Elon Musk’s Twitter Is First

A charismatic CEO is a double-edged sword for investors. When investors perceive that CEO as a heroic leader of disruptive innovation, the stock’s upside is unstoppable. However, when that CEO violates the social norms on which his or her business success depends, investors can suffer tremendously.

This comes to mind in considering shares of Tesla — a mere 2.72% of whose float is sold short — which ended 2022 a whopping 70% below its November 2021 high. Its CEO Elon Musk appealed greatly to Tesla customers who wanted to show off their wealth while appearing woke.

Since Musk announced his deal to acquire Twitter in mid-April 2022, Tesla’s shares lost 62% of their value — with much of that decline coming after he displayed his true colors by welcoming back the anti-woke crowd to the social network.

The plunge in tech stocks that began in November 2021 and Musk’s distraction with Twitter finally benefited those who placed bets on the decline in Tesla stock. According to the Wall Street Journal, those traders enjoyed $17 billion in gains last year.

But the party is not over for Tesla short sellers. I see four reasons why Tesla stock could further enrich short sellers:

CEO Elon Musk’s Twitter is platforming hate-speech and turning off Tesla customers EV customers are buying from Tesla rivals Tesla is offering large discounts to boost unit sales Tesla stock is way over-valued

Musk’s Twitter Distraction Is Turning Off Tesla Customers

If there is one thing I have learned since November 2016, it is that human irrationality can overpower logic. For example, a charismatic leader can compel people to do things that make no economic sense.

Elon Musk, for example, has clearly turned the power of systematic irrationality on himself. Otherwise, how can we understand why the world’s formerly wealthiest human being would spend $44 billion on a money-losing messaging system and then set about destroying it by firing half its employees and turning it into a platform for hate speech?

To be sure, Musk’s charisma helped to propel demand for Tesla vehicles and his use of Twitter to project himself on society — saving Tesla a considerable amount of marketing spend.

However, the conduct that Musk — who has sold $39 billion worth of Tesla shares since November 2021 — displayed between April 2022 when he signed a merger contract to acquire Twitter and today is clearly turning off people who own Teslas.

A case in point is John Blumenthal who bought a Tesla to help the environment and now wishes he didn’t own it. According to the Los Angeles Times, Blumenthal’s friends convinced him to dump his gas guzzler for a Tesla to cut his carbon footprint. It took a while for him to learn how to drive it but he was a happy Tesla owner.

Then in November, Musk turned Twitter into a platform for hate speech — which made him embarrassed to drive a Tesla. How so? As Blumenthal wrote, “Will people see me as a symbol of right-wing environmentalism, a living oxymoron?…Now that Musk has apparently swung to the far right — banning journalists from Twitter while reinstating neo-Nazis — I’m horrified to be associated with his brand whenever I drive anywhere.”

Blumenthal is not the only columnist to point out the negative side effects of Musk’s tenure as Twitter’s chief twit. Paul Krugman attributes the exceptionally steep plunge in Tesla’s stock to “Musk’s purchase of Twitter and the reputational self-immolation that followed,” according to the New York Times.

Krugman — who said he would not trust Musk to feed his cat based on his conduct — argued that “Tesla sales have certainly depended at least in part on the perception that Musk himself is a cool guy. Who, aside from MAGA types who probably wouldn’t have bought Teslas anyway, sees him that way now?”

Now that Twitter is a private company, there is no reliable source of information about the company’s cash burn rate. One key question that should concern Tesla investors: Will Musk need to come up with more cash — possibly by dumping Tesla shares — to pay interest on the $12.5 billion in debt he assumed to buy his $44 billion bauble?

EV Customers Buying From Rivals

Krugman went on to point out that unlike Microsoft or Apple, Tesla does not benefit from the kinds of network effects that lock customers into buying from these two iconic technology companies.

Tesla’s lack of network effects means that there is nothing that prevents customers like Blumenthal from selling their Teslas and buying other EVs that are untainted by Musk’s hate-drenched Twitter. And with Tesla’s relatively high prices and the pain of near-record inflation, consumers are happy to buy their EVs from other vendors.

While consumers who purchase internal-combustion engine powered vehicles care about price, make and model, EV buyers care most about how long it will take for them to take delivery of an EV.

That has mattered over the last few years due to EV supply shortages. Now there are more EV models available — 53 models now or soon to be on the market, according to the Wall Street Journal. On average, S&P Global Mobility has found that “about half of the people who own a certain vehicle brand return to buy another one” — meaning the other half switch to another vendor.

EV buyers in the last year are more likely to have traded in from another brand. Here are three examples reported by the Journal:

Kia. About 80% of Kia’s EV6 electric crossover buyers traded in something other than a Kia, compared to 61% for all its models. Ford. Over 66% of Ford Mustang Mach-E electric sport-utility buyers had non-Ford trade-ins, compared with Ford’s 42% brand-wide average. Rivian. The startup truck maker’s customers are equally likely to come from owners of a $30,000 Subaru Outback station wagon as a $100,000 Porsche 911 sports car.

Consumers’ willingness to shift brands means that market share is likely to migrate to rivals who can produce and deliver EVs more quickly than Tesla and other EV incumbents. If customers are happy with their purchases from Kia, Ford, Rivian and the like, they are likely to shun Tesla and buy from those rivals in the future.

Tesla’s Big Discounts Hint At Softening Demand

Tesla had set a goal of 50% growth in the number of vehicles it shipped in 2022. In October, Tesla lowered its target.

