By Steve Tepper, CFP®, MBA
On August 1, Elon Musk made what one analyst deemed “maybe the most valuable apology of all time.”
A few months ago, on Tesla Corporation’s quarterly conference call with Wall Street analysts, Musk, Tesla’s rock star CEO and co-founder, was a bit testy, at one point blasting “boring, bonehead questions.” Following that call, the price of Tesla stock plunged.
Fast-forward three months to the August call, and Musk struck a more conciliatory tone. “My apologies for not being polite on the prior call,” he said. The analysts seemed satisfied, and shares of Tesla spiked more than 16% the next day.
My back-of-the-envelope calculation says that the move added about $8.2 billion to the company’s value. $8.2 billion! With that kind of money, you could build five-and-a-half Yankee Stadiums (but for the love of God, why would you?).
The purported purpose of a quarterly conference call is for a company to talk with analysts about their business results (you know, trivial stuff like whether they made money or lost it) and explain how the company is doing and what to expect in the future. That’s why it’s generally referred to as the earnings and guidance call.
On Tesla’s August call, the earnings and guidance portion of the call seemed no different from every other Tesla quarterly call. The company announced a worse loss than expected ($3.06 per share vs. expectations of $2.92) and then proclaimed they would soon turn a profit (something Tesla has never done).
Then what drove Tesla stock from $300 per share to almost $350? Must’ve been that apology. KeyBank analyst Brad Erickson said: “Elon Musk apologized multiple times for his inappropriate behavior on last quarter’s call … and the CEO worked to restore faith and credibility with investors that he can be a plus to the investment narrative, not a minus.”
Erickson is the analyst who called it “maybe the most valuable apology of all time.” In monetary terms, it’s hard to argue with, as the company increased in value in one day by more than the entire GDP of Moldova.
Vitaliy Katsenelson of Advisor Perspectives maybe isn’t as impressed with the value of Musk’s contrition. In an article published the next day (which I concede may have been written and submitted before the August 1 call), he said Tesla stockholders should be asking these questions:
- How sound is Tesla’s balance sheet? Katsenelson points out that Tesla loses billions of dollars every year and has incurred a lot of debt. Tesla’s recent attempt to squeeze its suppliers to lower its costs was seemingly a recognition of its financial jeopardy.
- What happened to 345,000 reservations? Katsenelson says that 400,000 people paid $1,000 apiece to reserve a place in line for Tesla’s new Model 3, which was to be offered at $35,000. He estimates that, to date, Tesla has delivered 55,000 cars, but the price ended up starting at $49,000, not $35,000.
Now, Katsenelson has learned, Tesla is advertising that the Model 3 is available in the U.S with no reservation. With current production at less than 3,000 units per week, Tesla would need about two years or a miracle to fulfill all of those prior orders, unless a whole lot of people canceled their reservations (and drained the company’s balance sheet of upward of $345 million in interest-free deposits).
- How effective is Musk at running Tesla? While respectful of Musk’s many talents and accomplishments, Katsenelson lists recent confidence-destroying erratic behavior from Musk (and didn’t even mention the previous quarter’s conference call). Musk threatened a lawsuit against an investor who published negative research and called a diver who helped rescue a cave-trapped Thai soccer team a “pedo” (shorthand for pedophile, we assume) after the diver criticized him.
Katsenelson believes that Tesla’s value (and stock price) should be based on the company’s fundamentals: its balance sheet, sales (and canceled sales) numbers, and strength of management. And here are some other people who believe that: everyone who has ever taken a basic class in economics. So that would include, for example, me.
If short-term capital markets actually adhered to some basic rules of logic, there might be value to using fundamental analysis to determine which companies you should invest in. Probably not, but maybe. But when a company’s value can make an $8 billion swing based on insults and apologies, stock picking is far too risky a game to play.
“Elon Musk Makes the ‘Most Valuable Apology of All Time’ on Tesla’s Earnings Call” by Tae Kim, cnn.com, 8/2/2018.
“Questions I’d Be Asking If I Owned Tesla Stock” by Vitaliy Katsenelson, Advisor Perspectives, 8/2/2018.
“10 Reasons Why the Yankees Are America’s Most Hated Team” by Curt Hogg, bleacherreport.com, 5/17/2010.