Today’s piece started as a snarky Twitter response. Yesterday, a business news anchor noted that her program would be covering Tesla (TSLA) earnings, the battle for Twitter (TWTR), and a SpaceX launch. That was the Elon Musk trifecta.[i] My snarky response was “At what point do we reach peak Musk?” Haha, move on. But then it occurred to me that it was actually a reasonable question, and besides, I needed a topic for today. So, let’s do our best to answer the question.
Elon Musk has been a transformative figure in many ways. He had a key role in the genesis of PayPal (PYPL), then parlayed that success into TSLA, which is now the fifth most valuable company in the S&P 500 Index (SPX). Along the way he launches rockets into space, builds solar installations, digs train tunnels in the desert, and still found the time to promote dubious cryptocurrencies into huge valuations. I have to believe that even Tony Stark and Ernst Blofeld[ii] would both find that to be a mind-boggling set of accomplishments. When does he eat, sleep, play Wordle, etc.?
As a result, Musk has earned himself a legion of enthusiastic followers. Quite frankly, he has made a lot of believers wealthy. During a recent podcast, I interviewed a former colleague who invested heavily in TSLA and made a fortune.[iii] He is not likely to be dissuaded from his positive opinion about Musk anytime soon. Nor should he. Elon Musk has promised much and delivered against those promises. His following is well-earned. TSLA is continually the most actively traded stock and options class by IBKR customers, though it has recently been battling with TWTR for that status. Either way, it’s peak Musk at our shop as well.
Laid out this way, it is all quite awesome. But markets are forward looking, and so we will try our best to take a sober view into this futurist’s future. Investors certainly enjoyed TSLA’s most recent earnings report, with an adjusted result of $3.22 per share versus a $2.26 estimate. It is quite astounding to see a company beat its number by nearly a dollar per share. There was obviously some enthusiasm priced into the stock, since it rose “only” 10.5% on the market open and spent most of the day trading about 7% higher before succumbing to the broader market’s drop near the close. (By the way, that is in line with what we said the options market was expecting yesterday:
In short, traders are expecting relative normalcy from TSLA, with a roughly 7% post-earnings move priced in and some traders relatively sanguine about seeing that move occur to the upside.
Let’s put this into perspective – if yesterday’s move was what the markets were already expecting, and a 40% earnings beat led to that move, investors were certainly pricing some extraordinary results into TSLA. That’s quite a “whisper number.” Under that scenario, I shudder to think what the result might have been if the results missed, or simply matched expectations. In response to yesterday’s Netflix (NFLX) debacle, we pondered what happens when growth stocks shrink. There is no doubt that TSLA still earns its classification as a growth stock, but we also have to ponder whether a company with a PEG ratio over 2[iv], implying a 40%+ growth rate is already priced to perfection.
Can TSLA match that expectation? Sure. Does it leave massive room for disappointment? Heck yeah. Could investors have reason to worry that adding another public company (TWTR) to Musk’s already packed stable might eventually prove one distraction too many? Of course, but his various non-Tesla distractions haven’t proven problematic for stockholders so far. It also appears that his attention has largely shifted from cryptocurrencies, so it is quite possible that even Elon Musk recognizes some constraints on his time and attention.
Even more amazingly, Elon Musk appears to be doing this by himself. Other than his brother Kimbal, who is in Musk’s brain trust? The top three managers at TSLA other than Musk have only been in place since 2019. Of the company’s six outside directors (other than the Musk brothers), only one has a tenure longer than 2017. Again, none of the various managerial departures over the years have flustered the TSLA faithful. Their faith lies in one man and his vision, and it has been richly rewarded.
Things are going so well for TSLA and Musk, that it seems almost sacrilegious to ponder what could go wrong for them. Like it or not, even the most bullish investors need to stress test their holdings from time to time. There are regulatory risks, competitive risks, market risks, and a personnel risk that could upend the rosy situation.
First the regulatory risk. We have seen Musk’s conflicts with the SEC over his various public statements, most notably those surrounding his comments about taking the company private and funding secured. So far being in the SEC’s crosshairs has not affected the company one bit, and probably for good reason. Even though most of us would scrupulously avoid a fight with a government agency, Musk has the ego and the deep pockets to take them on. And quite frankly, there isn’t all that much that they can do to seriously disrupt his activities, at least in the short term. Also on the regulatory front, the company counts millions in revenues from regulatory credits. This was indeed a huge risk when TSLA was smaller, but at this point they represent “only” $679 million of a total $18.8 billion in quarterly revenue. With or without that source of relatively cost-free revenue, they are now a drop in TSLA’s revenue bucket.
TSLA had a huge first-mover advantage in the electric car market. It is reasonable to acknowledge that the popularity of electric vehicles can be attributed to TSLA in a significant way. The company benefits enormously from being a young company in an emerging market sector, and its market value reflects that. But a recent visit to the New York Auto Show made it clear that the rest of the industry is not eager to cede the electric vehicle sector to TSLA. It appears that electric vehicles are poised to become a larger piece of the automotive industry, but it is perhaps too much to assume that the growth will come only from TSLA and not from its myriad competitors. At this point, TSLA’s market valuation exceeds the combined value of most of its competition. One must reconsider whether this is sustainable. This week’s plunge in Netflix (NFLX) was partly attributable to the erosion in its first mover advantage. That erosion doesn’t seem imminent to TSLA right now, but it lurks out there somewhere.
Finally, while it may be premature to wonder what the succession plan may be for a 50 year old, there has to be some consideration placed upon the idea. What would happen to TSLA if Musk needed to take a step back from the business? He has undoubtedly been coping with an enormous amount of stress and demands upon his time. While he has been managing those demands remarkably well, the idea of him ratcheting back to even a normally heavy workload shouldn’t be completely out of the question. Or worse, what would happen if Elon Musk needed to take an extended leave from TSLA?[v] Investors would likely question the company’s direction under that circumstance.
People have gone broke betting against Elon Musk for years. It doesn’t appear prudent right now to bet heavily against him right now either. But that doesn’t mean that betting on him is a sure thing anymore. I can’t say we’ve reached peak Elon Musk yet, but I can’t say we haven’t either.
[i] The superfecta would have been if they had a reporter in a tunnel being dug somewhere in the desert by the Boring Company.
[ii] Both are fictional characters to whom I’ve heard Elon Musk compared. Tony Stark is the industrialist who became Iron Man. Ernst Blofeld was the archenemy of James Bond who sought world domination. Feel free to choose one or neither.
[iii] Shameless plug here for our new podcast series, IBKR Traders’ Insight Radio. A link to all our episodes can be found here.
[iv] According to Bloomberg data at the time of writing, TSLA’s trailing P/E is 140.7, its estimated P/E is 88.33, and its P/E to growth ratio, AKA PEG, is 2.08. That implies an enviable growth rate of about 42.5% is already priced in.
[v] What happens to the private companies would be interesting, but not relevant to common shareholders
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