Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC
And so where specifically will you be in terms of capital requirements?
Elon Reeve Musk - Tesla, Inc.
Excuse me. Next. Boring bonehead questions are not cool. Next?
Elon Musk doubled down on his conference call comments on Friday morning, blaming his dismissive attitude toward analysts on "analysts trying to justify their Tesla short thesis" and short sellers in general. This is not a good look.
Of course, the best way to stick it to critics (or short sellers) is to either:
1. Directly answer their questions without fear of the truth
2. Produce results that will shut them up
Look, being an unprofitable public company can be difficult. I know firsthand. I worked IR for a couple of years for a money losing company that was under constant pressure to either raise money or turn a profit. The environment at the job is usually one of constant pressure and dealing with the 6,000+ retail shareholders we had - many of who were obsessed with operating timelines and profitability (rightfully so) - was a daily, intense, extremely high pressure job. You get anxious, you lose sleep, your stomach hurts. It's real stress.
Now, multiple that 6,000 by several hundred, and you have a similar situation with Tesla: a pressure cooker, where results are now a must and where the public will no longer buy the "carrot on a string" approach.
The pressure can be crippling. As a public company CEO, you have to be able to stand this heat.
Many times, there is bad news that is difficult to break to shareholders or that you know is going to cause a move lower in your stock price. This happens with clinical stage biotech companies all the time. Many of them that await clinical trial results often find themselves having to put out a press release that decimates their stock after they have to inform the market of a trial gone poorly. Rather than beat around the bush, biotech companies come out and, for the most part, explain this relatively straightforwardly and suffer the eventual consequences when the data isn't good.
Along the same lines, especially when you are a major public corporation that is constantly in the media and investing spotlight, more transparency is always better. The more information that the market has made available to it, the more likely it is going to feel empowered and informed to make prudent investment decisions. It isn’t just investors that companies owe explanations to, it is also analysts who, many times, come from banks that do business with a company or large financial institutions that hold significant amounts of a company's stock.
It appears to me that Elon Musk only wants to take the good parts of being a public company and not have to deal with the bad. On the good side, being a public company allows you access to trillions of dollars in liquidity across global financial markets and it puts your company in a public spotlight that can often times help it gain traction not only with raising capital but with brand awareness. The bad part about being a public company is that it is a far more tedious process when it comes to reporting all of your financials and the day-to-day operations of the business. Your feet are held to the fire. While these things can stay under wraps in a private company and while private companies are not under any obligation to disclose any of this information, public companies must all share the same information in the same SEC mandated format.
Up until this point, it has been a joy ride for Elon Musk and Tesla. The stock has done nothing but go up and Musk has been heralded by pretty much everybody as the second coming. Books have been written about him, case studies have been done about him and he is often mentioned by random people in just normal, day to day conversation. Elon's living the easy part.
Facing challenges and tough questions is a more difficult part and, as a public company, it is a way of life. So, when Elon Musk told a couple of analysts on his last conference call that he was not interested in answering their questions, but rather deferring to a 25-year-old retail shareholder on YouTube, there’s a reason the stock went down $15 after hours. The market is maybe starting to figure out one, if not all, of the following:
- Elon Musk is starting to get stressed. He is feeling the pressure of the narrative change in the mainstream media and he is starting to realize that investors and analysts, as well as the newsmedia, want tangible financial results and not just a good looking product to swoon over.
- Elon Musk simply thinks he is above the baseline level of minimum courtesy and transparency expected of the CEO of a major public corporation.
- The relationship between Elon Musk and investment banks in general has soured. This angle becomes especially interesting when you start to think about the fact that Tesla didn’t raise capital by selling equity while the stock was at all-time highs near $360 per share, but rather it issued debt.
Regardless, Musk's petulance tells us something about the CEO that investors should find alarming, and should be considering. It offers an air of hubris and a holier than thou attitude that obviously drove comparisons to things like Jeff Skilling on Enron's conference call calling an analyst an "asshole", but more importantly Musk's conduct should make investors wonder about what else Musk is ignoring because he doesn’t find it important, despite the fact that investors or analysts may.
This is a really important thing about public companies: the CEO isn’t the end-all-be-all of decision-making at all times. At a public company with proper governance, the Board of Directors is supposed to oversee all major decisions and the CEO is supposed to lead the company, but also be beholden to his or her shareholders. In this light, when something like the SolarCity lawsuit is brought up, which suggests that Musk had full control over his company and his board when he made the decision to acquire debt-bomb SolarCity, it starts to become a little bit easier to understand that Elon’s mindset may be "I am in full control".
As I’ve commented, this is fine with a private company. It is not fine with a public company.
Another unintended consequence that this may have, aside from it showing that Musk has lost his patience, is that this may sour potential financing relationships for Tesla going forward. Although Musk claims that he is not going to need to raise capital this year, at some point the company is going to have to raise capital again, I strongly believe. When that point comes, Musk is still going to need the willing participation of a major financial institution or high net worth individuals to help them close a bond or issue equity. What are major financial institutions and potential financiers thinking when Elon Musk publicly calls them "boneheads" and ignores what are arguably some of the most pressing questions that could be asked about the well-being of the company on its most recent conference call?
Confidence needs to remain high in order for Tesla's equity price to stay high and, for the company to, as a result, issue equity that isn’t dilutive (should they need to finance the company further going forward). Any type of standoffish nature, especially with the people that are integral to Tesla's business (like the NTSB or financiers for instance) may help shift a mainstream narrative that is helping prop up confidence in Tesla stock. If this is disturbed, Tesla could “take the elevator down" after "taking the stairs up" and see its stock price depreciate rapidly. I wrote about this in my last article about Tesla called "Tesla: It Feels Like Endgame".
I’m not sure what Musk's intended consequences were of this action or Friday's Tweets – maybe he had good reason to do this that I just haven’t figured out yet or maybe he thought he was actually saving himself some time and energy by skipping these "bonehead" questions and blaming things on short sellers. But the statement that it has made about Musk's attitude towards being a public company and the unintended consequences that may arise as a result of it are things that Tesla investors need to consider seriously.