Elon Musk, #Dealmaker

An analysis of the Twitter deal in terms of Twitter business financials, the deal’s impact on Tesla and other considerations.

https://watchingtheherd.blogspot.com/2022/04/elon-musk-dealm…

A note… I could paste the entire content here (it’s my content) but formatting for Blogger requires significantly more HTML tagging which needs to be stripped out and replaced with alternate formatting to render nicely here. If readers here are bothered by having to click over to another site to read the entire post, I can consider doing the extra work to strip and reformat for Fool rendering. However, in light of… ahem… recent events, the payback on that extra hassle has been diminished.

WTH

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nice blog, first time I’ve seen it.
I don’t mind clicking the link and going to your site, the formatting was nicer than
what can be done on TMF.

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Is there a way that is easy for you to notify people when you have put up a new article?

World Domination?

The dude doesn’t even have a secret liar. He lives in a tiny home in an ugly part of Texas. That is saying a lot as Texas has a lot of ugly parts.

I mean, with all that money he could at least build a johnson shaped space ship.

Cheers
Qazlight

3 Likes

Blogger, like other blogging platforms, supports RSS feeds which are an older 2006 era approach to “subscribing” to streams. There is an app in the Google play store that can run on an Android device that allows you to add RSS URLs to it and you can then just open that app and it will check for new content at each RSS endpoint and summarize it. There is probably a similar app available for Apple iOS devices.

For numerous philosophical and practical reasons, I’m not a fan of Twitter or Facebook to use them as a notification mechanism. I would probably choose Twitter if held at gunpoint and forced to choose between one of the two for mere “notifications” but I would have to resist the temptation to use it “natively” for original thoughts. I’m not a fan of anything that limits contiguous thoughts to such small chunks. (That’s probably obvious given my writing style…) Besides, anything fitting in that small of a limit tends toward “snark” rather than “analysis” or “thought” and there’s already enough snark.

Certainly for content that is on-topic here, I can post a link here. For stuff that’s more iffy, it may be easier to just bookmark the bare blogger link and check every once in a while. The latest post will always be on the “plain” link at https://watchingtheherd.blogspot.com and the ten most recent post titles will be shown on the left navigation to help spot any other recent posts. I have no intention on monetizing it so you won’t get bombarded with ads on how to buy gold, crypto currency or hair restoration tonic.

WTH

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The stock was trading around $60 and Musk claimed the deal would pay around $420 per share. The market reacted with a 10% jump but the Tesla board issued a communique stating no such deal had been finalized and the stock stayed in the $40-60 range for another year.

Other than the $420, these numbers are wrong. You’ve forgotten the 5:1 stock split that has happened since then. And, of course, almost everything you’ve written is wrong in some way. Comes from reading smear articles rather than what actually happened.

Bloomberg ran a story April 21 itemizing many cases in which Musk went to extraordinary efforts to silence critics or publicly smear them…

Yeah, Bloomberg runs many articles that smear Tesla and/or Musk. That one is full of self-truths and outright lies. Dana Hull, the lead author, is a long-time critic of Tesla who relies on Tesla short sellers for information. If an article has her name on it you can count on it being mostly true (Teslas catch fire!!!) but lacking relevant context (… mumble mumble at a rate less than 10% that of ICE vehicles, and getting smaller every year). So unless you know all the relevant information going in, you walk away thinking exactly the opposite of what’s true.

Musk owning a car-firm that seems HIGHLY overvalued and dependent upon hype

Um, really? Seems way undervalued to me, and I see no hype that underpins its valuation. The only thing I know of that there is some possible justification for calling hype is Tesla’s Full Self Driving option, and that figures into absolutely nobody’s valuation of TSLA. Tesla is a hyper growth company, which has grown at 50%/year for the past decade and has nothing but blue skies ahead. Your assertion is based on nothing but a vague impression from poor information.

Musk has significant holdings of Bitcoin, Dogecoin and Ethereum.

Why do you think so? You have a disturbing habit of making assertions with no referenced sources, and many seem highly questionable. So far as I know, Musk owns little or no Ethereum, a small amount of Doge, and maybe a little Bitcoin. I’m quite certain that many people own orders of magnitude more. Tesla has something under 10% of its cash in Bitcoin, but that’s Tesla, not Musk.

…worried Musk might unload a significant portion of…

You think that because jittery fools invent stuff to worry about that Musk is to blame? You are pretty much saying that because Musk has lots of assets and nobody knows what he might do with them, that we should all panic. Or something. Doesn’t that apply then to everybody who might influence the deployment of large sums?

So far, from this analysis, it seems difficult to justify the Twitter buyout on purely financial terms and the merits of possible non-financial motivations seem dodgy at best.

