Elon Musk's Petulance Should Worry Investors

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?

- Tesla Q1 Conference Call Transcript

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:

  1. 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.
  2. Elon Musk simply thinks he is above the baseline level of minimum courtesy and transparency expected of the CEO of a major public corporation.
  3. 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.

Comments

PrivetHedge DownWithYogaPants Mon, 05/07/2018 - 05:16 Permalink

Agreed.
Musk took over a company using lotus car shells and initial ideas about drive units and batteries.

He turned it into a company with 3 self-built, poorly thought out, unproven designs whose chief features were a big computer screen, retracting door handles, a self driving system of dubious merit and some very questionable rats-nest wiring and poorly protected batteries.

From first mover advantage and collaboration he's moved the company to a glitz first, quality and design last company who are now fighting the inevitable deluge of problems that comes from a total lack of vision about how best to run a new EV car company.

The major management fails he has created are:

1) Failure to collaborate with companies who actually know how to build cars

2) Focus on bells and whistles while battery, control and drive unit issues persist

'Genius' Elon has taken a potentially world class company complete with finance and huge opportunities and ruined it, there's no way it can now recover from his disastrous decisions.

I think a few weeks ago he finally realised what his own mismanagement has done.

In reply to by DownWithYogaPants

JLM Mon, 05/07/2018 - 00:55 Permalink

Musk is running scared.  He has already experienced almost losing it all at least once.  He has a form a PTSD and is clearly losing it.  It is too much pressure for one person.

oncemore1 Mon, 05/07/2018 - 01:04 Permalink

A Tesla company was established 15 years ago.

The company never turned profitable during this period.

To contrary, company burned billions.

The new product line, model 3, seems to make company burn capital quicker, than before.

Tesla wants to be compared to Porsche.

Porsche is profitable since 80 years, never got a cent of public money.

Hence, Tesla should be closed.

Magooo Mon, 05/07/2018 - 03:48 Permalink

This Is What $30,000 Of Damage Looks Like On A Tesla Model S

https://gas2.org/2015/01/06/this-is-what-30000-of-damage-looks-like-on-…

 

Imagine what that does to your insurance bill!

 

Bit of a warning to early model S owners and others. I have owned a model S since Dec 22, 2012 and I bought the extended care package. It has gone through 4 winters, 2 hard ones and 2 warmer ones. The car has 104,000km on the odometer.

Last year I started hearing a rattling noise in the right rear and it turned out to be a loose parking brake pad. That got fixed and this year the other side started rattling. As well the breaks seemed to be a little soft but in no way concerning. After 3 weeks waiting for the appointment I dropped the car off and got a call saying that all 4 break pistons has seized and it would cost $8500 to repair! Wow. That is the most expensive repair I have ever had on a car. By a long shot. I was told that because the breaks are not used that much the pistons can seize. So one of the benefits of regen might not be so much of a benefit at all. Apparently Tesla is recommending a break servicing for cars in the northeast every year. I was also told that there was lots of wear left on the rotors and brake pads but they wanted to change them all out as the rotors were heavily pitted. They also mentioned that I should break hard a couple of times a week but I'm not sure if that is official Tesla policy.

Here are some of the part costs costs:
Break caliper assembly with piston (each): $745.00
Rear rotor (each): $331.00
Front Rotor (each): $290.00
Parking break caliper with pads: $1,235.00

They also replaced a the upper control arm on the driver's side: $261.00

Tesla managed to salvage one of the pistons but they had to change out 3 of them agreed to not charge for labour on the job so my final bill was $5,824.75. I was not expecting that when I dropped the car off.

I asked Jay (who is as helpful as ever) what other 'surprises' I might be in for and he could not think of any but I am nervous.
 

https://teslamotorsclub.com/tmc/threads/ouch-first-huge-repair-bill.703…

 

 

WHO ARE THESE FUCKING MORONS WHO BUY THESE PIECES OF SHIT?  

 

KEEP IN MIND - TESLA IS MADE FROM ALUMINUM -- AND LITHIUM - TWO PROCESSES THAT REQUIRE MASSIVE AMOUNTS OF FOSSIL FUELS (COAL MAINLY) TO CARRY OUT.  

 

AND THEY ARE CHARGED IN MOST COUNTRIES WITH ELECTRICITY THAT IS GENERATED FROM BURNING COAL.

 

SO SAVING THE WORLD THEY ARE NOT. 

 

FUCK ME.... THIS IS INSANITY!!!

PrivetHedge Magooo Mon, 05/07/2018 - 05:27 Permalink

The ridiculous $8500 bill directly comes from two extremely poor Elon decisions:

1) WTF was Elon doing designing and making their own brake calipers and discs?
The world is awash with a huge choice of off-the-shelf cheap reliable brake parts that work and last. For many established cars a whole set of rotors and calipers can be had for $1000.

2) It's been well know for years that EV regen means brakes get rarely used but Toyota manages the issues on their hybrid Prius. It's simply shoddy design not to put shielded inboard brakes on these cars, the brakes on an EV should last a lifetime.

Elon's customers are paying for his hubris in the 'I'll build a new car my way' approach and when the warranties run out (and/or Tesla goes bust) these cars are only going to be saved by 3rd party (possibly Chinese) firms supplying pattern parts.

In reply to by Magooo

ParkAveFlasher Pernicious Gol… Mon, 05/07/2018 - 16:53 Permalink

It's because there aren't any other poorly managed US companies with faulty business plans ...

...who voluntarily fire their mouth off...

...and consistently assume a posture of scornfully superior intellect sans humility and irony...

...and is a darling of Big Change...

...and purports to be a genius, yet pitches a product that has the same barriers to market as it did 120 years ago...

...etc.

In reply to by Pernicious Gol…

wholy1 Mon, 05/07/2018 - 12:38 Permalink

Hmmmm.  Is the adage that "there is no honor among thieves" possibly apply in this instance.  A multi-billionaire tech shyster bilking a bunch of parasitic, UN-productive "investors/traders".  Ya gotta luv it when there are still instances of "un-adjudicated" justice.

pitz Mon, 05/07/2018 - 13:57 Permalink

The fact that this guy can even obtain capital is somewhat of an indictment on the nature of the US economy and stock market.   

GreatUncle Mon, 05/07/2018 - 14:38 Permalink

Truth ... a very poor CEO leads to an underpforming company that if not economically resolved quickly enough goes bankrupt. The real issue is how long this has been going on ... these articles could all have been written a year ago with the exact same problem being expressed.