Published on August 27th, 2018 | by Peter Forman (aka Papafox)0
The Billion-Dollar Tesla Hit Piece
August 27th, 2018 by Peter Forman (aka Papafox)
By Peter Forman, aka Papafox
The New York Times interview of Elon Musk released late in the night of August 16, 2018, clobbered Tesla’s stock price the next day, resulting in a fall of more than $30 a share by the end of Friday’s after-market trading and a single-day transfer of wealth of over a billion dollars from Tesla’s investors to the stock’s short sellers. Musk likely agreed to the interview expecting an expertly crafted portrayal of just how difficult his job at Tesla has been, particularly with the relentless negativity of the media, egged on by the enemies of Tesla, especially the short sellers. He almost certainly wished for the world to understand why taking Tesla private might provide needed relief. Instead, he fell prey to what can best be described as a journalistic ambush. The story of this interview is really a microcosm of a larger story about Tesla, Musk, and the forces that seek to disrupt this disruptive team. To fully understand the implications of the interview and its aftermath, one needs to understand the psychology of Musk himself, the truly extraordinary accomplishments and aims of this man, and the sordid relationship between Tesla short sellers and the media.
One of the few positive developments from the interview was that it sparked this insightful essay from executive coach Jonathan Rotenberg. The author sees Musk as belonging to a rare personality group that includes Steve Jobs, Nikola Tesla, and Albert Einstein. According to Rotenberg, “Fully actualized INTJs are very intense, deep people who typically think ~1000X harder than most people do about the problems of humankind, and how they can best be of service to humanity over the course of their life.” He adds, “They feel such a profound sense of personal responsibility for their lifelong missions, they often cannot allow themselves to rest if they feel their work is in jeopardy or could have negative consequences for others.” Thus, there’s a cavernous emotional reaction when a labor of love such as Tesla is threatened by scheming short sellers, whom Rotenberg says would be regarded by an INTJ visionary as “toxic, venomous, Energy Vampires.”
Looking at Musk’s accomplishments, one can start to grasp the immense responsibility this man chooses to shoulder. Tesla is well along in forcing other vehicle manufacturers into accepting a future consisting of electric vehicles simply by building more compelling vehicles than the competition. Some European countries have already adopted drop-dead dates for the sale of internal-combustion vehicles. Similarly, by building vehicles with robust electronic safety features and autonomous driving, and enabling widespread adaptation of these life-saving devices in the future, Musk can envision traffic deaths decreasing at least ten-fold. Tesla Energy’s projects have already shown the fabulous economies of integrating solar power and batteries into electrical grids in places such as South Australia. At Musk’s other company, SpaceX, reusable boosters have slashed the cost of sending payloads into space so much that a world of possibilities has now opened. Imagine a constellation of 6,000 low-Earth-orbit internet satellites circling above, launched and financed by SpaceX and a partner, providing every inhabitant of this planet with internet access. Add affordable solar and battery microgrids to the equation in areas where the grid doesn’t reach and you can see opportunities for transforming the lives of Earth’s poorest inhabitants. His dream of making humans a multi-planetary species in his lifetime remains on track with SpaceX working on the design of the BFR, the Big Falcon Rocket, that will take humans and materials into space to establish a human outpost on Mars. Extinction events such as nuclear holocaust or the collision between Earth and a wayward asteroid are just the stuff of science fiction to most people, but for Musk, they’re very real threats with significantly non-zero probabilities.
