On Tuesday, news broke that the Department of Justice had started a probe into Elon Musk’s August 7 tweet: “Am considering taking Tesla private at $420. Funding secured.” The news of the DOJ inquiry sent Tesla stock tumbling yet again, continuing what has been an extremely tumultuous 2018 for Musk (and, by proxy, Tesla). Since the beginning of 2018, Musk has [deep breath] angrily lashed out an an analyst on an earnings call; accused someone of being a pedophile; accepted a blunt from Joe Rogan on video; started a feud with the media about “fake news”; maybe trapped rapper Azealia Banks in his own house; gotten into a fight about stealing a picture of a farting unicorn; and headbutted one of his own cars. He also started dating indie musician Grimes.
So, we smoked some DMT with Joe Rogan, convened with the machine elves and hyperspace jesters, and came out with four possible futures for Tesla and Elon Musk.
Tesla Glides Along
Obscured by blunt smoke, the drama surrounding Musk, and news of execs fleeing Tesla is that the company has gotten better at the one thing a car company really needs to do: make cars. Tesla hit an important milestone earlier this year of producing 5,000 Model 3s in a week, though it seems to have once again slowed down after hitting that peak. (A massive “tent” in Fremont and an assembly line shipped in from Germany dedicated purely to producing Model 3s seems to have helped.)
Going purely by preorder numbers, at one point there were least a half-million people interested in buying a Model 3. (Many of those, of course, have now cancelled that preorder, but still: the demand was there.) In order to produce 500,000 Model 3s, you need to make about 9,500 cars per week. Tesla is still far away from hitting that production target, but it’s closing the gap.
Tesla sells the most purely electric vehicles on the road by a wide margin, even with its production headaches. Audi’s much-anticipated E-tron, meant to compete against the Model X, was a dud when it was unveiled, with slower acceleration, shorter range, and (to my eyes) uglier styling. Even Tesla skeptics like UBS admitted that Audi’s “e-tron underscores that catching up with Tesla is more difficult than expected by many.”
So let’s say Musk hires a COO to help him run Tesla’s day-to-day business, curtails his 120-hour workweeks and Ambien habit, and repopulates the emptying executive suite. Tesla’s complicated financial debt engineering doesn’t blow up in its face. Getting your Tesla serviced stops being a nightmare. Musk can remain a deeply impulsive and perhaps personally troubled guy, but Tesla starts to produce more and more electric vehicles at a significant profit margin to a public eager to buy them.
Odds: Good, and much more likely than recent news coverage would suggest. By mid-2019, Tesla could be a smoothly running company once again (even if its CEO headbutts vehicles on the assembly line from time to time).
Tesla Gets Acquired
Tesla’s next earnings report is due at the end of October, and how it looks could swing things dramatically one way or the other. The company was quick to highlight that it had surpassed the 5,000-cars-a-week milestone, but that number seems to have dipped back down for Q3, and the company seems to be slowing to something more like 4,000 cars per week. That 5,000-per-week target was supposed to be a starting point for Tesla, not a high-water mark.
An earnings report showing weak production numbers could cause Moody’s to downgrade Tesla’s bond rating yet again in 2018 (it already did so once in March of this year). While Musk has claimed that Tesla will not need to raise money again in 2018, analysts across the board disagree, with Morgan Stanley estimating the company needs to raise at least a billion dollars this year.
Tesla is already carrying $10 billion in debt, and it’s likely that Tesla will need to issue even more “convertible debt” — a type of debt that can either be repaid in stock (good!) or cash (bad!). Convertible debt is risky, mainly because if a company’s stock price isn’t trading above a set price, lenders can demand to simply be paid in cash. Tesla, for instance, has $920 million in convertible debt due in March 2019, and its stock would need to be trading at $359.9 per share in order for lenders to take their payment in stock — otherwise, they can demand $920 million cash. For a cash-strapped company that hasn’t traded over $359.9 for the vast majority of 2018, this is a real problem.
The nightmare scenario for Tesla, then, is that weak earnings reports send its stock price down even further, it finds itself unable to raise more money as institutional investors start to become leery, and is forced to pay off its convertible debt in cash. As all of the existing Model 3 preorders get fulfilled, Tesla discovers there’s weak demand for its semi-affordable electric sedan, and fails to start turning the profits it so badly needs.
