Tesla Shareholders: Are You Drunk On Elon Musk's Kool-Aid?

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Elon Musk, CEO of SpaceX and Tesla, speaks during the International Space Station Research and Development Conference at the Omni Shoreham Hotel July 19, 2017 in Washington, DC. (BRENDAN SMIALOWSKI/AFP/Getty Images)

Tesla shareholders (and bullish Wall Street analysts) are either geniuses or delusional and I am betting on the latter. Typical of the lack of gray matter being applied to this investment is a recent post on Seeking Alpha, often a place where amateurs go to pump stocks they own.

Someone calling himself “Silicon Valley Insights” issued an ungrammatical “Strong Buy” recommendation on October 11 based on the following syllogism: (1) “Tesla CEO Elon Musk has stated very firmly that they can and will reach his goal of producing 5,000 cars per week by the end of this year.” (2) “Musk has a history of setting aggressive targets (more for his staff than investors) [Editors’s Note: That is a lie.] and then missing them on initial timing but reaching them later. [Editor’s Notes: That is another lie--Musk has NEVER reached a production target.] (3) “Reaching anything [sic] significant portion of that 5K target (say 1-2K) by the end of December could drive TSLA shares significantly higher.” This genius then suggests that investors stay focused on the Model 3 ramp as the key price driver over the coming weeks and months and argues that the announcement that only 260 Model 3s were produced in the third quarter leaves “much of the risk…now in the stock price.” He is correct--there is a great deal of risk embedded in a stock trading at infinity-times earnings with no prospect of profitability , a track record of breaking promises, a reluctance to sell equity to fund itself even at price levels above the targets of most analysts, and a market cap larger than rivals that are pouring tens of billions of dollars into putting it out of business.

Undeterred, he offers two investment strategies. The first he terms a “reasonable and conservative” one that waits to invest in TSLA shares until the early November third quarter earnings call. In my world, a reasonable and conservative strategy would be to run for the hills or short the stock (as I am doing). A “more aggressive and risky strategy” (compared to skydiving or bungee jumping) would be “to buy shares before that third quarter report and call on the bet that the Model 3 production update will be taken positively.”

No doubt investors like Mr. Silicon Valley Insights will put a positive spin on whatever fairy tales Elon Musk spins on that call, but that is a big bet indeed.

With revelations that the reason the company only produced 260 Model 3s in the third quarter (80% fewer than its projection of 1500 vehicles) was because its assembly line was nowhere near completion, and that workers were literally hammering together cars by hand (which sounds a little like cavemen building rocket ships), shareholders are not just assuming the guise of run-of-the-mill cult members but drinking the financial equivalent of the Kool-Aid served by Reverend Jim Jones at Jonestown. Companies tell all types of lies to burnish their financial results but Elon Musk’s fish tales make Moby Dick look like a guppy.

The question is why so many people like Silicon Valley Investor and analysts at some of Wall Street’s biggest firms are willing to believe him. Unsurprisingly, investors are acting out of blind faith and Wall Street out of greed. Neither motivation constitutes a viable investment strategy.

One day Musk says that the company has 500,000 deposits for the Model 3 (which is a Ponzi scheme because the funds are not escrowed) and the next day has to admit there are only 450,000 (and perhaps fewer since it is going to take years to produce those cars at the current production rate and people will get tired of waiting and ask for their money back). In any case, he refuses to update the current level of deposits or give monthly sales figures like the rest of the industry.

Undeterred, he offers two investment strategies. The first he terms a “reasonable and conservative” one that waits to invest in TSLA shares until the early November third quarter earnings call. In my world, a reasonable and conservative strategy would be to run for the hills or short the stock (as I am doing). A “more aggressive and risky strategy” (compared to skydiving or bungee jumping) would be “to buy shares before that third quarter report and call on the bet that the Model 3 production update will be taken positively.”

No doubt investors like Mr. Silicon Valley Insights will put a positive spin on whatever fairy tales Elon Musk spins on that call, but that is a big bet indeed.

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