For these dreams to come true, Tesla must first successfully introduce Model 3, in Musk’s words the last “bet the company” situation Tesla must face. It’s a bet-the company project because in order for Tesla to become cash flow positive and profitable, nearly 5,000 Model 3s per week must be built, 5 times the number that Models S or X currently produce. The worst is over now because the cash flow cadence as new models are introduced is already swinging to the positive side. The cadence goes like this: While conceptualizing the new vehicle and building prototypes, cash needs are relatively low, but as the production line is built and then labor is added, the negative cash flow is at its highest. Finally, after revenues start arriving from the sale of the new vehicles, the cash flow situation improves until we see positive cash flow at Tesla again. It’s been this way for Model S, for Model X, and it will be this way for Model 3 as well, but the scale of Model 3 is so massive that the swings between negative cash flow and positive are much more dramatic. Delays in ramping Model 3 caused the negative cash flow portion of the cadence to be extended a few quarters, but now, with Tesla producing nearly 6,000 Model 3s a week, investors know that Tesla has moved into the positive cash flow portion of the cadence, and this is why Musk and Tesla CFO Deepak Ahuja were so confident in the second quarter earnings report that the back half of 2018 would be both profitable and cash flow positive for Tesla. Simply by waiting to introduce Model Y, Tesla can extend the positive cash flow indefinitely. Model Y isn’t even going to be shown to the public until spring of 2019, and by the time the Model Y factory and lines are being built, Model 3 should be approaching 10,000 units per week, thus enabling Musk’s plan to bring Tesla to sustained profitability. Why then does the average person on the street believe that Tesla is a doomed company, struggling with no end of red ink in sight? To answer that question, one must examine the media/short-seller connection.
Most shorts don’t seem to understand this cash flow cadence of new Tesla models being introduced and then achieving profitability after a period of ramping up production. If they did, they wouldn’t be betting so aggressively against the company. A short seller is someone who borrows shares from an investor, paying an interest fee to the original owner for the privilege, and then sells the shares in the hope that they can later be bought back at a lower price, thus making money by selling high and buying low. Unfortunately for the shorts, the share price typically rises, the time arises to return those shares to the original owner, and the short loses the bet. Tesla is the most shorted company on any U.S. exchange, and every year in recent times, the shorts have lost hundreds of millions to billions of dollars betting against Tesla. The year 2018 could well be the most devastating year ever for shorts, who are already down over half a billion dollars, even with the recent dip. A privatization of Tesla at $420 would have brought devastating losses to this group, but even with the company remaining public, the stock should exceed $400 by early 2019 as Tesla proves its claim of cash flow positive and profitable operations indeed becoming the new reality.
Unfortunately for Tesla, many shorts are not passive investors. During times when the percentage of Tesla shares possessed by shorts (short interest) remains relatively unchanged, data from FINRA shows that shorts are identified as doing half and sometimes up to two-thirds of all the selling in a given day. Granted, that number is exaggerated for reasons such as how some transactions are batched together on the ticker, but the trading by shorts on a regular basis is still so huge that regular patterns of manipulating the stock price are regularly observed by investors. The net result is that rallies are marginalized and dips exaggerated by these massive and repeated short selling and buying efforts. The lower share prices caused by the manipulations affect the cost of raising capital through equity offerings, and the roller coaster ride of climbs followed by deep dips causes many investors to abandon the stock. One forum for Tesla investors has even given names (mandatory morning dip, capping, dip on steroids, whack-the-mole, and descent into low volume market close) to these manipulations because they are so common. Further, the shorts communicate regularly with each other in online forums such as Seeking Alpha and then, in a classic case of group think, they formulate the next big reason why they believe Tesla’s stock will go down. Few investors and potential investors frequent these dens of short-seller thought, though, and a means must be found for bringing these ideas to the public’s attention. That enabler is the media.
You would think that with all the business reporters out there, we’d see lots of sleuthing, lots of original discoveries made regarding Tesla, but the truth is otherwise. What we hear from media outlets the vast majority of the time is the current short-seller thesis. It really is a case of the tail wagging the dog. When an analyst who is bullish on Tesla appears on a business news channel such as CNBC, that analyst is grilled by the hosts with the short seller themes du jour in a manner that assumes the shorts are right. In reality, the shorts are wrong so often and the staggering losses they experience every year are so consistent that you’d think the media would figure it out by now. Apparently not.
The shorts follow a rather logical progression in attacking Tesla.
First, you see claims that Tesla will never succeed in producing the necessary numbers of whatever vehicle is spinning up at the time. Naturally, the media follows the lead of the shorts, focuses on this particular issue, and throws doubt on the company’s claims. Tesla wasn’t able to fully shake off the cynics of its 5,000 Model 3s per week accomplishment until the earnings report in early August when the evidence was by then overwhelming.
