After a telling New York Times interview revealing Elon Musk's shaky state of mind and erratic decision-making process, and even a few earlier blog reports, it's becoming increasingly clear that any Tesla investor has to consider what the stock will be worth with Elon Musk departing the company.
The same New York Times article reported the search for "No. 2 executive" to help Musk has intensified in recent weeks.
The issues are mounting on an hourly basis now, whether in the form of subpoenas from the Securities and Exchange Commission or a recent report that Tesla ignored drug trafficking at its Nevada factory.
Some argue that if Musk leaves Tesla altogether, or at least appoints some sort of manufacturing-oriented COO, that this will be the best of both worlds: a visionary Founder, but with the place being run by a competent manufacturing executive. "The Tim Cook to Steve Jobs' Apple" as the argument goes.
The first problem with this theory is that it has been tried in one vital and most relevant aspect.
Two years ago, Tesla hired Peter Hochholdinger from Audi. Mr Hochholdinger has been "Steve Jobs' Tim Cook" in Elon Musk's Tesla arsenal. Mr Hochholdinger was a top production executive for Audi's Q5, A4 and A5 production. That's about as good a background as it comes, in order to straighten out Tesla's production execution issues. So this solution has been tried before.
If Tesla were valued on regular car industry metrics, the stock would be selling at a tiny fraction of its current market capitalization and enterprise value. Let's say 300,000 cars per year (3x the 2017 total of just over 100,000) to be very generous. For a company that's losing money, getting a $3,000 per car enterprise value might even more generous.
Then $3,000 multiplied by 300,000 units is $9 billion. Let's round up the fully diluted shares to what they may become after dilution, close to 200 million in the near future -- and you might say we have a $45 stock, right? ($9 billion divided by 200 million) While a far cry from today's $300+ price, it would still be above the $17 IPO in 2010 and where the stock was trading until April 2013.
However, the story doesn't end there. Tesla also has over $10 billion in debt as of June 30.
With $10 billion in debt and a working capital deficit of over $2 billion, a $9 billion enterprise value would mean that the equity would be worth less than zero, not $45 per share.
So why is the stock still trading at an undiluted market cap of over $50 billion and $300+ per share? One name and one thing: Elon Musk and raising money.
Elon Musk's main asset to the company is his ability to raise money. Without a $1 billion a quarter average cash inflow from new debt or equity, Tesla does not keep its lights on. Any significant capital investments on top of that, such as a new factory, and even more new debt or equity would be needed.
I contend that trust in Elon Musk is the critical factor in Tesla's ability to attract new debt and equity. If Musk is removed or otherwise not trusted by the market, Tesla wouldn't be able to raise new money, and at that point the company could be as little as a quarter or two away from insolvency. A quick look at the balance sheet in combination with the cash flow statement would yield this conclusion under the light of basic corporate finance analysis.
Therefore, if Musk either departs the firm in whole or in part, and/or he loses the trust with the capital markets, Tesla's enterprise value (let's say $9 billion as in the example above) would be less than its long-term debt and working capital deficit. That means the equity would be worth zero, not even $9 billion or $45 per share. Are Tesla investors, who now start sniffing a Musk departure, disengagement or loss of trust with the capital markets, prepared to see the stock go from over $300 to zero?
Stay tuned for Act Four. The final Tesla chapter has yet to play out. But when it does, it could be a short one.