Tesla has long been the high-priced spread. Therefore, the discounts it announced in late December strike me as a sign that demand for its vehicles is falling short of its expectations.

Both new Tesla buyers and existing Tesla owners are the recipients of these discounts. According to Car and Driver, Tesla is offering current owners “a 30-day trial of some Enhanced Autopilot features, which are usually a paid upgrade. [Tesla is also offering Model 3 and Model Y buyers various discounts] including $7,500 [if they bought in] December, along with 10,000 miles of free Supercharging.”

In addition, plant shutdowns could make it more difficult for Tesla to meet its shipment goals. For example, on December 24, Tesla closed down its Shanghai plant — which shut down earlier in 2022 due to surging Covid-19 infections. The plant — which produces 40% of Tesla vehicles — is scheduled to reopen January 2, according to the Wall Street Journal.

It remains to be seen whether the discounts will increase demand enough to exceed Tesla’s original growth goal or whether the Shanghai plant shutdown will leave the company short of that goal.

Tesla Stock Way Over-Valued

Seven years ago, I wrote about Mark Spiegel, founder of $9 million (assets under management) hedge fund Stanphyl Capital Partners, who was betting on a decline in Tesla’s stock price. Since then, Tesla stock has increased over 10-fold from $12 to $123.

In the last seven years, Tesla has reversed the billions in negative cash flow that it generated in 2016 — producing $8.9 billion in free cash flow during the year-ending September 2022.

Nevertheless, despite relatively small top line, Tesla’s price-earnings ratio of 36.5 is high compared to that of four rivals. Specifically, Tesla’s $74.9 billion in trailing 12 months’ sales is 9% of the $825.6 billion generated during that period by Toyota ($260 billion), GM ($147 billion), Ford ($151.7 billion), and VW ($266.6 billion) combined during the same period.

On the basis of trailing or forward growth, Tesla seems way over-valued. These larger companies have much lower trailing P/E ratios: 10.1, 5.7, 5.2, and 4.6, respectively. Tesla shares trade at a P/E of more than 24 times 2023 estimated earnings — many times higher than GM and Ford — which trade between 5 and 6. In 2023, analysts expect GM and Ford to grow in the low single digits — way below Tesla’s 36% growth, noted Bloomberg.

In the latest quarter, Tesla grew more rapidly and was more profitable than its peers. For example, in the September-ending quarter, Tesla’s revenue grew 56% and its net profit margin was 15.3%. This compares favorably to its rivals Toyota (22.2% revenue growth and 4.7% net margin), GM (56% and 7.9%), Ford (10% and -2.1%), and VW (24.2% and 2.9%).

Tesla’s stock market capitalization — $389 billion — is $2 billion higher than that of all four of these rivals combined — $387 billion. Here is the December 30 market capitalization of Toyota ($219 billion), GM ($48 billion), Ford ($47 billion), and VW ($73 billion).

Despite the 71% fall in Tesla’s shares since it peaked in November 2021, the stock still seems over-valued to me. Exactly how much Tesla stock should be worth is a matter of what assumptions you use.

Tesla At $50?

There are many opinions about how much Tesla stock should be worth — my sense is that $50 a share is about right. However, cases can be made that its shares are worth anywhere between $251 and $30.

For example, one analyst assumed that a fair market capitalization for Tesla is $94 billion — or $30 a share. How so? According to Nicholas Colas of DataTrek Research, Tesla’s market capitalization should equal the combined market cap of GM ($49 billion) and Ford ($45 billion), according to a December 28 report in Investors Business Daily (IBD).

Here are four scenarios from IBD:

Most bullish — Tesla stock rises to $251, up 104%. Wall Street analysts expect the stock to end 2023 at $251. Less bullish ($119, down 3.3%). Based on applying Apple’s 2023 P/E ratio of 21 on its earnings estimate of $6.19 to Tesla’s 2023 estimated earnings of $5.66. Negative ($65, down 47%). This assumes that Tesla trades at the same valuation as the S&P 500 of 20. Applying that to Tesla’s trailing adjusted profit of $3.24 a share yields a Tesla target price of about $65. Scary ($18, down 86%). This takes the midpoint of the P/E ratio of GM (5.7) and Ford (5.3) — 5.5 — and multiplies it by Tesla’s trailing earnings to produce a target price of about $18.

Sheldon Liber CEO and Chief Investment Officer of Chasing Value Asset Management thinks Tesla will trade below $100 in January 2024. As he told me in December, “For the past year we have been short Tesla purchasing puts with $133 strike for January 2024 (Leaps) . It is our only short position and has worked out well so far. I now believe we could see the stock drop below $100 by that time.”

In October Tesla lowered its forecast for 50% growth in unit sales — setting a goal of shipping 429,000 vehicles in the fourth quarter of 2022. Some analysts are more pessimistic with Wedbush Securities estimating deliveries in the 410,000 to 415,000 range while Baird forecasts 387,000 for the quarter.

If Tesla exceeds the consensus estimate and raises its growth forecast, those betting on a further decline in its stock will lose out. Those beneficiaries could include individual investors who have purchased a net $16 billion of Tesla stock this year, according to data from Vanda Research. Viraj Patel, global macro strategist at Vanda Research told the Journal, “It’s one of the most popular stocks out there. The selloff draws bargain hunters.”

But the bargain hunters will lose out if Musk violates his December 22 pledge not to sell more Tesla shares until 2024 and Tesla reports fewer shipments than expected and lowers its forecast.