When you start with bad information, it’s often hard to get to any useful or reliable conclusions. Anyway, Elon has already said exactly why he’s doing this. You might want to start there rather than from other people’s claims of how it’s dangerous. He’s also said quite clearly that it’s not about the money. Personally, I think he’s being stupid and reactive, and is unlikely to succeed at what he’s trying to accomplish, but that’s just my opinion. I think he’d be better off just staying away from Twitter.

You might want to look at what they say here <https://www.theverge.com/2022/4/26/23040879/elon-musk-twitte…, a fairly even-handed take on what Musk has said he wants to accomplish. Personally, I think it’s pretty much impossible to get moderation right and I’d much rather he didn’t waste his time and money on it. What I’m guessing is that he’ll forge ahead for a year or two, make some things better and some things just different, then leave it to others. Elon Musk is an extraordinary problem solver, but his successes are all in solving engineering problems, not human interaction problems. It’s a whole different thing.

…someone with a poor record for even-handedness and honest communications about his own outsized financial interests…

You want to provide any actual examples to support this additional smear? I’ll point out that Jack Dorsey supports Musk in this buyout, and he should know better than anybody what is best for Twitter, at least in terms of function if not in how to achieve profitability. See <https://twitter.com/jack/status/1518772757340639232>.

Is there no other person who could try to fix what ails Twitter who seems slightly less bent on world domination?

World domination? What are you smoking? Elon Musk is extremely transparent about what he’s trying to achieve in the world. You might want to listen to what he says rather than making stuff up. Try this recent interview for a start:
https://www.youtube.com/watch?v=YRvf00NooN8

-IGU-

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and the merits of possible non-financial motivations seem dodgy at best.

No need to read further.

The Captain

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Interesting take, WTH. There’s one part that probably isn’t accurate, I think. In assessing Twitter’s potential for growth, you write these two successive paragraphs:

Twitter is estimated to have 400 million unique users with 206 million using the system daily. If EVERY human on the planet began using Twitter, that would cap Twitter's growth at 7.9 billion users or 19.75 times it's current scale. Clearly that won't happen but what if users grow to one billion? That's only a 2.5 multiple which doesn't justify current valuations given that operating costs are growing faster than revenue.

Musk has also hinted that he would like to enhance Twitter to ensure that "users" posting messages and retweeting other tweets are actual humans, not bot armies flooding the system with inputs to distort algorithms and spread propaganda. Okay, that's an admirable goal but is there resistance within the company that is so entrenched that taking the company private is the only way to accomplish that? And if the enhancement works and the 200 million daily user count is suddenly narrowed to only 45 million actual humans, what will happen to ad revenue?

I think the latter paragraph undercuts the former paragraph. If the user count is dramatically inflated by bots and there are only 45 million actual humans on the site, then Twitter’s potential growth to a billion users wouldn’t represent a 2.5 multiple. It would be a 25x multiple. That’s probably much too high a number (a quick google search suggests that maybe 20% represents a high-side estimate of the number of bots on the site) - but in that case, trimming the bots probably wouldn’t have much of an impact on ad revenue.

Albaby

I think the latter paragraph undercuts the former paragraph.

Yes, it would point to that. Got me curious about users. According to statista,

In the last reported quarter, the number of global monetizable daily active users (mDAU) on Twitter amounted to 217 million users. The last published figure regarding monthly active Twitter users amounted to 330 million before the company discontinued reporting on the metric.

https://www.statista.com/statistics/970920/monetizable-daily…

Would bots be able to counted as “monetizable” users or were they included in the 330 million total [non-monetizable] users?

Pete

IGU - Thanks for a great rebuttal to the OP. I am a big fan of Elon Musk and his efforts to provide the world with products to mitigate climate change. Innovation is the future. Fossil fuels are a dead end.

I bought more Tesla stock at noon yesterday.

Jaak

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Some feedback…

My apologies for the mixup leaving the 2018 share price in post-split numbers. I reflected the 10% bump that day correctly (which was the real point, not the absolute dollar value) but didn’t go back to un-split the price to 2018 terms. (I noted the error on the blog post…)

My point in describing the 2018 tweet incident is that it reflects a prominent case where Musk did not contemplate the restrictions about officers of a publicly traded entity making forward looking statements that can potentially mislead investors. The fact that this communication had not been approved by the board suggests his planning was ad hoc and had not been vetted appropriately, especially for such a volatile stock. The fact that the SEC charged him with securities fraud and extracted $40 million in penalties from him as an individual and Tesla the firm indicates the severity of the offense.

The Bloomberg article references a case where Musk responded to an online critic by publicly labeling him a pedophile. That’s an example of the exact bad social media behavior raising concerns across all media platforms and an example of the type of behavior that could grow exponentially if Musk fails to figure out a way to solve the content mediation problem for a platform with 200 million daily users. It is also an example of bullying behavior of the richest man in the world which can have a much larger impact than the average troll on any of these platforms.

