Tesla – What’s That Musky Smell?

It has been an odd month for Tesla and its founder, Elon Musk. In the midst of a turbulent period it does look like Musk has had a bit of a meltdown.

Early in August Tesla had a new Chief Accounting Officer join the company and the next day Musk surprised everyone – including the new officer – with a tweet: “Am considering taking Tesla private at $420. Funding secured”. The stock market reacted very quickly with reports that a Saudi fund was investing in the company. One thing that stock markets dislike is uncertainty and that tweet made the market nervous.

The stock initially rose, however the trading was halted and Musk blamed the short sellers for trying to damage the company. Short selling only works if the price is falling and it wasn’t, so that observation was wrong and disingenuous. In a report to employees, Musk said that he felt that the company could be private with him still controlling 20% of the stock. He didn’t elaborate on the funding, however it was reported that the Saudi fund was only interested in 5% of the company, so not enough to control the entity.

The stock ended at a high of $389.61 and then started to tumble – effectively giving the short sellers what they wanted, a handsome profit. Musk had helped those that he despised. This is also where things started to go badly for both Tesla and Musk with regards to the financial structure of the company. The Board was less than impressed by finding out via Twitter that he had “funding secured” when in fact he hadn’t.

The Securities and Exchange Commission were concerned because usually a company has everything ready before such an announcement is made. Apparently Musk had been having some talks with the Saudi fund who had invested in Tesla, however nothing was concrete. As far as the SEC is concerned, stating that you have funding when you don’t is false and misleading and has lead to an investigation with regards to stock price manipulation.

Incidentally, the price per stock unit was set at $420 by Musk because he wanted a price 20% above the recent trading amount which was $419, however he rounded it because 420 is a code for marijuana in counter-culture language. In a recent New York Times interview, Musk was quoted as saying: “It seemed like better karma at $420 than at $419, but I was not on weed, to be clear. Weed is not helpful for productivity. There’s a reason for the word ‘stoned.’ You just sit there like a stone on weed.”

With the SEC investigation starting, the stock started to tumble and in the last month has dropped by $120 per share to around $263 each. That is a fairly massive reduction in anyone’s terms. By the end of August, Musk was announcing that the company was staying public – not on Twitter but in a company blog post, although this time it was after he had met the Board! One excuse was that his tweet was overly simplified and he had realised his mistake. I suspect that he was given a reality check, especially with a worried Board.

Apparently someone had pointed out that it was a little odd that a country with connections to “big oil” was investing in an electric car company. That was part of the decision to stay public. I actually don’t see that as an issue, because we all know that oil consumption is forecasted to reduce with the associated rise in electric vehicles. It makes sense for a country struggling with a low oil price to find other sources of revenue, just as many of the European oil companies have bought charging equipment.

Last weekend, Musk was on a live video podcast smoking weed – the very substance that he apparently was against (despite admitting he was an “occasional” user), so much so that had he returned to his factory after the recording, he could have been sacked for breaching his own policy of having no marijuana in the bloodstream whilst on site! Tesla had sacked workers for using legal medicinal marijuana in their own personal time. In the same interview with the NY Times, Musk had also said that he uses Ambien, a drug, to help him sleep. That product is apparently one that can be used for recreational use and could lead to a dependence by the user.

The live weed smoking has triggered more problems because that is a definite taboo for corporate management and investors alike. In an article in the Australian Financial Review, a venture capitalist said that “the use of recreational drugs, legal or not, goes against the unwritten rules of being a public CEO”. Apparently, even in the cannabis market, it is frowned upon to use it as a company officer!

To cap it off, the Chief Accounting Officer has resigned after being in the post less than a month and several other senior management roles have opened up after resignations. The market is likely to be even more volatile for the company this week after Musk’s latest public appearance and I wouldn’t be surprised if he goes the same way as Shai Agassi of Better Place, who was shifted sideways to try and save the company he founded.

Tesla is at a critical point – it needs to have a settled governance and financial structure with increased production of the Model 3. That car has to have its quality improved such that the costs are reduced, sales are increased and the company is making a profit. This has to be done with a background of many competitors grabbing a bigger share of the electric vehicle market. It is not good enough just to be  one of the pioneers, Tesla has to compete with other manufacturers who can use the Federal Tax Credit system to sell cars – something Tesla is now having to reduce.