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With apologies to Janet Malcolm, every investor who is not too stupid or full of themselves to notice what is going on knows that what they do isn’t exactly rational. That’s why stories matter so much to investors.
Money doesn’t behave in the same predictable way that, say, a rocket behaves. It doesn’t matter much whether you think the rocket will go up. The rocket goes if the physics is right, and it doesn’t if the physics is wrong. Money, being a human construct, functions in a much weirder way: it only works if we all agree it works. And when it comes to investment, that psychological component gets amplified, which means money can be used as a way to track Wall Street’s primary emotions: hope and fear.
So when Elon Musk announced on August 7th that he wanted to take Tesla private at $420 a share, the shares surged, indicating hope. The fact that the Tesla share price never actually made it to $420 a share suggested investor skepticism that the deal would get done.
Those investors were right to be skeptical: last Friday, after 11PM ET, Musk posted on Tesla’s site that he had decided against taking the company private. On Monday, Tesla shares fell, which could be read as disappointment about the deal falling through or nervousness about the company’s leadership.
For a company like Tesla, stories really matter. Since Tesla has never had a yearly profit, it is essentially peddling hope — the hope that the company will become profitable. There are a couple of secondary narratives, too, and they feed into the primary narrative of profitability: (1) that it is good for the environment to switch to electric cars rather than gas-powered ones, and (2) that Musk, with his history of making the improbable real, was exactly the kind of visionary who could bring on the future of cars.
These narratives exist for good reason. Environmentalists have been pushing electric cars as a kind of harm-reduction method for transportation for a very long time. But until Tesla’s Roadster, electric cars were clunky. The Roadster showed that it was possible to make a good-looking performance car that car people would want to buy on its merits, whether or not they cared about the environment. The Roadster essentially forced a number of automakers’ hands: they now had to compete on electric cars or look like gas-guzzling, planet-destroying jerks who couldn’t innovate.
Tesla is already punching above its weight when it comes to forcing other automakers to contend with electric cars. When I met with Polestar, Volvo’s electric brand, earlier this week, COO Jonathan Goodman was very clear: its second car, the Polestar 2, is meant to compete with the Model 3. It’s not just Volvo, either — electric cars appeared at classic gearhead auto show Pebble Beach last weekend.
Those two secondary narratives — along with the primary one about profitability — appear in Musk’s Friday note. “We will not achieve our mission of advancing sustainable energy unless we are also financially sustainable,” Musk writes. “Moving forward, we will continue to focus on what matters most: building products that people love and that make a difference to the shared future of life on Earth.” In the note, Musk mentions that he talked to shareholders and that they pretty much wanted Tesla to stay public, so he’d bow to their wishes. “I’m incredibly excited to continue leading Tesla as a public company,” he concludes. “It is a privilege.”
But throughout this year, another Tesla narrative has arisen, one that originates with the short-sellers who have bedeviled Musk. It is the narrative that Musk is actually not a very good CEO.
“Elon Musk appears erratic and desperate,” wrote David Einhorn in a letter to Greenlight Capital investors last month, in the most succinct summation of this narrative I have seen. Einhorn is a Tesla short, which lends some credence to Matt Levine’s theory that Tesla shorts are sabotaging Tesla by… hurting Musk’s feelings.
The foundations of Einhorn’s claim can be found on Musk’s own Twitter account. On April Fools’ Day, Musk posted a series of joke tweets about a Tesla bankruptcy. Musk slammed the media in May, after a report on working conditions at Tesla — which sparked an investigation — and reports of Model 3 production woes began appearing. In a quarterly earnings call with analysts, Musk stopped answering what he called “boring, bonehead” questions and went to YouTube. (Musk apologized for this in a subsequent earnings call.) He accused a former employee of sabotage — a kind of familiar refrain, which spawned a defamation suit. On Wednesday, the National Labor Relations Board accused Musk of violating US labor law with his tweets.
Then there’s the Thai submarine debacle, which neatly illustrated the narrative divide. A soccer team of children trapped in a cave in Thailand became a media sensation, and Musk built a submarine to help rescue them. People who believed in Musk celebrated his generosity; people who didn’t derided the effort. This conflict — perhaps predictably — escalated, with Musk posting emails he’d received encouraging him, and one of the rescuers (whose work was crucial to rescuing the children!) mocking the sub. That’s when Musk, on Twitter, called him a “pedo.” Musk later deleted the tweet and apologized.
The “erratic Musk” narrative seems to be gaining steam. You can see it in the headlines! Here’s The Washington Post: “Tesla without Elon Musk? How a once-unthinkable idea became unavoidable.” Here’s Autoweek: “Could Tesla survive without Elon Musk? Tesla’s founder may need to stand aside for company to grow.” CNN: “Elon Musk is lashing out on Twitter again.” NYT: “In Elon Musk’s World, Brakes Are for Cars, Not C.E.O.s.”
This past Friday’s blog post provided Musk with the opportunity to reset the narratives — to say, in effect, that he’s been focusing on the wrong things, he’s been distracted by negative press and Twitter trolls, and to make Tesla the best company it can be, he’ll go head down and focus on the Model 3, end of story. He didn’t take the opportunity.
On Tuesday, he revisited the cave debacle, essentially implying the rescuer was, in fact, a pedophile: “You don’t think it’s strange he hasn’t sued me?” he tweeted. On Wednesday, it emerged that the rescuer was, in fact, exploring a lawsuit and has now been double-dog-dared to file it; his lawyer has tweeted an August 6th letter informing Musk that the lawyer is “in the process of preparing a civil complaint for libel against you.”
One way of looking at this behavior is to suggest that Musk has lost the plot. For instance, Tuesday also found him challenging a New York Times characterization of him as alternating “between laughter and tears.” “For the record, my voice cracked once during the NY Times article. That’s it. There were no tears,” he tweeted. (The New York Times’ finance editor disputes this.) But the (admittedly minor!) feud may reflect Musk attempting to counter the “erratic” narrative by fighting it head-on.
There’s an obvious problem with this strategy: the harder Musk comes out against the narrative that he’s erratic and desperate, the more erratic and desperate he looks.
You can’t fight a story by arguing with it. You fight a story by offering a better story. Facts are finer-grained than narrative, which is why it’s possible to construct multiple narratives with the same facts. But Musk might want to pay closer attention to the “erratic” narrative because it’s gaining steam, at least in part from his own actions. A YouGov poll suggests this year’s shenanigans have undermined the public’s faith in Tesla: “The amount of US adults open to buying a Tesla have diminished from 8 percent at the beginning of 2018 to 6 percent near the end of August,” the report says. That has consequences for car sales, Tesla’s share price, and, ultimately, the future of the company.
There’s another, easier way to keep track of Tesla sentiment, though, and it’s to watch the share price. After spiking on August 7th — following Musk’s tweet about going private — to $379.57, it’s been falling. And this week, the stock has continued to fall. Tesla shares began the year at $320.53; they closed Thursday at $303.15.
But then, it’s also worth remembering Tesla’s market cap, which, as of Thursday’s close, was $52.9 billion. That’s bigger than General Motors ($51.6 billion) or Ford ($38.8 billion) — despite the fact that Tesla makes far fewer cars. So while the “erratic Elon” story may be gaining steam — Tesla is heavily shorted — a lot of investors are still willing to bet Tesla will succeed.