Today, I want to talk about why I think the joyride is soon going to be coming to an end for Mr. Elon Musk over at Tesla (NASDAQ:TSLA).
The news cycle for Tesla has been moving so quickly that there have been legitimate developments and things that need to be updated on a daily basis. Sometimes two or three new pieces of news on a daily basis and so while I hate to continue to kind of quote/unquote beat a dead horse, when new information does become available, it obviously needs to be analyzed and needs to be included in my overall analysis of the company and so that’s exactly what I’m going to do today and the point that I’m trying to make today is that the joyride for Elon Musk could very much be over soon. I’m going to give a couple of reasons why.
First, Bloomberg reported that CTW which represents several pension funds or is working together with several pension funds who own Tesla stock are going to challenge some of the Tesla Board members and this is a huge deal.
A proxy contest is going to be a huge deal because as any skeptic of the company understands, the only reason that Elon Musk has been able to get away with the things that he’s been able to get away with, the statements he’s been making publicly and things like the SolarCity acquisition in my opinion are because he does not go properly checked by the Board of Directors. There doesn’t seem to be any real corporate governance at the company and I’m basing this just on my own opinion and my own analysis of the things that he has said publicly, some of the targets that he has put out publicly and missed as well as the decision to go and acquire SolarCity which currently right now there’s a lawsuit outstanding that basically alleges that that acquisition was made without the approval of anybody but Elon Musk and even though he had recused himself, he essentially is running the company and he essentially was the guy that was in charge of pushing that acquisition through
And the lawsuit alleges that he has control and the only way you can have control of the Board of Directors is you surround yourself with people who are either just going to be yes-men or, you know, in the case of his brother, Kimbal Musk, relatives, right? I mean Kimbal Musk is actually listed as an independent director. He’s listed as an independent director. It’s the CEOs brother. I mean I don’t understand how much more non-independent of a director you can be. So, the article I read was a Bloomberg article and it talked about wanting to push Kimbal Musk and a couple other Board members out the door, a couple of people that don’t have experience in the automotive industry and essentially a couple of people that I’m guessing like Kimbal Musk, shareholders think are really following what Elon Musk says and kind of not keeping him in check but rather agreeing with him and being yes-men and that would make sense because you know I’ve said many times in this podcast before as have other skeptics and critics that a majority of the things that Elon Musk has said online, on Twitter would not have happened in a regular company with regular corporate governance. They just wouldn’t.
It doesn’t look good but also from a liability standpoint, it’s not healthy. It creates outstanding liabilities for the company when you come out and you say things like there’s going to be a massive short squeeze which he didn’t say directly but he alluded to it while he was talking about VW and just like Montana Skeptics said on the last podcast, you know, this is unconscionable, right? He’s just said on the conference call don’t worry about the stock price and now he’s saying the stock price is going to the moon. Now since then we’ve already found out that part of his plan was to buy $10 million in stock which he did. We’re waiting to see if there’s any more open market buys that come down the pipeline but $10 million is a relatively negligible amount if that’s what he thought was going to cause some short carnage. You know, nice try but not going to happen. We found out that on the day he was buying, some of his buys were I think at 295 even or they were at the lows of the day during the premarket. So, he was bidding up the stock in premarket I think it was found after his form 4 had been disclosed.
So, that was part of his plan but this proxy fight really looks like it could be ushering in a new era at the company and this is an era where hopefully CEO Musk’s feet will be held to the fire. If there was a real Board of Directors at this company that, you know, if you had General Motors’ Board of Directors running this company or governing this company rather, Elon Musk would probably be out as CEO. You’d have to think, I mean if Mary Barra was going around doing the things that he’s doing, right? What would happen at General Motors if Mary Barra was promising you know the short squeeze of the century? What would be the reaction of the Board of Directors at General Motors in a case like that? What would be the reaction of the Board of General Motors if all of these production targets and operational targets dating back to, you know, 2012 or 2013 have been missed or a majority of them have been missed and what will be the Board’s reaction going forward if targets that have been issued this year namely for the company to be cashflow positive in Q3, Q4 and for them not to do a capital raise, what will be the Board’s reaction if those targets are missed?