But Tesla has a great brand, a great product, and a lot of physical infrastructure set up to produce electric vehicles. It’s never going to be a company stripped for parts. As Tesla’s valuation plummets, acquisition — particularly considering that Musk has so much of his personal fortune tied up in Tesla — could start to be on the table. Tesla has anti-takeover provisions in its governing documents meant to snap up any common stock and fend off hostile takeovers, but a friendly acquisition, particularly one that would allow Musk to remain in his position as CEO, could be viable.
Odds: Decent. A cheap Tesla is an enticing acquisition target for a variety of companies, both traditional auto manufacturers and (on the outside edge of possibility) other big Silicon Valley firms such as Apple or Alphabet with large amounts of cash on hand, and Tesla’s financial future is far from certain.
Elon Is Forced Out From Tesla
Besides Steve Jobs at the height of his time at Apple, or perhaps Mark Zuckerberg at Facebook, there is no other person so closely tied with a company as Elon Musk and Tesla. The problem is that Steve Jobs and Mark Zuckerberg were focused on one company, and one company only. Musk is pulled in all sorts of directions, whether that is the Boring Company, a goofy idea that has mainly dug some holes and sold a few flamethrowers, or DeepMind Technologies, a plan to create a cyperpunk-ish interface between human and computer that will allow us to outpace AIs before they destroy us all.
Musk is vital to the brand of Tesla. He is able to generate tons of earned media (i.e., free advertising) simply by being who he is. He is also by all accounts a brilliant engineer with a keen eye for how to make things both functional and desirable. But his Twitter account has now brought both the Department of Justice and the SEC knocking on Tesla’s door. Tesla’s board of directors is stacked with Elon’s friends and family, and so far seems unlikely to force him out of his role as CEO. But activist investor groups already mounted attempts to oust Musk as chairman of the board in June of 2018, and there should be a lot more ammunition to use against him next year.
Also worth noting: One of the risk factors in Tesla’s own financial statements is that Elon Musk owns about 22 percent of Tesla’s stock and has borrowed heavily against that stock (about 33 percent of his total holdings). If the stock price of Tesla were to ever dip too low, the lending institutions Musk has borrowed against would issue a margin call on Musk’s stock. (A “margin call” is one of those gee-whiz financial terms like “short squeeze” you can use to pretend like you’re on Billions, but it’s basically the same thing that would happen if you put down your home as collateral for a loan that you defaulted on — the lending institutions could legally demand that Musk sell shares of his common stock to cover his debt.) This would send Tesla’s stock plummeting, and likely force even a very friendly board to demand that Musk step down.
This sort of margin call isn’t a hypothetical situation. It’s taken down other CEOs, like Aubrey McClendon of Chesapeake Energy and Worldcom’s Bernie Ebbers.
Odds: Slim, particularly the margin call scenario. But the odds rise every time Musk does something seen as unstable, or brings more negative publicity on the company. And with so much of Musk’s own cash tied into Tesla stock (and Musk’s apparently sincere belief in Tesla’s stated mission to reduce carbon emissions), self-preservation may kick in, meaning Musk might even do unthinkable: voluntarily step down.
Elon Musk Goes to Jail
While headlines about criminal investigations may give you visions of Musk being perp-walked down courthouse steps in handcuffs, there’s almost no chance of this happening. In order to find Musk criminally liable for fraud, the government would have to prove that Musk intentionally tweeted that he planned take the company private when in fact he had no such plan to do so. Barring a smoking gun email or text from Musk (“gonna announce going private at $420 but never gonna do it, really screw with the haters. also doing Rogan’s podcast, lol”), it’s hard to imagine a way that this ends in criminal charges ever being filed against Musk.
On the other hand, the investigation by the SEC is much harder to predict. After all, when Musk tweeted “Funding secured,” it now appears that funding was not, in fact, secured — which probably should interest the Security and Exchange Commission! Unlike a federal prosecutor, the SEC doesn’t have to prove that Musk intentionally was misleading investors — just that he made a false statement (or, in this case, tweet). The SEC (and Tesla) has a range of options here, from the SEC seeking to bar Musk from serving running a public company because he made a false or reckless statement (which would likely see the SEC and Tesla engaged in a lengthy court battle), to Tesla and Musk quietly settling out of court for the price of a few Model S coupes. It’s a weird case about a weird tweet from a weird CEO. It’s really hard to tell where this all lands.
Odds: Musk serving jail time? The same as you retiring happily to Mars. Tesla writing a check to the SEC with more than a few zeroes in it? Pretty dang likely.