Betting on Elon’s a risky business

(John McCann/M&G)

(John McCann/M&G)

If a messiah was needed to lead us in these climate-challenged times, Elon Musk could be seen to fit much of the bill. His projects include electric cars, which may even self-drive, solar energy, battery storage, trucks and underground car transport, to name just a few.

Nothing with Musk is niche; everything is done, at least in planning, at industrial scale.

There’s also a double pay-off. With the Tesla electric car, for instance, you get not only a vehicle with greener credentials than its fossil-fuelled competition but something that looks cool to boot.

Wired’s Alex Davies has captured Musk’s efforts rather well: “Start with the tale of Tesla.
When the company launched in 2003, car salesmen were stocking up on the 12-mpg Hummer H2. The most popular battery-powered vehicles were golf carts.

“The American auto industry is famously brutal to newcomers. For years, sceptics waited to bury Tesla alongside Tucker, DeLorean, Fisker. Musk defied them. He made electric cars capable (and sort of self-driving). He made them easy to charge (on an infrastructure he built),” Davies wrote.

“But most importantly, he made them desirable. Owning a Tesla became a status symbol; about 400 000 people are on a waiting list to own the Model 3.

“Simultaneously, Musk was running SpaceX. The commercial space company defied entrenched aviation giants like Boeing by breaking into the rocket science business. Musk promised to colonise Mars. As his side hustles, he wished a hyper loop industry into creation, dabbled in artificial intelligence and won a contract to dig tunnels under Chicago.”

This is walk-on-water stuff. Who would not bet on Elon Musk?

But equally, he has his detractors who have been prepared to bet — big — that his seemingly unbridled ambition amounts to overreach and that he will fail. Tesla has more investors short in its stock than any other United States-listed company, analytics company S3 Partners reported. It said $11.2-billion worth of its shares, or more than a quarter of the company’s free float, is out on loan to investors betting that its share price will decline.

Shorts take positions to profit when share prices fall. You do this by first borrowing the stock, which you immediately sell at the ruling price. If the share falls as you expect, you then buy at the lower price and repay the party who lent you the share, pocketing the difference.

If you’re not a market watcher, short selling can sound crazy, but an efficient market is where there is ongoing competition between those who see the value of the company going up with those who see it falling.

But why short a good thing? Tesla is surely a good thing?

The crisp issue has been the Model  3, Tesla’s car aimed at the mass market. Its goal has been to produce 5 000 units a week, which it achieved in the final week of June. This level of production, Musk has said, would mean revenues would exceed costs, leading to sustained profitability.

This has been the big bet, those backing Musk being prepared to pay top dollar for its shares, whereas the critics, who think the targets are too ambitious and will not be met, have taken huge short positions on the basis that the share will fall.

Until June, the Model 3 has been missing production targets but now it seems the chief executive himself is unravelling.

“Am considering taking Tesla private at $420. Funding secured,” Musk tweeted on August 7, the share jumping by 12% and closing on the day at $379.

Musk said Saudi Arabia’s Public Investment Fund, which became a Tesla shareholder earlier this year with a stake of just under 5%, could help to fund the deal, though sources close to the secretive sovereign wealth fund have played down that prospect, the Financial Times reported.

The share price quickly reversed and, at the close of trading on Friday, was 19% down before the tweet.

The value of the short positions was up $1.2-billion over that period, according to S3 Partners. “This has been one of the largest shorts in the US for several years,” says Ihor Dusaniwsky, managing director at S3 Partners.“It’s become a battle of wills. The big players on the short side have a conviction that the stock is going to tumble to bankruptcy,” he told The Guardian.

There are rules regarding how price-sensitive announcements are made. It appears that the going-private, funding-secured message had not been agreed to by the board. Information of this kind must be made by regulatory filings. Musk’s nine-word tweet, made on his account as he was driving in a Tesla to the airport, does not meet these criteria.

The Securities Exchange Commission has begun an inquiry. It was already investigating Tesla before Musk sent the tweet, Bloomberg reported on August 9. It said Tesla and Musk’s disclosures have been closely scrutinised by investors amid the company’s year-long struggle to ramp up production of the Model 3.

In the wake of the maelstrom the tweet provoked, Musk told The New York Times “this past year has been the most difficult and painful year of my career. It was excruciating.”

He acknowledged he was overworked and exhausted, saying his intense involvement at Tesla’s factory had taken a steep toll on his personal life and health.

“It’s not been great, actually. I have had friends come by who are really concerned.”

Musk railed in the interview against his nemesis, the short sellers: “They’re not dumb guys, but they’re not super smart. They’re okay. They’re smartish,” he said.

Tesla’s board was reportedly worried about their chief executive’s use of Ambien, a sleeping tablet Musk has previously joked about.

At Tesla’s annual meeting in June, in response to a question about what he does in his time away from work, Musk said, in part, “sometimes go crazy on Twitter. You know, sort of, red wine, vintage record player, some Ambien, magic! Magic happens.” The assembled crowd burst into laughter, The Wall Street Journal reported.

Arianna Huffington, a sleep advocate, wrote an open letter to Musk: “Dear Elon, please change the way you work to be more in line with the science around how humans are most effective: You need it, Tesla needs it and the world needs it.”

Musk responded in a tweet at 2.30am: “Ford & Tesla are the only 2 American car companies to avoid bankruptcy. I just got home from the factory. You think this is an option. It is not.”

Business Insider reported this week that, of the 5 000 Model 3s that contributed to Tesla’s end-of-June manufacturing target, about 4 300 required rework, citing internal documents it had viewed.

“Within the auto industry, cars that make it through a manufacturing process without requiring rework are part of a factory or line’s first-pass yield or FPY. That means the Tesla factory had a first-pass yield for Model 3 vehicles of as low as 14% during the last week of June.”

An industry expert said good auto plants have a first-pass yield of about 80%,Business Insider reported. It quoted a Tesla representative who said the number of labour hours required per Model 3 had decreased by almost 30% since last quarter.

Tesla’s tumultuous year has fuelled concern among some of its suppliers about the automaker’s financial strength after production of the Model 3 car drained some of its cash, according to industry executives and documents, The Wall Street Journal reported this week.

“A recent survey sent privately by a well-regarded automotive supplier association to top executives found that 18 of 22 respondents believe that Tesla is now a financial risk to their companies, according to the document reviewed by The Wall Street Journal,” it reported.

By midweek, it appeared that Musk was not giving up his idea of taking Tesla private, which would cost some $72-billion if existing shareholders were to be bought out at $420. Alternatively, as he suggested, they could be rolled up somehow into the new structure.

Wired’s Davies wrote that: “Musk has landed rockets on boats and deliver[ed]a wonderful, affordable, electric car. But the effort seems to have left him mad. And now he threatens to destroy what he has created.”

Pass the Ambien.

Kevin Davie

Kevin Davie

Kevin Davie is M&G's business editor. A journalist for more than 30 years, he has worked in senior positions at most major titles in the country. Davie is a Nieman Fellow (1995-1996) and cyberspace innovator, having co-founded SA's first online-only news portal, Woza, and the first online stockbroking operation. He is a lecturer at Wits Journalism. In his spare time he can be found riding a bicycle, usually somewhere remote. Read more from Kevin Davie

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