(Bloomberg Opinion) — Elon Musk’s initial motivational address to the social experiment now referred to as “Twitter employees” didn’t bury the lead:
Musk Warns Twitter Bankruptcy Possible as Senior Executives Exit
Bursts of hyperbole are, of course, Musk’s oeuvre — “funding unsecured,” as it were — which is why he took so effortlessly to Twitter in the first place. You could say that also makes him Twitter’s natural owner but (a) I mean, just look and (b) we’ve all been warned about the consequences of folks getting high on their own supply. There is an alternate reality in which, earlier this year, Musk did not decide, seemingly on a whim, to buy Twitter and instead just kept using it for free to a perhaps excessive but, by his own lights, successful degree. Somehow, our actual reality, featuring a live broadcast of corporate vandalism on a grand scale by the richest man on Earth, seems plausible even though I can actually feel my fingertips hitting these keys.
I say “hyperbole” but with Twitter’s estimated new interest payments equating to roughly a fifth of its revenue, Musk may well be onto something with his note of caution. And that revenue was before we even got into this week’s convulsions, with Musk’s introduction of an $8 avatar dress-up — Full Self-Verification, as it were — giving any advertiser thinking of trimming budgets ahead of a possible recession ample reason to get started.
I tend to be more interested in that other business Musk runs, the one that makes cars. It has been a rough year for Tesla Inc.’s other shareholders, with the stock having more than halved, wiping out $644 billion, which happens to be $600 billion more than what Musk and chums paid for the other thing. Bear in mind that this doesn’t reflect a collapse in profits; far from it: Tesla’s net income doubled, year over year, in the latest quarter. Rather, it is just air being squeezed out of the price/earnings ratio.
Think of that ratio as an expression of belief. At the start of the year, Tesla’s stock traded at 130 times forward earnings while Ford Motor Co.’s commanded 10 times. The market was effectively saying, sure, Ford’s been at this car-making business a while and can probably keep turning a decent profit for the foreseeable future but, man, Tesla is going to own this industry and more besides: self-driving, solar energy, humanoid robots. Ford may have the F-150 truck, but Tesla has Musk.
Belief has softened. The current ratio of 35 times forecast adjusted earnings is lower than it was at the start of 2019, when Tesla was still essentially unprofitable on a trailing basis. Moreover, Tesla’s P/E began the year at six times that of the S&P 500: and while the latter’s has also dropped, today Tesla’s is merely double that of the market.
Tracing that deterioration in financial belief to any one cause is perhaps a fool’s errand (or maybe a columnist’s). Reversion to the mean, and a bit below the mean, after a colossal run up is the oldest of stock-market narratives. Technology stocks, which Tesla is viewed as by many, have had a particularly rough year. Personal and financial cults of all types — crypto, the metaverse and, yes, Musk himself — have been diminished in 2022. Maybe it’s all just a function of a 4% Federal funds rate after a decade of zero. The future generally becomes less futuristic when money costs something.
Does the live feed of Musk’s apparent flailing over at Twitter make this worse? There’s no definitive answer. Musk has defied seemingly existential crises before; one thinks of the botched launch of the Model 3 back in 2017. Plenty of people will give him the benefit of the doubt, expecting Twitter to rise as a blue phoenix on the back of some unknown genius plan. Certainly, the bankers holding the loans to fund the deal must fervently hope so.
But I think it’s safe to say the Twitter debacle — which, let’s not forget, includes Musk’s shambolic takeover “process” itself — cannot have helped. On a straightforward level, Musk’s liquidation of Tesla shares to pay for his new distraction cannot help but undercut the stock. It also adds to the dissonance that so frequently characterizes Musk’s visionary statements. Exhibit A: If, as Musk claimed just weeks ago, Tesla will eventually be worth north of $4 trillion, why sell stock when it’s valued at less than $600 billion to fund an unprofitable social media site?
Above all, Musk’s combination of obsession with, and seemingly bungling of, Twitter demonstrates his fallibility — which is not useful when your car company is valued as an Edison-like moonshot factory. Tesla is profitable these days and has billions in the bank. So while Twitter will no doubt feature in many a future business-school case study, it’s a stretch to imagine that those case studies will trace a path to some catastrophe at Tesla. But for anyone who bought Tesla when it was valued above $1 trillion, that is beside the point. Tesla may run well enough as a car company even when the genius CEO is this distracted, but a plain old car company doesn’t get them their money back.
One final thought. Twitter puts me in mind of that other dubious acquisition Musk consummated, Tesla’s buyout of SolarCity Corp. in 2016. This was, in essence, a bail out of a failing enterprise chaired by Musk, run by his cousin, and owing money to both (see this). Even one of the starrier-eyed Wall Street analysts covering Tesla later referred to the deal as a “controlled detonation” to protect Musk’s aura. That aura is all and Musk at the time felt obliged to release an update to his Tesla “Master Plan” stressing the need to twin renewable energy with electric vehicles. I’m not saying we might one day see a new update laying out the eight-dimensional rationale for a car company to have an in-house social media site. I’m just saying our present reality produces some truly weird outcomes.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’s Lex column.