is no shortage of cash being offered to founder-managers to take their operations private. Moreover, private equity players seem to accord firms higher valuations than stock markets – a curious phenomenon that I would like to unpack soon.
Meanwhile in China…
At least the Chinese still believe in the utility of stock markets. In fact, Tesla is likely soon to have a rival electric car manufacturer listed on Wall Street – and a Chinese one too. Nio is a start-up, founded four years ago in Shanghai and backed by Chinese internet giants Tencent (HKG:0700) and Baidu (NASDAQ:BIDU). Last week the Financial Times reported that it is seeking a $1.8 billion IPO on the NYSE[iii].
Nio (plural) are the wrathful and muscular guardians of the Lord Buddha which stand at the entrance of many Buddhist temples throughout East Asia. The business case for Nio is that sales of electric cars in China are rising rapidly. Last year, China accounted for half the sale of electric vehicles worldwide, and by 2022 that figure will rise to 65 percent. Further, Nio’s models are likely to be more inexpensive than Tesla’s; and the design of the cars is “smart” in every sense, with advanced customer interfaces on its dashboard. The company is already working on an autonomous model.
But Nio remains untested. It only started to deliver new vehicles on 28 June and has accumulated losses of $1.6 billion over the last three years. It doesn’t even make the cars – it has outsourced the pesky manufacturing process to JAC Motors (Anhui Jianghuai Automobile Co. (SSE: 600418)). Nio has thus far booked only 17,000 orders but 490,000 people have downloaded its social networking app by means of which the company aims to maintain a relationship with its consumers. It will be offering mobile charging vans, the ability to swap batteries quickly, and even a service to tow cars away, charge and then return them.
And back in space…
Getting back to Mr Musk, the travails at Tesla may have an unwanted knock-on effect at his other brainchild, SpaceX. For space buffs there has been a stream of exciting news from that stable of late.
In early June it was reported by Aviation Week[iv] that SpaceX had made progress towards the successful recovery of the spent payloads from its Falcon 9 rockets for reuse on future missions. (Non-space-buffs need to know that SpaceX has pioneered the reusable rocket: the aim is that nothing gets discarded in space or on Earth.) The company is also developing the use of inflatable aerodynamic decelerators as part of more ambitious reuse plans for the vehicle’s upper stage.
SpaceX now routinely recovers used booster rockets by parachuting them back to Earth. Since its first successful first-stage rocket recovery in December 2015, SpaceX has emphasised its plans to reuse as much of each vehicle as possible in order to drive down launch costs. The company has recovered 23 of the past 24 first-stage launches. On 04 June this year, with the launch of the SES-12 commercial communications satellite, it reused the vehicle that originally deployed the US Air Force’s X-37B spaceplane in September 2017.
Elon Musk founded SpaceX in 2002 with the short-term aim of cutting the cost of satellite launches – and the much more ambitious long-term aim of colonising Mars. The cost of launching a communication satellite – $100 million ten years ago – has come down by about 40 percent today. SpaceX reckons that its Falcon 5 rocket can launch a 22.8 ton payload for just $62 million. The Falcon Heavy, with a payload capacity of 60 tons, can launch a large satellite for around $90 million. By comparison, launching a standard satellite on France’s Ariane 5 rocket comes in at around $65-$90 million while China’s Long March rocket would cost roughly $70 million.
Mr Musk is not the only billionaire with ambitions in space. Jeff Bezos, founder and CEO of Amazon (NASDAQ:AMZN) has launched Blue Origin and Sir Richard Branson stands behind Virgin Galactic. Former Microsoft (NASDAQ:MSFT) CEO Paul Allen has set up Stratolaunch and Max Polyakov, one of the founders of the Cupid dating site, recently opened Firefly’s launch station in Ukraine[v].
All of these start-ups are currently focussed on unmanned missions. Whether the economics will change when they are launching humans into space, given the additional levels of safety required, is an open question.
In February this year the symbiosis between Tesla and SpaceX was neatly symbolised when Tesla launched a cherry-red Tesla convertible into the high-Earth orbit of the Van Allen Belt. The Falcon Heavy actually overshot its trajectory, sending the roadster hurtling off in the general direction of Mars. It’s now on its way to the asteroid belt. The iconic vehicle may cruise the solar system for millions of years (if radiation or space debris doesn’t rip it to shreds first). I wonder if that is a good omen – or a bad one.
Evil was right…up to a point…
Over lunch one hot summer afternoon last month in Chelsea with my friend and colleague, Evil Knievil, the inevitable subject of Tesla came up. Evil, who as we all know is an investment genius – with whom one only disagrees with one’s heart in one’s boots – has been consistently calling Tesla short. He concluded the case why the loss-making electric car company was hopelessly overvalued with the pop of a champagne cork. I, poor fool, put the counter-argument that this kind of massive disruptor to the conventional automobile market might turn the corner sooner than we might think…
Mr Musk is known for fighting with short sellers, often using Twitter to attack them and even accusing them of wanting my company to die. In a tweet after Tesla’s Q2 2018 earnings report, the CEO posted an adulterated scene from the 2004 German-language movie Downfall about Adolf Hitler’s final days. In Mr Musk’ version, Hitler is a worried fund manager. “If Tesla doesn’t go bankrupt soon, I’ll lose everything,” Hitler froths. I would respectfully suggest to Mr Musk that this is highly dubious PR.
Long-term, my optimism might yet be justified; but short-term, Evil has cashed in a few chips. Further to the Twitter storm, Tesla’s share price fell from $360 on 13 August to $311 on 17 August (nearly 14 percent down) before recovering to around $321.50 yesterday. That is still well above its 02 April low of $248.58. Anyone who bought the stock back at Easter is still nicely in the money.
fund manager James Anderson told MoneyWeek this month that, in his view, $420 a share hugely undervalues Tesla over the long-term. I suppose it really depends on your time horizon.
But Scottish Mortgage Investment Trust (LON:SMT) fund manager James Anderson told MoneyWeek this month that, in his view, $420 a share hugely undervalues Tesla over the long-term. I suppose it really depends on your time horizon.
If Mr Musk were British he would long since have been made a lord, or at least a Sir, such are his extraordinary achievements. (Even though he is not a gentleman – but then neither are most lords or Sirs!) Being an American citizen of South African heritage, he’s probably not too bothered about being a plain Mister.
What he should be bothered about, however, is corporate governance. And, until he gets that concept, both Tesla and potentially SpaceX – incredible companies, both – will continue to be hounded by short-sellers.
[i]Tesla gloom as investors scatter after emotional Musk interview, by Shannon Bond, Peter Campbell and James Fontanella-Khan, Financial Times, 18/19 August 2018.
[iii]Nio hopes IPO will help steer it clear of rivals, by Peter Campbell, Financial Times, 18/19 August 2018, page 12.