Elon Musk's $3 Billion Meltdown Is Everything Wrong With The Market Today

Tesla CEO shot from the hip and outside investors once again learned they’re hostages to his moods. If he can go it alone, why take us all for the ride?

The problem with Elon Musk’s 10-minute communication breakdown on last week’s investor call wasn’t his lack of patience with fielding “boring bonehead” questions from the outsiders who know his company best.

We can’t all be serial visionaries, after all. Sometimes us mere mortals need to slow it down and make sure all the dots still connect the right way to separate success from corporate failure.

But by inviting us mortals to invest our money alongside his, the serial visionary has at least a moral obligation to keep us up to speed.

And from market reaction to his 10-minute tantrum, breaking that obligation carries an extremely high price for everyone.

Once shareholders got a chance to digest Musk’s palpable scorn for them as partners in his process, quite a few of them decided to take their money elsewhere. At one point, 9% of the wealth parked in Tesla evaporated, leaving remaining investors $5 billion poorer.

While a few buyers came back the next day, $3 billion of that money is still gone and 80% of it came from the people who invested alongside Musk. Maybe it recovers, maybe not. But here’s the thing: with only a few adjustments, it could happen to any closely held company.

Tesla is a hostage to its genius. It needs an everyman who can share the vision. Clearly the genius is unwilling to do that.

Transparency versus blind faith

Analysts need to ask the questions that they and their clients don’t have answers for yet. It doesn’t mean they’re stupid or even slow. It just means they’re not already 100% in the company’s corner — they’re not PR telling the story and they’re not management calling the shots.

Quite a few analysts who want that kind of inside perspective end up going to work at the companies they once followed, becoming strategists or playing some other internal role.

But the rest are only valuable as long as they’re independent. They aren’t true believers. They push back when management’s statements don’t add up. When the follow-up questions hit a wall, they warn their clients. 

Musk pushed back specifically on the question of whether Tesla is going to have enough money to ramp up mass production on the Model 3 before the company chokes on its debt. 

That’s a serious concern. Musk might have an invulnerable faith in his ability to make it happen, but if Tesla fails, he’s still got another $25 billion company to play with and quite a bit of cash. The institutions who invested in his dream will get stung. Retail investors who bet the nest egg lose big.

Weighing the odds on that coin flip between world conquest and defeat is why analysts get paid. Granted, a lot of those analysts are just rubber stamps for management and consensus, but mocking the ones who take their responsibility seriously only compounds that problem.

Wall Street desperately needs more courageous analysts and fewer rubber stamps. They don’t have to be “mad money” pundits or entertainers cultivating a cult of their own expertise. They just have to have an opinion on the stocks they follow and the fortitude to trust that opinion when the market goes the wrong way — or admit they were wrong if it comes to that.

A few dozen big firms cover Tesla. Only half of them even submitted a question, not to entertain Elon Musk but to test their own sense of the odds his company will succeed. On the next call, they’ll probably pander a little more to Musk in order to get noticed. 

The others will remain silent. The minutia in their earnings models tell them everything they need to know, and if they’re wrong, they’re wrong. Either way, the stock will trade on how well the headlines match the whisper numbers, and that will be it for another quarter.

Diverging from expectations

Musk got something right on the call. He isn’t interested in running a company to game expectations quarter to quarter. He’s about the all-or-nothing long game, the literal moon shot. 

Wall Street has gotten away from even contemplating that kind of value. After all, the last time I checked, the average tenure for analysts was under two years. If they do eight of these calls, they’re done. They won’t be here any more. Unfortunately their clients will.

Unless someone asks the right questions and gets the right answers, those clients ultimately have to rely on their gut instinct about Musk’s ability to make it happen. If they share his confidence, they’re in Tesla for the duration. 

Otherwise, as he pointed out on the call, he doesn’t want them around. Day traders can sell. Those who can’t handle a little quarter-to-quarter volatility can sell.

That’s a problem for him because he doesn’t get to pick who invests in his stock and whose money he won’t take. The whole point of a public float is that anyone with the money can buy a few shares and participate in the company’s journey. 

If he’d wanted a more elite and fanatical shareholder base, he could’ve structured Tesla as an employee-owned enterprise, maybe with some private equity assistance like what he has on Space X. 

But realistically speaking, he couldn’t have done the things he’s achieved already at Tesla without broad capital backing. Back in 2003 today’s “unicorn” private equity valuations were still only a fantasy — to get the scale he needed, an IPO was required.

He’s stuck with the rest of us until the company is so successful that he can buy us all out and never explain himself again. In the meantime, he needs us and if shareholders don’t get the information they need, they’ll head for the exits. 

And we’re stuck with him. The Tesla board isn’t set up to purge the visionary CEO. Where would they go in a world without Musk? 

They’re in roughly the same position as retail shareholders, only their exposure is multiplied to reflect the overall amount of money they’ve sunk into this stock. They got where they are through some combination of gut faith in the vision and willingness to trust Musk.

For the rest of us, it’s fun to listen to a sassy genius when you don’t have skin in the game. There’s no room for that on today’s Wall Street. We aren’t here to buy instruments for the town marching band. We’re here to protect clients’ savings and help them accumulate wealth. 

That’s serious business. He can walk away if he's wrong. Not everyone is so lucky.


More Articles