I have no concerns about the value proposition of Tesla VEHICLES. Among the owners and test drivers I’ve spoken to, satisfaction in the performance, quality and value of the VEHICLE is unanimous. Tesla the COMPANY has contributed a great deal to the auto industry by demonstrating how much vehicle engineering has to change to switch from internal combustion engines to EV with much heavier focus on software for driver interfaces, control systems and self-driving capabilities. Tesla’s leadership has also clarified to markets and governments how much re-invention is required for the charging infrastructure required to make the vehicles practical for more customers in more destinations. People forget our existing investment in gas stations didn’t happen over night for free and a switch to electric will require similar investment (and standardization).

My concerns about the VALUATION of the COMPANY stem from reviewing math on units sold, opportunities for market share growth and capital investment needed to get from current state to a top 3 player in the industry by volume. Tesla produced 305,840 vehicles in the fourth quarter of 2021 which confirms capacity to make at least 1.2 million vehicles per year. Ford produced 1,104,000 vehicles in 4Q2021 and 3,942,000 vehicles for the year 2021, roughly 4 times the capacity of Tesla from the assembly line back through supply chains. Worldwide production for Toyota was 2,077,000 for 4Q2021 and 8,234,000 vehicles for the year 2021, roughly 6.8 times that of Tesla. Ford employs 183,000 workers and has a market capitalization of $59 billion. Toyota employs 371,365 workers and has a market capitalization of $233 billion. Tesla employs 99,290 workers and has a market capitalization of $906 billion.

Thinking of those numbers in ratio terms, the ratios of capitalization to production capacity unit are:

Tesla – 906000000000 / 1200000 = $755,000
Ford – 59000000000 / 3942000 = $14,967
Toyota – 233000000000 / 8234000 = $28,297

Looking at the ratio of capitalization to employees,

Tesla – 906000000000 / 99290 = $9,124,785
Ford – 59000000000 / 183000 = $322,404
Toyota – 233000000000 / 371365 = $627,415

To me, these ratios would normally be about equal for a relatively stable industry in which competitors are using similar technology to create similar products. When the numbers vary significantly, the variation would be due to some combination of these factors:

  • one firm having invested more or less capital than the others
  • one firm’s competitive advantage / disadvantage stemming from technology choices
  • one firm having higher or lower productivity than the others
  • one firm have higher or lower expectations for growth

For example, I would expect Ford and Toyota to have roughly similar ratios of capitalization to unit capacity because they both build a mix of EV, hybrid and ICE vehicles. Toyota’s higher ratio is likely due to higher estimates of long term unit growth volume since Ford is voluntarily shrinking from the sedan market to focus on trucks and SUVs. If the above ratios were plus or minus 100% of each other, I couldn’t tell you if that meant anything scientifically. When one of the firm’s ratios are ten times the others, the delta has to stem from high expectations, especially when I would expect them to be LOWER reflecting lower manufacturing complexity.

Part counts in electric vehicles are far lower than ICE technology vehicles so one can argue that Tesla’s plant investments and work force won’t need to be as massive as traditional ICE-based makers. That’s true for the car assembly but doesn’t reflect investments required for battery manufacturing being split between Tesla and Panasonic and doesn’t reflect investment and labor needed to build out charging station infrastructure. It isn’t clear to me if Musk plans on continuing to own / control charging stations or if he expects / wants to encourage others to build out that infrastructure with industry standards.

I have no short or long position that benefits either way from what happens to Tesla or any of Musk’s firms. I am interested in the behavior of the world’s richest person and what he is enticed into doing in other sectors given much of the wealth providing him influence and clout is tied to something that I see as highly overvalued. As stated before, I don’t care about Tesla’s stock price (or Twitter’s…) My concern is that a volatile stock is a major concern to the world’s wealthiest human who has a pattern of impulsive and inappropriate communications that can move entire markets.

Regarding the point on user counts with Twitter, I assume most advertisers know “subscriber” counts are very fuzzy factually and, to a large degree, the absolute numbers don’t matter. If I’m an advertiser trying to reach 10,000 humans in a particular location and demographic in the next week and the cost to do so on Twitter is $XXX dollars, I don’t really care whether Twitter says there are 219 million active users or 400 million or a billion as long as I get some sense I reached my targeted 10,000 in my ZIP in my desired demographic. If 200 of those come by my store, I got what I wanted regardless of how many fake accounts exist in the system. I think inflated user counts due to bots and hackers has been an open secret across social media certainly since at least 2016. However, after watching Facebook shares plummet twenty percent on February 2, 2022 after subscriber losses were reported with earnings, Twitter knows that any process developed that can identify and block bot activity in volume could trigger a similar reckoning and result. Of course, if they go private, they won’t have to worry about that.

