James Ball: Elon Musk is overvalued

Wednesday 27 January 2021

The world’s richest man is telling one hell of a story – and lots of people are aching to believe it


Generating a billion dollars of value isn’t as difficult as it used to be, at least for some of us. An apparently idle four-word tweet on Tuesday – “I kinda love Etsy” – led within five minutes to an almost ten per cent boost in the stock price of the craft marketplace, representing an extra billion dollars on its market capitalisation.

The decisive factor in the tweet’s value-generation lay, of course, in who sent it: Elon Musk, the man who this month overtook Amazon founder Jeff Bezos as the world’s richest man, with a net worth sitting at just under $200 billion. 

Never mind that nothing suggested Musk’s tweet was intended as investment advice – he followed it up with “Bought a hand knit wool Marvin the Martian helm for my dog” – the most inane of his pronouncements seem to be enough to move markets. But perhaps that shouldn’t come as a surprise, given how his wealth has accumulated.

First, though, consider Jeff Bezos. He is a self-made billionaire, amassing his fortune over the last two decades as the founder of Amazon. That company’s scale needs almost no description: it is the dominant provider of services that power the modern web; the world’s largest online retailer; a huge player in online video and audio streaming; and is behind lots of advanced and proprietary software for managing logistics, autonomous delivery drones, and numerous other things. It has a sky-high valuation, but also the obvious business to back that up.

Musk makes Bezos’s Information Age success seem almost Victorian. His net worth, based predominantly on his shareholding in electric carmaker Tesla – in which he was an early investor, but not a founder – has quadrupled in just a year. No-one has ever got so rich so fast. Yet, looking at Tesla from a traditional standpoint, it is almost impossible to see why. Yes, the company makes very nice, high-end cars with a devoted core fan base – but it makes shockingly few of them, it’s loaded with debt, and struggles to make much profit.

The scale of Tesla’s stock market value is similarly difficult to comprehend. It is worth over $800 billion. That’s more than Toyota, Volkswagen, Daimler, General Motors, BMW, Volvo, Ferrari, Hyundai, Ford and Nissan combined – with nearly $100 billion left over. And that’s despite its total global output of cars in the fourth quarter of 2020 being less than 200,000 cars – a figure barely above one per cent of just the US production of the other major automobile manufacturers. 

This valuation comes despite a huge amount of public and erratic behaviour from Musk. This included a tweet apparently claiming he was in talks with Saudi Arabia to take Tesla private for $420-a-share – taken as a weed reference by many of Musk’s fans, as well as a serious stock-moving event by many more – which prompted an SEC investigation requiring Musk to step down as chairman.

It also included Musk “inventing” a submarine to assist in the rescue of 12 boys trapped underwater in a cave in Thailand, only to dismiss one of their actual rescuers as a “pedo guy” when he said the sub would have been useless. 

Less dramatically, Musk’s public pronouncements often include apparent inventions and innovations rapidly dismissed by people working in their areas. Musk proposed “hyperloops” – ultra-high-speed, train-like vehicles reliant on traveling in a vacuum – to revolutionise transport at low-cost, to the disdain of rail engineers everywhere. 

More recently, he offered his underground boring services to the mayor of Miami, proposing an underground network for cars, apparently forgetting that the city lies, at best, 6ft or so above sea level.

Normally, we would expect these public displays of fallibility to hurt the net worth of a CEO like Musk – but he’s subverted the usual model of company value, which is based on mundane factors like sales, assets, or profits.

Of course, there are multiple ways to assess the value of a company, some far more conservative and traditional than others. At the most cautious end of that scale is something known as “book value” – which essentially looks at the physical assets of a company, such as stock, buildings, even office supplies, and so on, then subtracts from this any debts. The value is what’s left. 

This might sound perfectly reasonable, but practically no-one would sell their company at this price. It leaves out the profit-making potential of the business in years to come, and many kinds of intangible value – the strength of its brand, its reputation in the industry, the accumulated skills and talents of its workforce, and much more.

In practice, then, the valuation of a company more typically involves its sales, as well as, sometimes, its profits and growth in recent years, and then situating all that within the context of the sector in which it operates. A company in a relatively staid sector, such as commercial property or grocery retail, might expect to be valued at three to five times its sales. One in a fast-growing and profitable sector might expect 10x sales, 20x sales, or even more.

Getting that top-notch valuation, then, relies on having a good story to tell. At a basic level, you might want to tell investors that while you look like a company operating in one sector, you’re actually something different. Amazon, for example, would much rather we think of it as an exciting tech company than a boring low-margin retailer.

For the very highest of valuations, this kind of storytelling is usually combined with promises that the company also has some form of advantage no other business could hope to rival – whether that’s true or not.

WeWork’s immense valuation relied on it telling the world it was a data company with unprecedented insight into its clientele, rather than a high-risk commercial property company. Opening its balance sheet to the public when it wanted to list on the stock market showed this wasn’t true. Theranos claimed for years that it had broken new ground in medical testing, until whistleblowers from within revealed it hadn’t.

Finding a story for why you’ll defy economic gravity – but one that isn’t outright false – is the key to victory. Some of Musk’s personal valuation is backed by this kind of true story: he is the founder of SpaceX, which is already able to ship cargo to and from space using low-cost and reusable rockets. The company is a long way from profit – and may never hit it – but it is not hard to see why this is a story that excites investors.

Tesla’s valuation, though, and the rest of Musk’s net worth with it, relies on the world believing a wildly optimistic story that assumes it shouldn’t even be compared to other carmakers – that because of its investment in batteries, or its software work on self-driving, it is a completely different type of business, and one so certain of success that decades of huge excess profits have already been factored in to its price.

None of this constitutes the kind of baked-in decades-long advantage that might even begin to justify Tesla’s stock price. Tesla makes good electric cars, but General Motors alone already sells eight times as many of them as it does. It makes good batteries, but uses broadly the same battery technology as everyone else. 

Tesla has a head-start in self-driving car tech, but faces fierce competition from Google and others, and this problem is proving far harder to solve then companies imagined – as Uber’s recent step back from research into autonomous motoring demonstrated.

So what does Tesla actually have that no-one else does? The answer inevitably has to be Elon Musk and his huge and engaged personal fanbase, many of whom engage in frenetic day trading – i.e. buying and selling on the same day – of Tesla stock, sometimes at the rate of 10,000 day traders an hour.

Day trading, every investment expert warns, is a fool’s game: in the long run, no-one can beat the market. It encourages people to over-invest in individual stocks, rather than spreading their risk. It encourages them to double-down. It encourages pumping and dumping stocks. It is also, at the moment, enjoying a surge of popularity – especially because, when things go well, people see huge gains, and then want more.

Tesla is a darling of day traders because Musk is the kind of chaotic, volatile figurehead they want. They need unpredictability and volatility to make quick profits. They need the sense that a new, revolutionary idea might come and create billions more value. 

Musk, the perennial “inventor”, is the human embodiment of their dream – even if it makes little actual investment sense. When Musk has a new idea, he puts it into a new company, rather than into Tesla. SpaceX and Tesla are separate businesses, as is his tunnelling business Boring Co. 

There might be a good carmaker and maybe even a good software business in it somewhere, but the bulk of Tesla is nothing more than a hype machine – but one that people lose a lot of money betting against. It is the ultimate realisation of Keynes’ maxim that markets can remain irrational longer than you can remain solvent.

But the core of it is this: Elon Musk has not become – for the moment – the world’s richest man in spite of being a chaotic, erratic asshole. He has become the world’s richest man only because he is a chaotic, erratic asshole. 

That may tell us more about ourselves as a society than we would like to admit.