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Tuesday 20th March 2018

A $72bn Tesla Buyout Is Surprising, As Per Usual


Benjamin Schmidt

Thu, 09 Aug 2018 20:28 GMT

If Elon Musk keeps his word to take Tesla off the stock market and back under private ownership, he has promised the buyout will be for an extraordinary $72 billion dollars.

There are many details about the announcement that are surprising -- from the way Musk announced this plan (on Twitter) to the fact that he announced publicly the per share amount ($420 per share) at which the private buyout would be valued. 

The movement of the company’s stock price in the aftermath of the announcement was similarly unusual. Before Musk posted his tweet, the company stock hovered around $340 per share, but soon after the announcement its price spiked by more than 13% to more than $380 per share. At the end of trading on Wednesday, August 8th, the price had dropped again to $370, possibly dampened by fears that Musk would be unable to deliver on what critics were calling an outlandish claim that he had already secured funding for the buyout.

It makes sense to take a step back and take a broader view of these events. From this vantage point, it is obvious that a lack of orthodoxy is a consistent quality of Elon Musk, Tesla’s visionary and mercurial CEO.  

The same can be said of Tesla’s controversial run on Wall Street. Tesla already holds the honour of being the most shorted stock on the New York market, according to financial technology and analytics firm S3 Partners. Since investors who short a stock are seeking to benefit from a drop in that stock’s value, there is a persistent belief among traders that Tesla is overvalued and that a drop in price is imminent. 

A reasonable case can be made for Tesla’s overvaluation. For one, Tesla is currently valued at around $56 billion, which is more than General Motors, even though it sold barely 1/100th the number of cars that GM did in 2017. $72 billion, Tesla’s proposed buyout price, is equivalent to the valuation of Daimler, the world’s 13th largest automobile manufacturer. In 2017, Daimler generated $197 billion in total revenue from across its various brands. Subtracting most of the company’s internal costs leaves a net revenue for 2017 of about $12.6 billion. By contrast, Tesla generated $11.76 billion dollars in revenue in 2017, or less than 6% of what Daimler did, and ended the year with a net income of negative $2 billion.  

Even though stock valuation is an expression of a company’s future growth and earnings, such a massive disparity in current financial results is troubling to many investors who doubt that Tesla will be able to deliver future gains in proportion to its massive current valuation.

Yet investors who view Tesla’s stock price as being driven purely by “objective” measures of financial fundamentals, like cash and revenue flow, fundamentally misunderstand the company’s supporters. Tesla devotees are mission-driven. Their loyalty derives not from the company’s financial results but from the vision laid out by Elon Musk of a future built on exciting, bleeding-edge technology and sustainable energy. Truly, there is not a business leader in the world who is better at winning over supporters by “starting with why”, per Simon Sinek’s bestseller book, than Elon Musk.  

Tesla’s legion of supporters also really care about results. They also have plenty of evidence not to doubt. Few supporters forget that the Tesla Model S was the first car to receive a perfect score on Consumer Reports. In fact, it was initially given a 103 out of 100, forcing the website to rework its rating system. Reviewers have also gushed about the upcoming, more affordable Model 3. declared “this is the Tesla to buy,” Car Magazine reported “this electric 3-series rival goes one better than the Model S: cheaper...snappier handling...more Euro-friendly,” and BBC called it “a triumph, if only they could figure out how to build them quicker.”  

Tesla supporters also tend to be more patient than most traders. As early buyers and Elon Musk himself keep up a steady stream of enthusiasm and updates on blog posts and social media, supporters have enough reasons to keep manifesting their faith in Tesla’s future. 

That faith will be vindicated if the company’s stock price continues to rise. It will also make the short sellers the biggest losers. According to reporting by Reuters, short sellers already took on $1.3 billion in paper losses after Tesla shares soared following quarterly results for a total loss of more than $3 billion for the year. If the stock rises to the buyout price of $420 and the number of shares sold short does not change, year-to-date paper losses could swell to $4.45 billion, according to S3. 

Furthermore, the announcement of the $72 billion buyout vindicates Tesla supporters who own stock. Not only is the buyout price higher than the market’s current valuation, it is much higher. $420 a share is 9% higher than the company’s all-time market peak of $385. Musk is known for telling people that they are not thinking big enough. Declaring on Tuesday that the funding had already been secured for $420 a share gave Musk another chance to make that message loud and clear.

It is still surprising to many that there are funders willing to foot the bill of such an expensive buyout. Perhaps it makes more sense if one considers that they are cut from the same cloth as other Tesla supporters. Like the Tesla faithful, they believe in the company and in what Musk is trying to achieve, and they want that vision to be realised so badly that they are willing to invest great sums of money in it. 

Are we still surprised? 

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