And the interesting thing is the Board can’t really take action and oust Musk as it is now I don’t think and I think that’s part of the reason that this proxy fight is being waged. When shareholders, you know, it’s okay for skeptics and for bears and for people who are critical of the company to come out and demand accountability but now that shareholders are starting to notice, right? The Bloomberg article I read this morning stated that this group is working with pension funds that own the stock. So, now you’re almost dabbling into these institutional investors. When shareholders are starting to have a little bit of shaky knees and the possibility of a little bit of sentiment change in terms of how they’re holding the company up and what kind of light they’re looking at it in, then all of a sudden you know shit might be getting real at this point and this is coming at a time now where I’ve argued if you read my last article on Seeking Alpha, I’ve argued that the mainstream media coverage of this company is really far more skeptical now than it has ever been.
I mean the Wall Street Journal, Charlie Grant at The Wall Street Journal continues to do a good job of cutting through the bullshit and laying out the facts. He’s kind of always been on the case but now you see some other mainstream media outlets including Bloomberg has had a couple articles over the last couple days about how much cash the company burns and again the article about the proxy fight and you have commentators on CNBC and hosts on CNBC that are starting to just continue to further bat around the question of whether or not the company is ever going to be profitable and that is the most important thing here. As I’ve said continuously on this podcast, whether or not the company is going to be profitable is the end-all be-all because if you buy the stock now and you pay a $50 or $60 billion valuation for the equity now, what you’re hoping as an investor is you’re hoping for a return on that investment in the form of net income divided by the amount of outstanding shares. You’re hoping for earnings per share to the tune of more than what you’re paying for the stock. So if you buy in it for $300, you’re hoping that in the future you’re going to get more than $300 per share and earnings back and that just seems at this point ridiculous, just seems completely impossible if you ask me, doesn’t seem likely that’s for sure.
Another interesting little tidbit that has moved the vice-grip in further on Elon Musk is that the analyst he snubbed on the conference call wrote an open letter to him which I read just moments ago on Zero Hedge and you know basically says to him look, it’s my job to be an analyst and go out and ask these tough questions. I’m sorry if you think they were boneheaded or if you think that they were dry but I have a responsibility to connect the present narrative with the potential future operating expectations of the company and again, if you’re buying the stock here, that’s why you’re buying it. You’re not buying it because Tesla’s going to lose $6 a share this year. Nobody wants to buy that nobody wants to buy a company that’s going to lose $6 a share this year. There’s no — it doesn’t make any point. There’s no reason especially when the company is priced at $300 a share. You’re buying it now because of the future expectation that the company is going to be able to earn money and generate cash and the analyst is absolutely right.
I mean that’s the whole point of being an analyst. The point is to try and reconcile what’s going on now and the equity price now or the bond price now if you’re going to analyze the bonds versus what the future expectation’s going to be and that’s really all you’re doing when you buy a stock or when you short a stock is you’re looking to find out if the market value now is really higher or lower than what the fair market value is going to be in the future, specifically however long you intend on holding the equity or holding the bond or whatever. So, the analyst is 100% right when he comes out and he says Mr. Musk, all I’m trying to do is my job, all I’m trying to do is gather as much information possible so I can put together an analysis that is flush with facts and an analysis that takes all possible discernible information and puts it into a blender and outcomes where I think the company will be in years from now and ultimately I will you know adjudicate as to whether or not I believe $300 per share is a good price to pay for the stock now because it may be worth more than that at some point or a bad price to pay because it won’t build, you know, it won’t grow into its valuation.
So, he released this open letter to Elon Musk and he asked him openly in the letter, he said why don’t we just have a public Q&A together and I’ll run through my list of questions because Musk had come out and actually said a couple of days ago that he regretted calling the analyst a bonehead and that he shouldn’t have done it, you know, after the market hacked off several billion dollars in market cap from the company and the mainstream media made Elon Musk out to look like an idiot after he did this. He did a small mea culpa on Twitter and so the analyst says look, let’s hash it out publicly. Let’s do a public Q&A and I don’t think Musk has responded yet but we will have to see what happens going forward. The point is with the mainstream media narrative changing and now you have you know members of the sell-side analysts community that are at the very least unamused, I think this guy said he plans to hold Tesla’s feet to the fire or plans to hold the company accountable, something to that effect, but sell-side analysts aren’t really amused and it doesn’t seem as though the shareholders are going to go quietly into the night and just reelect the Board of Directors that has gotten us to where we are today or has gotten the company to where it is today and again you have the media and you have this kind of public perception of the company that might be changing.
