Tesla’s Icarus Syndrome

Photo by Joe Raedle/Getty Images
Elon Musk
William D. Cohan
November 10, 2021

I first wrote about the Tesla enigma back in September 2018, during what we now know to be far more innocent times regarding speculation about the company and its valuation. This was shortly after Elon Musk tweeted that he wanted to take his company private for $420 a share and that he had “funding secured.” As it turned out, of course, Elon was just being Elon. He didn’t have the funding secured for the buyout, apparently had no intention of taking Tesla private, and may have violated securities laws in the process of suggesting to the market, as Tesla’s largest shareholder, that he was going to do something he had no intention of doing. 

What made it all more bizarre, back then, was that Tesla was still something of a vision: a large, well-capitalized bet on the direction of the auto industry, the green economy, and a singularly brilliant founder. Tesla, after all, had never made any money from selling its electric cars and had some $11 billion of existing debt. The idea that Musk could take Tesla private by borrowing even more money without having the profits to repay that debt was just another one of Elon’s fantasies. Wall Street would never have provided the capital for that bit of financial folly. So suggesting the buyout was a really dumb idea at the time and it would never have been completed, even if Musk had been serious, which of course he wasn’t. (In the end, Musk paid the S.E.C. a wrist-slapping $20 million fine, stepped down as board chairman, and conceded that his Twitter feed would be vetted.) In my New York Times piece that day, I wondered at the outset: “Is it too late for Tesla?” 

Well, while I may have been right about the possibility of Tesla going private in the summer of 2018, I was very wrong about the lengths investors would be willing to go to support the bildungsroman that is Tesla and Elon Musk. Don’t get me wrong. Tesla is now very real. It makes electric cars that people buy, and in droves, especially in Los Angeles, where every other car on the road seems to be a Tesla. And Elon Musk is real and it’s real that he is the world’s richest man with a net worth, depending on the nanosecond, of around $290 billion. (That is not a typo). 


But what is not real—and what is not sustainable—is the logic for the company’s valuation. At $1 trillion, Tesla is now worth more than the entire auto industry combined plus, as Scott Galloway, the entrepreneur and N.Y.U. professor, recently put it to, “Boeing and Airbus and every specialty retailer on the planet.” (Musk recently called Galloway an “insufferable numbskull” on Twitter.) There simply is no justification for this valuation, not by any metric previously known to mankind, no matter how many times you adjust your EBITDA to try to make it look like Tesla is making enough money to justify that kind of valuation. As I have written before, the vast majority of the money that Tesla is making these days comes from selling “regulatory credits,” which Tesla sells to other companies so that they can comply with regulatory requirements. 

Again, it’s not that Tesla isn’t selling cars, it’s just that Tesla isn’t making its profits from selling cars—at least not at the moment. In the first six months of 2021, Tesla sold 203,736 more cars than during the first six months of 2020, generating $8.8 billion in revenue. It’s worth noting, though, that 10 percent of Tesla’s revenue, or $872 million, came from selling carbon credits. Those regulatory credits are basically pure profit for Tesla and accounted for nearly half of its pre-tax profit, of $1.8 billion, in the first six months of 2021. In the last twelve months, ending June 2021, Tesla earned $2.166 billion, of which $1.67 billion, or 77 percent, came from selling carbon credits to other car manufacturers, not from selling cars. 

To put this in proper perspective, Tesla’s $1 trillion market value represents 462 times its last twelve months’ net income, of which only a small percentage actually comes from selling its electric cars. Since I wrote that Times piece, Tesla’s stock has split five-for-one. In September 2018, the split-adjusted Tesla stock was trading around $60 a share. Now, it is trading at around $1,030 a share, an increase of around 1,600 percent. Since Tesla went public in 2010, the stock is up more than 27,000 percent. Again, for some perspective, Apple—one of the most valuable companies in the world and that makes more than $80 billion of profit a year—has increased in value 1,577 percent during the same time.

Honestly, there’s no good reason for why investors have lost their minds when it comes to Elon Musk and Tesla. Maybe it’s all just part of the Cult of Elon, or part the promise of the electric car revolution—of which Tesla will have plenty of competition—or part of the idea that as long as the stock keeps going up and up, and the landscape keeps filling with the carcasses of the non-believers, the Cult members become more emboldened than ever. All the way back on September 1, when I wrote another piece about the Tesla insanity and when Musk and Jeff Bezos shared the title of the world’s richest person, Elon tweeted, “I thought 1999 was peak insanity but 2021 is 1000% more insane!” Since then, Tesla’s stock has increased another 40 percent or so, in two months. Musk’s net worth, meanwhile, nearly doubled.

The latest sugar high for Tesla and Musk came two weeks ago when Hertz, which just emerged from bankruptcy and had its own bout of meme stardom, announced that it has reached an agreement with Tesla to buy 100,000 cars for its rental fleet. Whether this was true is still being sorted out. But the facts on the ground seemed to be of little concern to the Cult. On October 25, the day of the Hertz announcement, Tesla’s shares increased 12.7 percent and Musk’s net worth shot up another $36 billion, more in one day than he was worth at the start of 2020, when he was already one of the world’s richest people. 


