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Elon Musk is rolling the dice with his company(s) at stake.
When dealing with such vast sums of money as Musk is, it is difficult for mere mortals to grasp what it all means, so let’s jump straight into the realm of unimaginably big numbers, with Tesla’s 'Market Cap’ (Market Capitalization). That term describes an amount equal to the rough market value of a corporation; market analysts go to great lengths to get that number right; it is usually based on the current stock price.
This is relevant not only as a benchmark of what investors consider the company to be worth, but as a consideration of appropriate salaries for executives:
While the amount of money that Musk could earn is ludicrous, it's probably fair to say that he's more important to his company's success than any other CEO in the world. If Tesla really does reach a market cap of $650 billion a decade from now, I doubt any shareholders will complain about how much Musk got paid.
- Adam Levine-Weinberg, The Motley Fool, March 26, 2018
Just as a nominal comparison, General Motors' market cap as of May 7, 2018 was $51.32B. Tesla’s market-cap is $51.16B as of May 8, 2018 (off 0.20 B since May 7, 2018). Compare those two numbers: one of the largest automobile companies in the world (GM) versus a company which has not even begun full-scale production on its intended big seller model (the Tesla 3) are considered to be worth just about the same.
But, contrast Tesla’s market cap with its value on February 23 – 59.4 7B, significantly more than the century-old GM - briefly. Tesla suffered a drop in value of nearly 16% in 60 days - not something to be breaking out the magnums of Château Lafitte over.
An investment in Tesla may make a great deal of money, or it may lose just as much – it is risky and volatile. And it is extremely questionable why a company which has never produced anything (or very little) is as valuable as a company that has been in business for a century, has many solidly anchored assets around the world, and has a reputation for success, discounting somewhat the financial sleight-of-hand that went on during the Obama administration. GM will be around for many more years; nothing about Tesla can be said with the same certitude.
Another concern: the way that Tesla handled a fatal incident which occurred on March 23 of this year. You might think Tesla was hiding unpleasant facts like GM did for years at the cost of human lives, but you’d be wrong: the NTSB has lodged a complaint that Tesla released information about the accident prematurely. Tesla probably did nothing wrong in this case, but the timing of a government investigation is very bad.
There is more. In the Wall Street Journal of May 7, 2018 is an article detailing the litany of Musk’s problems. The article’s opening statement, “Recent drama surrounding Tesla Inc. has masked a more mundane reality: The carmaker’s finances are deteriorating.” In another Journal article about Tesla’s Board of Directors, an advisor recommended that three members of the board not be reelected.
It turns out that the recommendation comes from a firm who makes its living advising on pension funds, a major function of unions. At this time, Tesla is not a union firm – more power to them.
Musk has been uncharacteristically edgy in his past few interviews with financial analysts, barking at them when they posed relatively routine questions. The flamboyant CEO is usually quite a showman in his presentations for the Wall Street press, but the recent ones have been a little downbeat.
Up until very recently, the adulatory press coverage that Mr. Musk gleans is nothing short of amazing. Extremely clever schemes like his world’s largest battery, or landmark innovation like the landing of two rocket boosters may be signs of technical prowess, but they do not indicate good management of his enterprises that leads to long-term profitability.
As much as can be said about the audacity and bravery of his enterprise ideas, there is a tinge of hucksterism about them that is starting to annoy the heretofore captivated investment community. After all, Musk has packed a lifetime’s worth of career into what is really a pretty short time.
Elon Musk was born June 28, 1971 in South Africa. He was educated at Queens University in Canada and at the University of Pennsylvania Wharton School of Business. He has dual citizenship, Canadian/US, is #21 on the Forbes list of "The World's Most Powerful People" and is on several of the other Forbes lists also.
His entrepreneurial bent led to his first success with Zip2, a web software company which he sold to Compaq for $340 million in 1999. Then he co-founded PayPal.
