How Elon Musk Helps Fools to Part Ways with Their Money

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MN Gordon
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Image credit: Tesla Motors

Tesla Goes Fishing

Tesla Motors is up to something remarkable.  But what it is, exactly, is unclear.  According to the Tesla Motors website, the company’s mission is: to accelerate the world’s transition to sustainable transport.

Tesla Model 3: the company’s first “mass market” entry so to speak, which is supposed to help the world to reach the nirvana of  “sustainable” transport. On the side, it is helping a number of Wall Street firms to increase their commission income.

This all sounds quite brilliant, indeed.  Though we must admit, we’re not really sure what sustainable transport is…or why the world’s transition to it should be accelerated.  Nonetheless, we assume it is a noble cause.

Tesla’s bold CEO, Elon Musk, certainly thinks it is.  In fact, the twelve billion dollar man is so sure of merits of the endeavor, he keeps upping the ante.  The company is now on the hook to expand production of its electric vehicles to 500,000 a year by 2018.

They have got their work cut out for them.  Production of 500,000 Tesla cars per year represents an increase of nearly 1,000 percent from the 50,580 electric vehicles the company delivered last year.  Is this even remotely achievable?

Wall Street certainly thinks it is.  For while Tesla is on the hook to deliver 500,000 electric vehicles per year by 2018, the big investment banks and the savvy investors they serve just bought the story, hook, line and sinker.

Today’s Premier Purveyor of Spectacle and Hucksterism

For example, last week Tesla Motors raised $1.46 billion in new capital from a 6.8 million new common stock offering.  “The shares were priced at $215 by the lead managers Morgan Stanley, Goldman Sachs, Deutsche Bank, Citigroup, and Bank of America Merrill Lynch,” IFR said.

TSLA Tesla Motors Inc. TSLA, weekly: early this year it looked like the stock was about to break down from a long sideways channel, but it has managed to recover along with the rest of the market. When it trades above the $200 level, fresh stock offerings are a constant threat…

TSLA Tesla Motors Inc. – click to enlarge.

From what we gather, Tesla had already raised over $4.5 billion through a combination of debt and stock offerings over the last six years.  The $1.46 billion addition “will be used mainly to pay for $2.25 billion in capital investments Musk has said will be needed this year to prepare for high-volume production of the Model 3.”

Obviously, Musk takes his company seriously.  We wouldn’t expect anything less.  Yet its noble brilliance may be obscuring what business it is that Tesla is really in. The company, if you didn’t know, doesn’t earn a profit.  Thus its main activity so far is the consumption of capital.

The legendary P.T. Barnum’s “Greatest Show on Earth”

Investors with soft brains and warm hearts give Tesla money and the company devours it.  Based on this we can make some conjectures about the type of business Tesla is really in. For instance, one could easily see it as a business someone like P.T. Barnum – the 19th Century’s premier purveyor of spectacle and hucksterism – would appreciate.

In this respect, Musk is really not in the sustainable transport business after all.  Rather it is the business of separating fools from their money.  Without question, like P.T. Barnum, he’s good at it.

How Elon Musk Helps Fools to Part Ways with Their Money

Matthew DeBord, writing at Business Insider, offers a succinct overview of how Musk empowers fools to part ways with their money:

“It’s all kind of predictable: Tesla will lack market-moving news, or face up to its own substantial challenges, and the stock will tank below $200, sometimes falling below $150. (Remember, this is a company that went public in 2010 at $17 a share.)

Then something like the massive Model 3 pre-orders will hit, and the stock will lurch higher, prompting Musk and his team to access the easiest money they can: The well of risk-loving capital represented by Tesla’s market cap.

An outsider might study this pattern and conclude that it’s unsustainable.  But Tesla has been selling chunks of itself since before the IPO, when both Daimler and Toyota took stakes.  If you can handle the volatility, Tesla promises some quick, big gains — and proposes to be worth much, much more as an investment when hundreds of thousands of electric cars wearing its badge take to the streets.”

Come on in… Elon Musk at a Tesla presentation. Photo credit: Matt Sumner / ZUMAPRESS

He’s undeniably a good businessman with enormous drive and conviction. Whether TSLA is a good investment is a different cup of tea though.

Of course, the promise of quick, big gains is too much for enlightened investors to pass up.  Who cares if the company has a valid business when its share price keeps going up?  Wall Street then seizes the moment and moves fresh share offerings like hot boysenberry funnel cakes at a county fair.

DeBord adds:

“Wall Street is a willing partner in this effort because volatility is the best way to make a fat return. The Street craves it.  And of course the Goldmans and Morgan Stanleys of the world also love the fees.  So Musk gets them on two fronts.”

Perhaps Musk and Tesla will live up to their mission – and promise.  Maybe they will even hit 2018’s challenging 500,000 production target and figure out how to turn a profit in the process.  Sure these things could all happen.  Tesla’s stock could double again from here.

But we suspect Tesla will run out of fools before it gets there.  As an aside, the company reported a net loss of $282.3 million for the first quarter.

Chart by: StockCharts

Chart and image captions by PT

M N. Gordon is the editor and publisher of the Economic Prism.