Next, if production quantity can’t be attacked any longer, the shorts turn their attention to questioning the vehicle’s ability to generate a surplus of cash (gross margin). The shorts had a field day with this issue this year, comparing the price of Model 3 to Model S and concluding there was no way to cut the cost of the vehicle enough to generate profits, especially with the $35,000 base model. Alas, a German firm hired by German automakers bought a Model 3, disassembled it, and reached the conclusion that this car could indeed be built for a cost of $28,000. Then, U.S. auto teardown expert Sandy Munro disassembled a Model 3 and concluded a long-range rear wheel drive model could exceed 30% gross margins. He was impressed especially by the electronics which Tesla had invented in house. And so the “Tesla can’t build this car profitably” argument fell through for the shorts, and when Tesla reported more than $2 billion cash on hand in early August the claims of the shorts that bankruptcy was coming temporarily dried up as well.
At times when there’s not an apparent reason for Tesla’s decline, rather than cover their short positions, the short community goes fishing for new explanations. Safety, build quality, and demand (especially upcoming “Tesla killers”) are favorites and used again and again when more substantial reasons are unavailable. This fervor for finding fault led to a rather ridiculous period recently when shorts were taking photos of Model 3s sitting in lots and concluding that Tesla had a demand problem with its newest vehicle. Never mind a little matter of Tesla holding more than 400,000 paid deposits for Model 3 at the time. Naturally, the media lapped up the opportunity to jump on this new threat to the company and its boss Elon Musk.
Moreover, the timing of negative Tesla pieces by the media is often uncanny in the way it arrives on the day when it will do the maximum damage to the stock price. Take the 4th of July week, for example. During this week, big stock traders are often in the Hamptons or elsewhere, enjoying a vacation break. Volume is low, the day before the 4th is a reduced-hours trading day, and it’s a perfect setup for manipulating the stock price. The July 4th week in 2017 was a real bloodbath for Tesla investors and several expressed their concerns about being in the stock come 4th of July week 2018. Balancing these concerns was a solid belief that the production report that Tesla would make public some time on or after the first of the month would indeed show that the company had at last hit its goal of 5,000 Model 3s per week and thereby brought production to a point where Tesla could become cash flow positive and profitable once again. So, over the weekend, investors learned the good news that Tesla had indeed met this milestone and all expected a nice climb on Monday. Tesla’s stock did indeed gap up to a higher price and start climbing from there, but not long after opening, it reversed the climb and started down. Likely the shorts had sold heavily to cause or expedite the reversal, and then investors started doubting their optimism. Did Tesla really make 5,000 Model 3s that week or did they cheat as the shorts implied by questioning Tesla’s use of the words “factory gated?” Did Tesla’s temporary tent assembly line cost so much that Model 3 would be unprofitable as shorts suggested? And so Tesla sagged that day, losing about $8, and that might have been the end of the dip.
The following morning, Tuesday, July 3, a Business Insider reporter released a story entitled “Elon Musk ordered Tesla engineers to stop doing a critical brake test on Model 3s.” On the surface, this is a damning report suggesting that Musk was in such a hurry to reach his June production target that he eliminated a test that was critical for ensuring the brakes were working properly. In reality, the test was actually called the “brake and roll test” and the biggest concern was alignment. Since Tesla, unlike most auto manufacturers, takes every vehicle onto the test track to check proper braking and numerous other qualities, the drive actually made the brake and roll test redundant for safety concerns. A brief reply from Tesla’s spokesman was buried deep in the article. For good measure, the reporter brought up the factory gating issue, solicited comments from Tesla owners or employees for information she might find useful, and included a photo that indicated some disgruntled employee was feeding her photos and any suggestion of wrongdoing he could find. The title of that article had it’s desired effect and Tesla closed down more than $24 that day as this new cloud of uncertainty questioned the manner in which Tesla reached that 5,000 Model 3s per week goal.
