Is Elon Musk’s wealth mostly a market bubble that could burst literally overnight? Francis Menton (aka the Manhattan Contrarian) emphasizes how Elon Musk’s wealth comes from the 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.
How solid is the approximate $1 trillion 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.
Are Tesla’s prospects good for massive growth within just a few years? The Manhattan Contrarian concedes that Tesla is a great car, and, he believes, Musk is a genius. On the other hand, interjects Mr. Menton, no one can deny that Tesla’s current sales are “heavily dependent on government subsidies.”
Will Tesla’s sales shortly mushroom by a factor of 50 or 100? In order to believe burgeoning Tesla sales, a series of increasingly implausible things need to happen, continues Mr. Menton:
- Government subsidies will continue at current or even increasing levels. (This one is plausible, if a bad idea.)
- 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.)
- 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.)
- 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.
Has Elon Musk himself figured out that the value of the Tesla company is ready for a big fall? Mr. Menton believes Musk does have it figured out. After all, Musk has 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 (Musk) is limited in his ability to just walk away from Tesla, but he is certainly doing his best to diversify.
As a diversification project, Twitter was an inspired choice, continues Mr. Menton.
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.
Is Musk Committed to Free Speech?
Although Musk recently said that he is close to a free speech absolutist, his record is not so clean, explains Mr. Menton.
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 …
Big Egos Don’t Enjoy Getting Criticized
It’s just not in the nature of narcissistic big ego people to enjoy getting criticized.
Will Twitter Become an Upstanding Free Speech Platform?
It’s hard to imagine that he (Musk) will do a worse job than the prior management, but there are limits to what we can hope for.
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