Wall Street Journal
Tesla’s Unreal Stock Price Is the Peril of Elon
Enron’s problems began with a share price its business couldn’t support. Will Tesla do better?
By Holman W. Jenkins, Jr.
August 10, 2018
It is not a bad time to remember that Elon Musk created two amazing companies—not counting his role in founding PayPal —in the form of his car company, Tesla, and his rocket company, SpaceX.
He likely would not have achieved these successes if he weren’t a little crazy. One reader emails to compare him, both flatteringly and unflatteringly, to Howard Hughes.
Now our suspicious friends at the Securities and Exchange Commission are curious about Mr. Musk’s tweet of last Tuesday, in which he claimed to have “secured” funding for a Tesla buyout at $420 a share.
Mr. Musk surely had something in mind when he wrote these words, but I doubt that it will meet the SEC’s definition of “secured.”
A conventional, SEC-fearing CEO would never have proposed a buyout via tweet. If he had, an army of lawyers would have been standing at his elbow. Of no other CEO is it imaginable that he might blurt out such a thing for its effect, without consulting anybody or even having his facts straight.
With Mr. Musk, it’s just plausible. In some ways, he’s a throwback to 19th-century capitalism but with 21st-century tools. With a 19th-century CEO, all in a day’s work was to manipulate the share price, to ramp it up to facilitate a financing, implement a short squeeze, etc. Read about the doings of Daniel Drew, Cornelius Vanderbilt and Jay Gould. Anything went and investors knew it. Their contemporaries probably did not doubt they were a little crazy too.
Mr. Musk already risked trouble with the SEC over his numerous assurances that Tesla did not need fresh capital this year, a claim many analysts on Wall Street flatly contradict. Then there are his countless production forecasts that haven’t been borne out.
Till now, the SEC’s long leash amounted to, wittingly or otherwise, an experiment in 19th-century capitalism. Tesla was the right company for it: avidly followed by the global media and by analysts, critically dissected by short sellers. You have an unconstrained CEO acting however he wants. You also have an exceptionally well-informed market monitoring his actions, his statements, even his psychology. If any shareholder feels aggrieved or cheated at this point, he or she should look in the mirror. In the meantime, would the situation be any different in the absence of our possibly irrelevant mountain of “investor protection” regulation?
That said, his buyout proposal, after initially boosting the stock price, has stopped helping. A leveraged buyout, featuring large amounts of debt, is unlikely in a company whose cash-generating capacity is already overtaxed. An equity-for-equity buyout may be what Mr. Musk is thinking of, but why would anybody pay $420 for what could be had for $355 today? Such a transaction presumably would be premised on some large, value-creating advantage in being private, but nobody other than Mr. Musk can see it. No private-market valuation would be as friendly to Tesla as the public markets have been, nor would private markets be so willing to fork up new cash to sustain its money-losing car business.
One keeps coming back to Mr. Musk’s serially repeated promise that Tesla was done raising money, that it can finance its future capital needs out of sales revenue.
It’s hard not to suspect this is a statement of necessity rather than desire. Mr. Musk knows he risks popping the Musk bubble if he goes back to the market one time too many. His board cannot be unaware that Mr. Musk’s aura and celebrity are a key prop under the stock price, which is a key prop under the company’s economics. This creates a dilemma for them too.
Not to elicit howls, but Enron was a company that found itself trying to sustain a stock price its underlying business couldn’t support. Here was an overlooked progenitor of what became the signature corporate scandal of its era. A gas-pipeline company that was selling for $20 suddenly was boosted to $90 based on internet-era hype about the commodification of everything. Notice any similarity to today’s belief among a certain public that Tesla is solving the climate problem and government policy will guarantee Elon’s success? What followed, at Enron, was management’s resort to funky, illegal and then frankly piratical measures to support a valuation received from investors intoxicated with new-age thinking.
In its day, Enron could have swallowed hard and let investors catch up with the fact that its earnings, while real, were never going to meet expectations. Enron likely would have survived instead of self-immolating. Could Tesla undergo a realistic markdown in its share price and survive? That may be Mr. Musk’s most searing challenge of all