Musk’s threat to Tesla is countered by reality

By Liam Denning

There are any number of ways to read Elon Musk’s tweet about why he should have 25 per cent control of Tesla Inc.:

To me, it renders as: “Nice wannabe AI company you’ve got there. Be a shame if it turned out to just be a carmaker.”

Why is Musk suddenly tweeting gossamer-veiled threats to take his genius elsewhere? Possible explanations run the gamut. At a basic level, he dumped a lot of Tesla stock during 2022 when he was buying Twitter Inc. and it is generally agreed that this is not an investment that has performed well.

Any investor who self-ignites tens of billions of dollars, and does so very publicly, would probably like a do-over of some sort. It is notable that he calls out Fidelity — absurdly, but still — which recently made headlines for marking its X stake down (again) to a fraction of what Musk paid.

Meanwhile, Musk is also, along with Tesla, awaiting judgment in a lawsuit claiming shareholders were misled about a compensation package that he was awarded in 2018 worth more than 4,15,679 crore.

A recent, lengthy article in the Wall Street Journal reporting concerns among Tesla’s board about Musk’s alleged drug-taking may also have prompted a fit of pique.

In any case, Musk’s tweet usefully, and amusingly, reminds the world about one important thing. Tesla is, in tangible terms, a successful maker of EVs facing a slowing, and more competitive market. In valuation terms, however, it is a dream conceived in Musk’s head that has been internalized by the capital markets.

Tesla is, overwhelmingly, a maker of electric vehicles, combining high growth with high margins until recently anyway. Deliveries increased by 38 per cent in 2023, below the company’s long-term target of 50 per cent per year and the consensus for 2024 implies just 21 per cent. Trailing 12-month net profit as of the third-quarter was actually down, year over year.

Yet in the most starry-eyed Wall Street financial models, the making and selling of vehicles generating 92 per cent of Tesla’s current gross profit accounts for only a fraction of Tesla’s purported valuation. The rest relates to whatever Tesla’s next big thing might turn out to be, usually something related to artificial intelligence, be it robotaxis, licensed self-driving systems, the Optimus humanoid robot or just something else that might spring from the company’s Dojo supercomputing project.

Amorphous as the narrative may be, remove it and the tenuous tether between Tesla’s valuation and something approximating a potential future reality evaporates entirely.

So Musk’s apparent discomfort with forging ahead on AI at Tesla without owning a stake virtually two times as big as his current one seems like a real threat. Except, of course, that Tesla stock and options currently account for more than 70 per cent of Musk’s own net worth, according to the Bloomberg Billionaires Index (where he tops the list). Should he get so 'uncomfortable' as to actually start dallying elsewhere, the financial foundation that allows him to, say, buy a social media site for tens of billions and then take a flame-thrower to it would also suffer enormously.

The very idea that he needs a formal 25 per cent blocking stake is highly dubious for the same reason. Tesla is worth what it is because of belief in Musk. Even if someone else could afford to buy a sizeable enough stake with a view to launch an activist campaign or taking over the company, without Musk’s full agreement, they may as well incinerate their own cash.

Musk’s power doesn’t derive from this or that percentage of shares outstanding. Exhibit A for this: The fact that he can toss off an apparent threat to his own company, trashing the very idea of a fiduciary duty of loyalty, and not immediately draw a public rebuke from Tesla’s chronically supine board and a sell-off in the stock. The best counterargument against his absurd demand is that he feels empowered enough to make it.