For both investors and leaders of Tesla, the timing and over-the-top efforts to damage Tesla’s reputation brought up another concern: what if a few members of the media and some short sellers were coordinating their efforts? Millions could be made by front-running this material, non-public information and shorting the stock or buying put options if one knew the timing of a potent hit piece. The practice certainly existed, it was just too tempting and too easy, but how would one ever go about proving it without calling upon the overworked Securities and Exchange Commission (SEC)?
Musk figured he’d try to find out on his own. He addressed tweets to the Business Insider reporter who wrote both the critical braking test article and another inflammatory piece. Tesla had just nabbed the rogue employee who had been feeding the reporter information for both of these stories, and Musk went to work on Twitter. Had she bribed this Tesla employee who had allegedly hacked into computers and broken the law? Had she ever shared material, non-public information with short seller Jim Chanos? Musk apparently was hoping she’d spill the beans if she was guilty, but the reporter remained quiet for 6 days until she appeared on CNBC to deny the allegations.
The media was quick to protect their own. Some labeled Musk a Twitter bully and called for his removal from the social media platform while the negative coverage of Tesla and especially Musk intensified. More Twitter jousts between Musk and members of the media took place. It was open season on Musk, for he needed to be taught a lesson. Scoring one against Musk was taking one for the team. On Musk’s birthday, one Reuters reporter sent Musk a link to an insulting image. Others began to question his state of mind. If you wanted to go after someone and make an example of them, Musk was the perfect target. He was a brilliant, young, self-made billionaire with the golden touch for success who either married or dated beautiful starlets. Who would ever feel sorry for such a man?
These developments did not go unnoticed by the short sellers. Without production delays, without compelling reasons to believe Model 3 gross margins would be substandard, without a bevy of Tesla killers on the horizon, it was a less than terrific time to be a short. Now there was a new worry to exploit, Tesla’s leader was all too human and therefore flawed.
What the shorts as well as investors observed was that whenever Musk said something inappropriate for a CEO, the stock price reacted quickly, typically plummeting. This is what happened when Musk dismissed the questions of two analysts in the 1st quarter 2018 earnings call, when he tweeted his questions to the Business Insider reporter, and when he responded to a name-calling diver from the Thai rescue mission by doing some inappropriate name calling of his own. When he corrected himself for these actions by apologizing publicly, however, the stock immediately ran higher. Such was the case when he apologized to the diver on Twitter and when he apologized to the dissed analysts at the 2nd quarter 2018 earnings call.
Come August 7, the New York Times interview of Elon Musk tells us that he woke at his home in Los Angeles and before flying to Nevada made his infamous “Am considering taking Tesla private at $420. Funding secured.” tweet. What the interview leaves out is that there was a pressing need for Musk to say something about the privatization and likely not enough time to discuss the matter further with the board. The Financial Times had just announced that Saudi Arabia’s sovereign wealth fund had just acquired a 3–5% stake in Tesla (later updated by Reuters to be close to 5%). Tesla’s stock had already jumped from about 340 to about 360. Things were happening fast and discussing privatization immediately was apparently an absolute necessity in his mind.
The New York Times interview said “Tesla’s shares soared,” but this is ignoring the 20 point climb that had already taken place that day from the Saudi investment announcement. The upward bump from Musk’s privatization tweet disappeared a mere two days later.
Other aspects of the New York Times interview were more concerning. Why did the interview spend so much time talking about drugs, even talking about the number “420” being associated with marijuana? Why did these writers give insufficient coverage of the very reason Musk likely agreed to this article in the first place, which was to tell how the operational triumphs were already in place but the combination of the angst this complex man felt and the continued harassment of Tesla and Musk by the short sellers threatened Musk’s long-term staying power as CEO? In good part, it was likely aimed at telling how privatization might provide the needed relief?
