Elon, the Brand

What is the product of Musk's companies, really?

Musk’s record on innovation has been mixed. His first start-up, Zip2, had no impact on the tech world. PayPal wasn’t Musk’s company’s product but Peter Thiel’s. SpaceX is very successful. But Tesla’s increasing sales of impressively performing EVs is marred by a growing catalog of errors and recalls. Despite Musk’s haphazard approach to innovation and mixed track record, his companies suffer no shortage of investment. Tesla’s current market value is some 650 billion dollars, somehow a whole order of magnitude higher than companies, such as GM and Toyota, that produce far more vehicles. 

Telsa’s financial value far outstrips its actual production and profits.

Yet being awash in capital ends up being a double-edged sword. It affords Musk considerable financial freedom to pursue the technological avenues that he personally finds the most compelling. It allows him to dream big, such as in creating an electric truck that (perhaps obtusely) defies traditional notions of attractiveness, and even “truckiness.” But keeping that dream alive means continually convincing investors that his inventions will someday rule the world, risking complete divorcement from financial and consumer realities. 

In more recent cases, that dream has been far harder to maintain. Musk’s control of Twitter has seen the company’s value plummet over 70 percent. One wonders what may happen to his other ventures, should his technology and business acumen more often come into question.

In these terms, Elon Musk begins to eerily resemble Donald Trump. The former president’s frequent bankruptcies were caused by being chronically overleveraged. Trump compulsively acquired properties and businesses that could serve as symbols of his own self-perceived greatness, often not being smart and sustainable business decisions.

Especially in light of Twitter’s decline, some worry whether Musk’s characteristic bravado has become hubris, or even narcissism

On the other hand, Musk’s companies aren't overleveraged. They are flush with capital. Yet, most of his ventures have had a touchy relationship with profitability. SpaceX very nearly went bankrupt in 2008. At the time, both Tesla and SpaceX were losing money, and Musk didn’t have enough to save both of them. If SpaceX hadn’t received a $1.6B NASA contract for ISS cargo development in December, the company would have been totally insolvent. In 2008 SpaceX had $2B in revenues, all from government launches. 

Despite claims of revolutionizing spaceflight, SpaceX makes its money just the way aerospace money has always been made. The company is really just a government contractor. Even its financial valuation, valued at $36B after the successful crew launch in 2020, relies primarily on expectations from Starlink, not its day-to-day business.

Tesla lost some $862 million in 2019 and only got out of the red in 2020 by selling pollution credits to its competitors. And by many accounts, the stock has been chronically overvalued. The firm’s price-to-earnings ratio (P/E) paints a troubling picture. GE has the highest P/E of any major auto manufacturer at approximately 24, meaning that GE has a relatively high stock price given its earnings. Even the technology sector PE average stays below 50. Tesla’s was once over 1400, only recently coming in at a more modest 62.

A high P/E indicates two things. First, that a stock is probably overvalued. Second, that investors expect earnings to increase in the near future. So, much like SpaceX, Tesla’s value stems primarily from expectations rather than actual performance, but to a more extreme degree.

This may explain a bit why the president of Toyota, Akio Toyoda, once dismissed Tesla as like a restaurant without a real kitchen or a chef, just “trying to trade the recipes.” To many observers, at least back in 2020, Tesla made more money selling pollution credits and hype for the future than selling cars.

Tesla’s PE Ratio signals that expectations for the firm are slowly becoming more realistic

Musk’s real product is himself, the idea of innovation a la Elon. Even during his X.com days, Musk was able to attract investment from Mike Moritz based on his Silicon Valley superstardom and little else. But perhaps it isn’t himself that Musk is selling, but rather this myth of the Heroic Innovator that he embraces so enthusiastically. 

Yet, technology has always been as much about the power of ideas about the future as putting physics and silicon to new uses. When the inventor of the photocopier approached IBM for investment, the firm’s bean counters couldn’t imagine a future for the device. The first metal airplanes were less resilient, heavier, and no more fireproof than their wooden cousins. Early advocates' belief in metal as the material of the future would only be vindicated decades later. 

Charisma has its place in the innovation world. We have only so many dollars to invest, but it is not at all clear which technological creations will be revolutionary and which will be duds. Investors, and indeed the public, can’t be faulted for relying on emotion in places where rational analysis cannot travel. When overwhelmed by awesome complexities and uncertainties of reality, we rely on shortcuts, namely strategies for figuring out who to trust.

Of course, given all the words we’ve written to bring Elon Musk back to ground-level, readers can probably guess that we think that we could have a better system for navigating the complexities of innovation than venture capital dollars chasing charismatic individuals. How America currently chooses between different technological paths is not nearly as intelligent as it should be. Where it fails, and how things could be otherwise will be the focus of our next installments.