In between dabbling in geopolitics and buying-rejecting-no-really-buying Twitter, Elon Musk runs a car company.
Tesla reported results that were somehow simultaneously great and yet humdrum. Revenue jumped 56% versus a year ago but missed expectations by 3%; the stock fell slightly after hours on Wednesday. Such is the flipside of high expectations.
Musk appeared on the call and kicked off with a litany of reasons why, despite supply-chain problems, a strong dollar, and “China experiencing a recession of sorts”, Tesla was set for an “epic end of the year”. The tone came across as a tad defensive, like the chief executive was reaching for reasons to put the results in the rear-view mirror.
The reachiest moment was when he said Tesla — market cap: $696-billion — would eventually be worth twice Saudi Aramco, equating to $4.2-trillion at current levels. Musk was careful to caveat with “now that doesn’t mean it will happen”, which is certainly a possibility worth considering.
The more interesting bit of Musk’s soliloquy was when he said Tesla’s board had debated the idea of doing stock buybacks “extensively”. Musk, having mentioned a range of $5-billion to $10-billion, said a “meaningful” buyback was “likely”.
There has been some talk (or, more accurately, tweeting) about potential buybacks recently, mainly because the stock has fallen 37% so far this year. Even so, Musk’s comments didn’t appear to stir any animal spirits, as the stock continued to drift down during the call. Perhaps one reason for this is that a buyback would cut against the rest of the ambitious narrative.
Consider this: in December 2020, Tesla announced it was selling $5-billion worth of new equity when the stock was trading at about $217 (adjusted for splits). Now, less than two years later and with the stock trading at almost exactly the same level, Musk talks of buying back maybe double that amount. Sure, Tesla’s net cash has swelled to $17.6-billion and the stock’s forward earnings multiple has shrunk dramatically. It was more than 200 times when Tesla announced that stock sale. Today it is merely 46 times. I guess from a certain perspective that looks like bargain basement levels.
The bigger issue is that Tesla maintains an annual growth target of 50%, which implies vehicle sales rising from just less than a million units last year to more than 10 million by 2027. Tesla is also, don’t forget, developing a humanoid robot that should render physical labour “a choice” and may even, as Musk said on Wednesday evening’s call, get into mining if necessary.
This is not to knock the ambition — well, maybe a bit on the robot — but rather to say that all this will require a gigaton of cash to pull off (especially if there’s a global recession along the way). It’s worth noting that the slight disappointment on sales in the third quarter came as Tesla’s sales expenditure fell to less than 5% of revenue. Sales, general and administrative expenses are now, strikingly, about where they were when revenue was a third lower. This would appear to nod in the direction of more spending, rather than less, being necessary.
Hanging over all this is Musk’s impending acquisition of Twitter. He candidly described himself as “obviously overpaying”, although adding “right now”. Even with that gesture to optimism, it still seems odd that he would be (presumably) selling part of his own stake in a company set to more than sextuple in value to over $4-trillion in order to fund an acquisition where it looks like he got taken to cleaners (right now).
Of course, if you believe the Aramco thesis, a Tesla buyback would make sense. Equally, though, who in their right mind would actually sell their stock back to Tesla today with such potential riches on offer? One thing is clear though: with that cheque for Twitter imminent, Musk could use all the optimism around Tesla he can muster. — Liam Denning, (c) 2022 Bloomberg LP