How Elon Musk Empowers Fools to Part Ways with Their Money

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.

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’ll assume this is a noble cause.

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

No doubt they’ve got their work cut out for them.  Production of 500,000 Tesla’s per year represents an increase of nearly 1,000 percent from the 50,580 electric vehicles delivered last year.  Is this even remotely achievable?

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

Today’s Premier Purveyor of Spectacle and Hucksterism

Last week, for example, Tesla Motors raised $1.46 billion in new capital from the sale of its 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.

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 serious.  We wouldn’t expect anything less.  Yet its noble brilliance may be obscuring what business it is that Tesla’s really in.

The company, if you didn’t know, doesn’t earn a profit.  Thus their main activity is the consumption of capital.  Investors with soft brains and warm hearts give Tesla money and the company devours it.  By this we can make some conjectures about what business it is that Tesla’s really in.

For instance, one could easily perceive it’s a business someone like P.T. Barnum – the 19th Century’s premier purveyor of spectacle and hucksterism – could appreciate.  In this respect, the business Musk is really in is not sustainable transport after all.  Rather it’s the business of separating fools from their money.  Without question, like P.T. Barnum, he’s good at it.

How Elon Musk Empowers 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.”

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

“Wall Street is a willing partner in this effort because volatility is the best way to make a fat return,” adds DeBord.  “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’ll 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 they get there.  As an aside, the company reported a net loss of $282.3 million for the first quarter.


MN Gordon
for Economic Prism

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