Since then he has founded SpaceX, Tesla, SolarCity, OpenAI, Neuralink, and The Boring Company. His real entrepreneurial efforts began in 2002 when he sold his interest in PayPal, which he had co-founded, for $1.5 billion.
SpaceX: Aerospace manufacturer and transport services provider which produced the spectacular landing of two boosters in 2018.
Tesla (TSLA – NASDAQ 300.93): The company which produces electric cars; solar panels and other ancillary items for solar electrification.
SolarCity (SCTY – NASDAQ 20.34): Solar energy services.
OpenAI: Nonprofit research to promote ‘friendly’ artificial intelligence.
Neuralink: A neurotechnology company developing interfaces with the human brain.
The Boring Company: Tunnel construction for subsurface transportation.
Other ventures include the Hyperloop, VTOL electric jet, and lesser-known visionary technologies.
(Stock prices quoted are as of May 8, 2018.)
That’s a lot of irons, but it’s a pretty big fire, and now his wealth has gotten him serious about the ultimate high-minded goal of expanding the realm of the human race by colonizing Mars.
Putting people on Mars sounds far-fetched, but given the technical complexities of some of his achievements, maybe not so much. Landing rocket boosters is a necessary step in furthering that goal, and many of the other intermediate steps that he has set for himself and his companies probably figure into that overall plan.
The problems that Musk and Tesla face are real and here on earth. Some of them have dates appended to their existence, like the $7,500 tax credit that electric vehicles get because of the supposed energy savings that they generate.
This government assistance for buyers of his vehicles will shortly be ending; what will that do to the price of those vehicles?
The rules are somewhat hard to follow:
Phaseout:
The credit begins to phase out for vehicles at the beginning of the second calendar quarter after the manufacturer has sold 200,000 eligible plug-in electric vehicles (i.e., plug-in hybrids and EVs) in the United States as counted from January 1, 2010…
The government in its infinite wisdom has designated vehicles which are worthy of receiving rebates and all of the qualifying ones are listed at that link. The rules for inclusion on the list are Byzantine in their complexity and of the sort which you might expect fall into the category of your mother standing, arms akimbo, stating, “Because I said so!” Only Donald Trump argues with the EPA.
One insight emerges from analysis:
Buyers of plug-in hybrids and electric cars benefit from a tax credit of $2,500 to $7,500, depending on the size of the battery in the car. On the low end of the spectrum, cars with 4 kWh battery packs will qualify for a $2,500 tax credit. The credit maxes out at $7,500 for cars with a 16 kWh battery pack, like the Chevy Volt. The credits were provided as part of the American Recovery and Reinvestment Act, otherwise known as the “stimulus bill.” The incentive begins phasing out after an automaker sells 200,000 vehicles that are eligible for the credit.
That website has a list of the tax credits, rebates, and other incentives that are available in various locations throughout the fruited plain. A telling fact is that in the list of those benefits, they ask politely that if anyone knows of other incentives to please notify them. This from a group who specializes in this endeavor!
Buyers of these new vehicles and others including this writer are at a loss to determine what the bottom line costs of electric vehicles are. With the myriad of financial trade-offs and incentives the real numbers are extremely hard to get.
The Tesla Company and SolarCity are the two on the list that are publicly traded now, and SpaceX will be publicly traded soon, they say. Of course the fact that a stock is publicly traded means nothing in terms of financial health.
Elon Musk has his work cut out for him. He must maintain his financial empire without allowing very real factors to become liabilities. He has a production limit on his cars before the EPA rebates become extinct, he must regain the confidence of Wall Street investors before his stock price falls more, he must prove that his financial skills are the equal of his entrepreneurial skills, and he must make sure that his companies – especially Tesla – deliver the goods as promised.
These things are all possible, but they are not automatic. Having been a Golden Boy of Wall Street for so long, it may be a hard row to hoe to get back into that position once again. And it all hinges on Tesla in the next few months.
That is the real question, is Tesla healthy financially? We don’t really know. We know that the CEO is a genius, but that has not ensured financial success – ever.