That move up—making Tesla worth more than $1 trillion—appeared to put the final nails in the coffin of the short sellers and skeptics. “If you put that kind of move on an equity in this environment, and you’re now worth more than a trillion dollars, and he’s now the richest guy on earth, by far, you’ve kind of won, and then some,” said Marc Cohodes, a short-seller who has stayed far away from Tesla. At that point, Cohodes explained, it doesn’t matter what Musk himself says or does, because all of his antics, all of his mishegoss—taunting the S.E.C., getting sued, taking drugs, pumping Dogecoin, tweeting at a senator “Why does ur pp look like u just came?”—only accelerates the stock’s move up. “So he is not only protected, and he’s not only above the law, and he’s not only invincible, he has a stock that flies, and there’s no one out there to slow it down or who can stop it. Anyone who’s tried it has been destroyed.” 

The latest Musk victim is Michael Burry, the short-seller who made a fortune shorting the mortgage market in 2008 and later became the hero of Michael LewisThe Big Short. Earlier this year, Burry had bought 10,755 Tesla put contracts—betting the stock would fall—but in an October 15 email to CNBC, he announced that he had unwound the trade. He was giving up, too. He had compared Tesla to the Dutch Tulip bubble and made his Twitter header a Brueghel painting, “Satire of the Tulip Mania.” (He did not respond to a request for comment so it’s not yet known publicly whether he made money or lost money. But it’s likely he lost money, given Tesla’s stock is up 42 percent in 2021.) “Anyone who’s skeptical of this thing has been beyond destroyed, beyond,” Cohodes sighed. “So those guys either cover or just completely throw in the towel, or completely say they’re finished. And the guys who own the stock are invigorated, because all it does is go up. And they think, ‘Why would this ever go down?’ Because all it ever does is go up. And if you come with a new incremental negative story, someone will simply say, ‘Well, if I listened to you back then, all I would have done is miss an eight bagger.’”

Cohodes continued: “So it’s human nature to want to own winners and sell losers. And since all this thing does is go up, in a very speculative market, people say, ‘Why don’t I just keep playing along?’ Why not? You know, why not? It’s a perfect name to own because all it does is go up.’” 

And, then, just like that, things appear to be changing. Over the weekend, Musk took to Twitter to conduct a poll as to whether his 63 million followers would support him selling 10 percent, or $20 billion, of his around $200 billion of Tesla stock. He said he would abide by the results of the poll. “Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock,” he wrote. Musk also noted that since he doesn’t take a cash salary “or bonus from anywhere,” and that he “only has stock,” the “only way for me to pay taxes personally is to sell stock.” (This lit up progressive fintwit, no surprise.) More than 3.5 million people voted and 58 percent of them voted that Musk should sell. 

It was another strange Musk Twitter stunt, reminiscent of 2018. (What happened to Musk’s S.E.C. settlement that required his tweets to be approved before sending?) But Musk’s apparently altruistic solicitation of a vote of confidence, or support, could have been nothing more than a way for him to signal to the marketplace that he was going to sell stock and to try to create cover for that sale. There was of course immediate speculation as to why he was choosing now to sell. A number of media outlets took Musk at this word that it was related to a supposed significant tax bill he has coming due as a result of cashing in some way-in-the-money options he was granted a few years back as compensation. In a since-deleted tweet, Burry wrote that the idea of him needing to raise cash to pay taxes was just another head fake; Burry suggested that he needed the money to service the “tax-free cash” Musk had borrowed on June 30 by pledging as collateral 88.3 million of his 170 million Tesla shares.


Whether Musk is paying down a tax bill, servicing a debt, or even somehow genuinely allowing his Tweeps to guide a multi-billion dollar transaction, let’s face it: when Tesla’s largest shareholder, and the world’s richest man, announces that he is selling stock, it’s a clear signal that the party may be over. In his little polling gambit, Musk was obviously trying to minimize the fallout. “He shares an attribute that all big tech C.E.O.s share,” Galloway told me, “and that is they are incredibly adept at the abdication of responsibility.” He reminded me that at the recent Code conference a few weeks back, Musk said he was “going to be the first in and last out” at Tesla “and that he would never sell stock.” Now, Galloway says, Musk “wants to sell stock but he doesn’t want to take responsibility for the decision. You can say a lot of things about him but he’s definitely not dumb. And when you have a stock that’s trading at the value of the global auto industry plus throw in a Boeing and an Airbus, and every specialty retailer on the planet, he probably recognizes that it’s not a bad idea to take some chips off the table. He also doesn’t want to take responsibility for that decision … I want to sell but I want to pretend someone else is making the decision.” 

Galloway credited Musk with being a “P.R. genius,” while also at the same time creating an “elegant way of getting liquidity without acknowledging the fact that he believes it’s a good time to trade the stock for money.” Like the independent research firm New Constructs, which published a research report last week suggesting Tesla was worth $200 billion, or $1 trillion less than it was worth when the report came out, Galloway believes Tesla’s stock, which rose about 80 percent in the past two years, could fall some 80 percent, or more, “pretty crisply,” making his decision to sell stock “a smart move” and an even smarter one to “make it look like someone else’s decision.”

At the moment, despite Cohodes’ historic note of caution, it appears the Tesla dam is finally breaking. Since Musk’s Sunday tweet, Tesla’s market value has fallen—in two trading days—14 percent, or nearly $200 billion, and is now worth $1.03 trillion. It’s still worth more than it was before the Hertz purchase announcement. Musk is still worth some $300 billion. Sure, that’s $25 billion or so less than he was worth yesterday, but he’s still up $120 billion so far this year. Musk could buy all of the restructured GE and still be the world’s richest man. I agree with the shirtless professor: We’re just in the first inning of the great Tesla unwind and that, most likely, of the rest of the financial markets too. This could get real ugly, real fast.