May 07, 2022 Francis Menton @ Manhattan Contrarian
The news of the past few weeks has been all aflutter over Elon Musk’s purchase of Twitter.
The main issue for discussion has been, what does this mean for the future of free speech in the American public square? That’s an important issue, to which I don’t have the answer. I think that there are reasons for both optimism and pessimism. More on this issue later.
A second issue is what Musk’s Twitter venture signals as to progressive fantasies about net zero utopia. This second issue has been little discussed, let alone recognized at all, in the recent press coverage. So let me open the door.
The most logical way to look at what Musk is up to is that he is getting money out of Tesla in advance of an almost certain huge decline in its value, while placing his next bet on something else with a much better chance for major future growth. I think that he has recognized that the net zero utopia necessary for Tesla to have continuing exponential growth is impossible and not going to happen.
According to Forbes, Musk is currently the richest man in the world, with net worth in the range of $255 billion. That puts him far ahead of the next richest, who could be either Jeff Bezos or Bernard Arnault, each at around $140 billion, depending on current stock prices for Amazon or LVMH.
But the problem for Musk is that his wealth may be mostly a market bubble that could burst literally overnight. Most of Musk’s wealth derives from the very speculative values of two companies, Tesla and SpaceX. According to Barron’s here on April 21, Musk owns about 17% of Tesla. Even after recent market declines, Tesla has a market cap of close to $1 trillion, which would thus account for about $170 billion of Musk’s net worth. The other big contributor, SpaceX, is not traded publicly, but Barron’s says that it is valued at about $100 billion “based on its recent capital raises.” Musk owns “between 40% and 50%” of SpaceX. The entire revenue (not earnings) of SpaceX in 2021 was about $1.6 billion, which should give you an idea of how speculative that $100 billion valuation is.
So let’s consider how solid is the approximate $1 trillion current value of Tesla. In January, Tesla reported earnings for the full year 2021 as $5.5 billion. That’s quite an increase from only $721 million of profit in 2020. But still, compared to a market cap of $1 trillion, the $5.5 billion in earnings makes for a price/earnings ratio of around 180. For comparison, the average P/E ratio for the S&P 500 is running around 18, based on yesterday’s close of 4128 and 2022 projected earnings of $228.
There’s nothing inherently crazy about a P/E ratio of 180 for a company with excellent prospects for huge and rapid growth in the next few years. Indeed, all of Google, Facebook and Amazon went public at huge valuations before they had much or any earnings at all. The markets bet that they would shortly show large earnings acceleration, and in each of these cases the markets were right. (There are plenty of other examples where the markets placed big bets on companies and turned out to be wrong.)
Are Tesla’s prospects really that good for massive growth within just a few years? I’m willing to concede that the Tesla is a great car (I’ve never driven one) and that Musk is a genius. But the truth is that even Tesla’s current sales are heavily dependent on government subsidies. And to believe that Tesla’s sales will shortly mushroom by a factor of 50 or 100, you need to believe a series of increasingly implausible things:
That government subsidies will continue at current or even increasing levels. (This one is plausible, if a bad idea.)
That more and more people will be willing to pay premiums of $10,000 or $20,000 or more to get a vehicle that shows off climate virtue, even if it has limited range and other performance shortcomings. (Much less plausible than the previous proposition, but not yet completely ridiculous.)
That Tesla and others will be able to ramp up battery production by orders of magnitude over the next very short number of years, without running into supply constraints for things like lithium and cobalt that either limit production to much lower levels or alternatively drive prices through the roof. (The amounts of production of things like lithium and cobalt that are implicit in plans to electrify automotive transport are complete fantasies.)
And finally, that sufficient amounts of electricity, supplied almost entirely by wind and sun, will emerge to power a mostly-electric automotive fleet. To electrify the automotive fleet will require, by itself, almost doubling the current supply of electricity. The idea that this can be done with wind and sun is completely ridiculous.
I have little doubt that Musk himself has figured out that the value of the Tesla company is ready for a big fall. Musk sold something in the range of $18 billion of Tesla stock at the end of 2021, and now just sold another $8.5 billion in connection with raising equity for his purchase of Twitter. Clearly he is limited in his ability to just walk away from Tesla, but he is certainly doing his best to diversify.
For the diversification project, Twitter is an inspired choice. Twitter has an excellent chance of seriously enhancing its future growth in new hands, for reasons that I think are obvious. Over the past several years, in the grip of its woke young staff, Twitter has intentionally driven away or limited the reach of easily half of its potential users. Now, if Musk follows through, it can be fully open to everybody.
But is Musk actually committed to free speech? Musk has recently said that he is close to a free speech absolutist, but his record is not so clean. Tesla has long been the subject of a group of financial skeptics who have pointed out its inflated valuation and even recommended shorting the stock. One of the most severe and long-time critics of Tesla’s valuation is a guy who has written under the name Montana Skeptic at a site called Seeking Alpha. Montana Skeptic, using that same name, has also been a commenter at this site from time to time. Montana Skeptic also corresponded with me personally several times, but requested that I not reveal his identity, because he suspected that he might become the subject of retaliation, and that his job as a money manager might be at risk. It turns out that exactly that happened. According to this piece at Mediaite on April 26, in 2018 Musk figured out the identity of Montana Skeptic and called his boss and threatened to sue:
A colleague relayed the billionaire’s [telephone] message. “Elon Musk says that you’re a very bad person and you’re writing bad things about him,” [Montana Skeptic] recalled the colleague explaining. “He’s going to have to sue you and he’s going to have to drag our boss into it.” . . . After the phone call, [Montana Skeptic] told his employer he would stop writing at Seeking Alpha and deactivate his Twitter account. He stated that while Musk had no valid claim, “I’m not going to drag my boss into a lawsuit he shouldn’t have any part of.” With one weird, but nevertheless heavy-handed phone call, Musk silenced a prominent online critic. . . .
It’s just not in the nature of narcissistic big ego people to enjoy getting criticized.
So will Elon Musk turn Twitter into an upstanding free speech platform? It’s hard to imagine that he will do a worse job than the prior management, but there are limits to what we can hope for.
No comments:
Post a Comment