In addition to that, you had another report of a Model S fire. Now the report was not really specific as to whether or not the battery had anything to do with it or what the details of the crash were but it’s being investigated and I imagine over the next couple of days more information will come out. It’ll be interesting to see if the NTSB gets involved as it relates to the NTSB and Tesla. I mean who knows how the two of them are functioning with one another right now? Again Zero Hedge had an article a day or two ago talking about you know Elon Musk hung up on the NTSB chair when he spoke to him, when they were doing the fatal Model X investigation and also I read that Uber hired a former NTSB chair to advise the company on safety for its autonomous vehicle program. So, Uber is now kind of getting cozy with the NTSB and Tesla’s relationship with the NTSB is spotty at this point.
So, what happens if the NTSB has to get involved and investigate this Model X crash? And my friend Cubico made a very good point, which is what happens if the NTSB ultimately finds that the battery in these cars is dangerous? What happens if the company needs to issue a recall on something like Model S batteries that cost $15,000 apiece or whatever it is? What happens if the battery is to blame and the NTSB can pretty much to the best of my understanding force the company’s hand to do this. If it has found that the battery is causing a safety issue, then there could be some potentially problematic repercussions for the company. Now this all remain to be seen but again as my friend Cubico mentioned to me today, a $15,000 part that needs to be recalled could be a complete disaster for the company especially given the company’s precarious financial position as it is. So, given the details of the new accident, which more details will be forthcoming, but given the accident, given the fact that there looks to be a proxy battle coming, given the fact that the mainstream media looks to be a little bit more critical of the company, given the fact that the sell-side now isn’t just buying everything Elon Musk says and given the fact that in my opinion, public perception of the company is changing, add that in with the cash burn, add that in with outstanding liabilities such as the SolarCity lawsuit and the joyride is over for Musk. The joyride is over.
It is a point now in the company’s history where results absolutely have to happen. They have to. I mean let’s not even get to the 10-Q which there was another great article about on Zero Hedge the other day and I also published my own notes about it on Seeking Alpha. But right here is a perfect example, you have the CEO come out a couple months back on Twitter and say we’re not going to need to raise capital and then says the same thing subsequent to that in an interview, we don’t need to raise capital and then the 10-Q comes out and what does the quarterly filing say? It says well, we may need to raise capital and what’s the difference between what Elon Musk says and what the 10-Q says? Well, one is kind of probably Musk off the top of his head just spitballing and the other one is a carefully crafted document that needs to be filed with the Securities and Exchange Commission that has probably hit the desks of several lawyers at the company. You don’t just file a 10-Q or a 10-K without the lawyers getting their hands on it. Your in-house general counsel looks at it, your securities counsel looks at it, the CFO generally always looks at it, the CEO generally always looks at it.
So, the difference there is you know maybe Musk is just speaking off the top of his head and saying hey, it’ll be nice, we won’t need to raise money but the reality of the situation as its laid out in the 10-Q is very different. So, which one is it? We’re going to know. I mean it’s only May. We have seven months left this year and at the company’s current burn rate, we’re going to know sooner instead of later whether or not this company’s going to need to raise capital. But there is a lot of shit outstanding right now that Elon Musk is going to have to deal with and for him to have this jovial attitude on Twitter where he’s joking around with Warren Buffett and I’m going to start a candy company, I’m going to do this, I’m going to do that when as it said in the Bloomberg article about the proxy fight, his attention is divided up between all of his companies and Tesla equity again valued at $50 or $60 billion doesn’t have anything tangible holding it up in the way of consistent cashflow, consistent profitability or equity on the balance sheet.
