The Elon Musk Show

When an electric car catches fire, the chemistry of the lithium-ion batteries mean they burn for far longer and are harder to put out, as thermal runaway in battery cells propagate to the others. To many Tesla shareholders, such a phenomenon must feel like their current predicament; a car crash and a slow burning fire, with no sign of being put out any time soon. Tesla’s board shows no signs of attempting to reign in their erratic CEO, to the detriment of the share price and overall competitiveness.

On the first day of US trading in 2023, Tesla’s share price dropped 12.2% on the back of worse than expected delivery data. It is impossible to disassociate the effect of CEO Elon Musk’s continued distractions with Twitter, and the associated loss of value and focus at a time when Tesla needs both.

Since Musk first announced his original acquisition of 9% of Twitter’s shares on 4 April 2022 (making him the largest shareholder) shares in Tesla have fallen by 68.63%. As its valuation has deflated along with the tech bubble, increasingly it looks like Tesla is starting to be viewed by investors like just another car manufacturer, particularly as ‘traditional’ manufacturers become bigger players in the EV market. It would be brave to assume that the multiple that Tesla has enjoyed has unwound as far as it will go.

Part of the magic dust sprinkled on Tesla’s valuation has previously come via Musk himself, who until recently was regarded by many as a planet-saving visionary whose leadership was unquestionable. But latterly, particularly as a result of his social media adventures, Musk has become seen as causing problems for the car maker. Whenever the mooted takeover inched closer to completion, Tesla shares took a hit – for example they were down 12% when the Twitter board unanimously accepted his takeover bid on 25 April.

It is important not to pin all, or even the larger part of Tesla’s current predicament on its wayward chief executive. Despite shipping a record number of vehicles in Q4 (405,278) this figure was well short of investor expectations (431,117). Total deliveries in 2022 rose by 40%, lagging Musk’s stated target of a 50% increase.

Many car companies have been impacted by the economic slowdown in China throughout its near three-year Zero Covid system of rolling lockdowns, but Tesla, with a hefty portion of its sales coming in China and multiple plants in the country, was particularly vulnerable. The economy has been battered, consumer demand hit, and recovery will take time.

Some of Tesla’s pain can be explained by its penchant for mass end-of-quarter shipping and deliveries, prone to delays with the current supply chain issues. When China comes out the other side of its Omicron wave, many of the China-specific supply chain problems should dissipate.

But demand is still expected to be down – in January it will run a reduced production schedule at its Shanghai plant, indicating continued downward pressure on demand. This comes at the same time as competition in EVs increases, with more and more car companies transitioning to the electric market.

Still, Musk’s behavior looms large in any analysis of what happens to Tesla next. He also faces a lawsuit from Tesla investors claiming he manipulated the share price by tweeting “funding secured” that would take Tesla private back in 2018. That never materialised, resulting in a US $20 million fine. The case begins later this month and is expected to last for 10 days – there could be further damaging revelations for Musk and Tesla to come.

Musk’s involvement with Twitter did not cause Tesla’s current slide. But it most certainly hasn’t helped. Shareholders are uneasy about the continued use of Tesla and its shares to finance the takeover and operations of Twitter. Since November 2019 Musk himself has sold off $39 billion in Tesla shares, including a $3.6 billion tranche last month, in part to finance his Twitter bid.

But that’s not the only resource from his business empire that he is being asked to explain. In a letter to Tesla Chair Robyn Denholm before Christmas, prominent US senator Elizabeth Warren wrote to raise concerns about possible breaches in securities laws by taking key Tesla software engineers and other employees to work on Twitter, raising questions “about whether Mr Musk is appropriating resources from a publicly traded firm, Tesla, to benefit his own private company, Twitter.” Senator Warren also highlighted possible conflicts of interest, with Twitter reliant on advertising money from Tesla competitors like General Motors, Ford and Chevrolet.

Ultimately it all comes down to governance, or the lack of it. Tesla’s board has been curiously quiet even as market participants complain about the Twitter takeover’s draw on Musk’s attention. Musk’s claim that he would sleep at Twitter’s offices is hard to square with the requirements of Tesla for a committed CEO.

At a time when Tesla needs leadership to steer through a crisis in confidence, reduced demand and increased competition, shareholders are worried its CEO is otherwise preoccupied. His Twittering proclivities, including attempting to find a new CEO but with an unspecified timeline, mean that Musk himself is one of “so many things working against the [Tesla] stock” in the words of Dennis Dirk of Triple D Trading.