Executive coach Jonathan Rotenberg gave us far more insight into Elon Musk than this New York Times interview. He writes that INTJs like Musk “will likely sound arrogant and dismissive to you. But the truth is, INTJs are always keen to have their beliefs & views challenged, because only one thing ultimately matters to them: Truth.” People who know Musk will wholeheartedly agree that he’s honest to a fault. Investors recall when Musk said more than once in the distant past that Tesla had no right to be priced this high yet, and to their chagrin, the market quickly responded. In the New York Times interview, the writers counter Musks words with contrary statements from unnamed sources who certainly aren’t as close to the facts as Musk and which served to make Musk appear either insincere or delusional.
What about the Tesla board of directors? The interview speaks of a significant effort underway by the board to find a suitable COO to relieve Musk of many day-to-day duties, as stated by unnamed sources close to the board. Well, I have found my own unnamed source close to the board and my unnamed source says that your unnamed sources greatly exaggerated the intensity of the COO search. Who is right? We’ll just have to wait and see how things pan out because trying to determine reality by quoting unnamed sources is really a methodology fraught with errors.
The New York Times writers all but tried and hung Musk on charges of overly exaggerating the “funding secured” rationale, yet this is a complex matter that only the SEC can decide once all the facts are considered.
What has emerged from the interview is not an insightful probe into the psyche of a complex and tortured man, but rather a caricature of a person on the edge of coping. The impression these writers left of the Tesla board of directors is a group that was considering alternatives to Musk for leading the company, which is likely far from accurate. The caricature of Musk, the conclusion that the SEC will find Musk guilty for suggesting “funding secured,” and the slanted depiction of the board’s feelings leads the reader to conclude that Musk’s continued leadership of Tesla is in serious jeopardy. No wonder the stock plunged the first day the article was readily available to be read by most investors and short sellers.
Of course well meaning people will suggest that Musk take a break or at least get more sleep, as Rotenberg, Jim Cramer, and Arianna Huffington have suggested. I think the one person who got it right in best understanding Musk, however, was a Twitter commenter known as @VillaPeter100 who had spent grueling long shifts working on the Tesla Model X production line during its difficult days. He tweeted to Musk and Huffington, “So as you’re writing a Letter to Elon for his exhaustive work, please also write a Letter to every military General. Because all Elon is doing, is being a Leader. Steering the ship in the best direction possible with the time that he has. And that means, #TeamNoSleep.”
The worst offense the New York Times writers committed was a tweet lead writer David Gelles posted early in the morning of August 17. He linked to the interview and said, “Tesla $TSLA stock now down close to 4 percent in pre market trading. Wonder why?” Whether you know it or not, Mr. Gelles, you were baiting Musk. Here’s a man who got himself into hot water with his tweets (which was a big part of your story) and now after a disappointing interview that could even be called a betrayal of the interview subject, you offer such an offensive tweet that it must have taken significant willpower for Musk to ignore. It’s like doing a long interview about a recovering alcoholic and then offering him a drink at the session’s conclusion.
I sincerely hope that the New York Times offers a public apology to Elon Musk for the conduct of its writers in this interview. Musk himself is man enough to make public apologies when he realizes he has done wrong, and I sincerely hope the Times is capable of doing the same. Also, although the business reporters of the New York Times are not allowed to own stocks in specific companies, it is well within their capabilities to spread word of the coming hit piece for others to benefit. Given the SEC’s close look at Musk’s tweets, it’s only fair that the SEC also investigate the media—short seller connection in this case. Now that Elon Musk has announced that both he and the board have decided that Tesla should remain public, we can expect the enemies of Tesla to continue their attacks on Musk and his company, with no relief coming to the man from a privatization plan. This development makes the plea for understanding that Musk made to the New York Times reporters all the more poignant and the handling of this interview all the more disappointing.
While the damage to the stock price will be remedied within a couple months or so, I can’t help but ponder the opportunity lost here. Is it asking too much to bring Tom Wolfe back from the grave to write just one last insightful piece before he resumes his slumber? Imagine what a writer of his caliber could have done with this material: society’s treatment of billionaires, the lines of conflict, the media—short seller connection, and the agony of the planet’s most capable creative genius after the operational success of his most important creation but before it has been made safe from the underhanded actions of his enemies.
My God, what an interview this could have been.