Given this tide kind of turning, the clock is on. Elon is running against the clock now and I don’t know what’s going to happen because again think about this, think about say a new Board does come on and they win this proxy contest. I mean what happens if say they try to hold Elon’s feet to the fire and they try to oust him? Well, that’s even worse almost. You try and hold him accountable and you take him out of the CEO chair, all of a sudden the Elon Musk, you know, call option premium that’s built into the stock price gets crushed and then you have like a Steve Jobs situation back in the day at Apple where everybody blames the Board of Directors for the company going under and not Steve Jobs even though he was running the company like a maniac after it first went public. But that’s what happened with Apple. They got a Board of Directors, a bunch of guys that wore suits and weren’t you know young acid dropping hippies like Steve Jobs was, they came in, they ousted him, they wanted to put in a real CEO quote/unquote and they brought in John Sculley, they brought in Gil Amelio and these guys fucking drove the company into the ground even further. Eventually Jobs came back, of course, everybody knows his interim CEO I think in ‘99 or 2000 and turned the whole fucking thing around after he had left and he went to, you know, he started NeXT Computer Company which eventually then he sold to Apple which Apple turned into OS 10. So, there’s your Apple lesson for the day. I know that whole history. Maybe I’ll do it again in a podcast at some point.
But the point of the matter is you could see a similar situation here in Tesla. You could see you know five or six guys in suits sitting around the Boardroom table looking at Elon Musk’s conduct and saying look, you may be a visionary, your name may be on this company but at some point we got to sell some fucking cars at a profit. Otherwise you know what are we all doing here and we can joke and this and that and the boring company and flamethrowers and candy stores and this and that and the other thing but at the end of the day as a Board and as executives, you have a fiduciary to your shareholders. So, what value does it provide to Tesla shareholders that you have a fiduciary to provide for when you go on Twitter and start arguing with Warren Buffett about starting a candy company? Doesn’t seem to really provide any benefit. All it does is kind of show the market that you’re having trouble taking things seriously in my opinion.
So, the whole outlook and the whole perspective on this company is changing now and I don’t think Elon has a lot of time left in his current state at Tesla. He’s going to have to produce some results or there’s going to be big problems. Either a new Board will come in and they will oust him which will be a fucking disaster if it happens because guys like Elon in my opinion don’t go down without a fight. When they feel like they’re being ousted from their own company, it becomes a shit show. You get things like guys going and blowing out all their stock in the open market and stuff like that. I’m not saying that that’s going to happen but I’m just saying that’s the type of situation you might see the company in if the Board tries to oust him. Regardless, if the Board tries to oust him, you’re going to have a problem because the Musk call option disappears. So, you have that going on. Even if he stays, even if he stays, he is going to be held to a new standard for accountability.
Now that he’s pissed off everybody, the NTSB and analysts and pretty much everybody except retail shareholders, now that he’s pissed these people off, if he can’t deliver on his promises for cashflow positive and if he can’t deliver on his promises of no capital raise, his feet will be held to the fire and this stock will go lower. There will be a loss of confidence, I’m telling you. Now I’ve said in the past if he can execute and he could put together you know a year’s worth of profitable quarters and this company starts generating cash consistently, I will come on my podcast and I will apologize. I will do a 30-minute long apology, I’ll tell everybody where I got it wrong and I’ll say hey, this is a guy that can execute. I used to think he was a guy that can execute. I mean some years back when I was writing about Tesla, I really liked what they were doing because he was setting goals and they were meeting them when they were pretty much at their inception stages. He wasn’t missing things the way that he’s missing them now and also in my opinion, four years ago, five years ago, turning a profit wasn’t even close to being important. It was about producing the vehicle, getting brand recognition, getting to a point where you could bring on a scalable project like the Model 3 but now it’s time to put up or shut up. You got there. You did the Model S, it was a success, you were a well-known household name, everybody knows who Elon Musk is, everybody knows — you know, Kanye West is tweeting about his Tesla. He loves it.
But as a public company, the question is always going to be asked what are you returning to your shareholders? Is the company profitable? Are you generating cash? And you can only ignore these facts for so long. You can only — you know, people say oh well Amazon did it, whatever but listen, the valuation here on this company has grown too fast, too quickly. One of two things needs to happen, the price needs to correct even if it’s just for the short term before the company starts to eventually turn a profit down the road like Amazon did. The company needs to correct or they need to produce and then maybe the valuation will hold up. But the pressure here I think on this company is immense and I think the pressure on Musk personally is immense otherwise he doesn’t get on that call and start mouthing off to those analysts. I mean think about the mindset you have to be in. You know you’re on publicly with these guys, you know you’re at a point of heightened scrutiny at the company and you come on and just tell people you’re not going to answer their questions? You can’t do that. That’s what people who have things to hide do. When you have nothing to hide and you have the truth on your side, you offer to talk to anybody about anything even if the truth is hey, we missed our targets and we fucked up the way that we laid out the plant floor but now we’re fixing it.
You shouldn’t be afraid to answer questions and the notion, the hubris of thinking that these questions are so unimportant that they shouldn’t be answered when you have a giant shareholder base who by owning the stock is making a sizable future bet on the future of the company after its past track record has not given us any indication that there will be any meaningful and lengthy operating leverage is ridiculous. So, this hubris will only get you so far and many times it’s what brings people down. I mean people have obviously made comparisons to the Jeff Skilling moment, whatever, okay, you know. Somebody tweeted the other day and Enron was a real serious accounting fraud and this company I don’t think is a serious accounting fraud. But I do think it is very overvalued. So, the joyride could be over for Elon Musk one way or the other. If a new Board comes on and they start holding his feet to the fire, that relationship can sour very quickly, six months after a new Board’s elected. I mean the fact that his brother is on this Board and is labeled an independent director in and of itself is hilarious. It’s ridiculous and it explains a lot.
You bring in a new general counsel at this company, you bring in a new Board of Directors that is not beholden to what the CEO says and you’re going to have a CEO that operates in a very different fashion or a CEO that’s going to be out the door. That as I said before in and of itself will kill the company if Musk leaves or if he gets into a fight with the Board. That’ll be it. But we have to see what’s going to happen. He has his chance now. His chance and really the spotlights are on him. The mainstream media spotlights, the analysts spotlights, idiots like me, we’re all sitting here, we’re all waiting, it’s time to put up or shut up. But right now the intensity on this company and the scrutiny on this company has never been more intense than it is now, has never been higher than it is now. So, this is it. The first five years or four years of this company being public has been a joyride. The equity has gone way up, a lot of people have made money, you’ve made some good-looking cars, you’ve made all these announcements, Model X, Model Y, Semi, Model 3, Model S, we’re doing all this stuff, new roadster, building giga factories, all of this stuff, right? Supercharger networks expanding, we’re going international, there’s been all these nice little things along the way that have helped you know from a story perspective move the stock higher. Goldman Sachs was on Board, we did some equity raises, everybody’s happy, everything’s going well.
That joyride stops right now though. It stops right now. I’m telling you, it’s very strange that the company has not raised money to me and when they do, if they do again, I think they will, it will either be dilutive or it will add to the company’s growing debt pile and that is a reality the company’s going to have to face whether or not the CEO wants to admit it and whether or not he knows it. I think that’s a reality the company’s going to have to face. So, the ball is in Elon Musk’s court and barring any type of major news development over the next couple of days, I want to make this my last podcast about Tesla for a little while because I don’t want people to think that this is a Tesla only podcast which it’s not and I don’t want to beat a dead horse but I did want to make the point today that I think this CEO’s joyride is over. I think it’s over. I think the media’s going to hold him to new standards, I think the fact that there is a proxy fight that’s about to happen is very telling, tells you that shareholders are pissed off, tells you that they are tired of the same old shit, they’re tired of the same old script, they’re tired of the same old actions, they’re tired of the same old story. Between the media looking at the company the way that it’s been, between these outstanding legal liabilities, I think Elon has it all to prove here. So, the next move will be on him. Let’s see what develops next and we’ll see if the joyride really is over or if Elon has something up his ass that he can pull out that’s going to give the stock the short squeeze that he publicly promised on Twitter. Ridiculous. We’ll have to see.