WTH

11 Likes

My apologies for the mixup leaving the 2018 share price in post-split numbers. I reflected the 10% bump that day correctly (which was the real point, not the absolute dollar value) but didn’t go back to un-split the price to 2018 terms. (I noted the error on the blog post…)

Glad to see you corrected that. Thanks! Generally, Musk critics leave their errors forever, which is one reason why most of what you read is all wrong.

That 10% bump may have been your real point, but as I wrote your understanding is at best superficial and you got everything somewhat wrong. The most important thing you got wrong is the exact timeline. When Musk first tweeted, TSLA was already up on the day significantly. As this article (https://www.investors.com/news/technology/tesla-stock-elon-m…) written that day reports: “Earlier Tuesday, the Financial Times reported that the Saudi Arabia Public Investment Fund built a stake in Tesla.” So TSLA actually went up much less than you said after Musk tweeted.

My point in describing the 2018 tweet incident is that it reflects a prominent case where Musk did not contemplate the restrictions about officers of a publicly traded entity making forward looking statements that can potentially mislead investors. The fact that this communication had not been approved by the board suggests his planning was ad hoc and had not been vetted appropriately, especially for such a volatile stock. The fact that the SEC charged him with securities fraud and extracted $40 million in penalties from him as an individual and Tesla the firm indicates the severity of the offense.

Nah. It indicates that the SEC is and was a tool of its Wall St. masters and interested not in policing actual malfeasance but rather in punishing those who don’t bow down before them. The entire incident never made any sense as stock manipulation as the SEC claimed. Musk never bought or sold during the relevant period. He made no money and never even tried to do anything but what he said he wanted to do: take Tesla private. The only thing it really said about Musk is that he’s impulsive and not given to following rules that don’t make sense to him. Well, it also demonstrated that he won’t back down when accused by bullies of doing immoral things.

You could, if you want to understand why he did what he did, try reading what he wrote that day: (https://www.tesla.com/blog/taking-tesla-private).

The Bloomberg article references a case where Musk responded to an online critic by publicly labeling him a pedophile.

Nope. Not an online critic – an a**hole who got into an exchange of insults with Musk and lost. And what Musk called him was a “pedo guy”. The whole thing went to court and the “pedo guy” lost again. See (https://www.cnn.com/2019/12/03/media/elon-musk-testifies/ind…).

Like I said, every time you believe what you read in a Bloomberg (Dana Hull) piece on Musk you end up misinformed. Your conclusions about the implications are thus drawn from misinformation and misunderstanding, so no wonder they aren’t much good.

Your analysis of Tesla’s valuation is an admirable exercise in how to value an auto manufacturer in a static market. However it’s pretty much useless for evaluating a player that is disrupting the market. Tesla is growing rapidly while all the others are slowly (and sometimes rapidly) shrinking. Tesla will sell more vehicles than Ford in 2023, maybe sooner; and more than Toyota soon after. Tesla’s operating margins are far higher than any other company in the auto business. Like Apple, they won’t have most of the market, but they will have essentially all of the profits.

Not to mention that Tesla consists of a large number of component startups, several of which have the potential to be larger than the car business (e.g. energy, robots, AI). Oh yes, as well you need to compare Tesla with not just the auto manufacturers, but include many of their suppliers, their dealers, service shops, insurance providers, and gas stations as well, since Tesla does all that stuff at once. But in any case, we’ll all get to watch what happens over the next few years.

Your comments regarding Twitter aren’t really relevant, as it’s not about the money. And Musk hates advertising, considering it a form of lying. It will be interesting, if this deal goes through, so see how things at Twitter evolve. Although however it goes, I think it will be miserable for Musk. He’ll probably do a bunch of stupid things because he doesn’t really understand people the way he understands physics. I just hope it doesn’t distract him much from Tesla and SpaceX.

-IGU-

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My concerns about the VALUATION of the COMPANY stem from reviewing math on units sold, opportunities for market share growth and capital investment needed to get from current state to a top 3 player in the industry by volume.

Good analysis based on a flawed conjecture, that Tesla is just one more carmaker. Above this analysis you state:

I have no concerns about the value proposition of Tesla VEHICLES. Among the owners and test drivers I’ve spoken to, satisfaction in the performance, quality and value of the VEHICLE is unanimous. Tesla the COMPANY has contributed a great deal to the auto industry by demonstrating how much vehicle engineering has to change to switch from internal combustion engines to EV with much heavier focus on software for driver interfaces, control systems and self-driving capabilities. Tesla’s leadership has also clarified to markets and governments how much re-invention is required for the charging infrastructure required to make the vehicles practical for more customers in more destinations. People forget our existing investment in gas stations didn’t happen over night for free and a switch to electric will require similar investment (and standardization).

and you ignore all of it doing the valuation!

Tesla produced just under a million EVs in 2021. Ford expects to make a million EVs in 2025, that’s a four year lead while at the same time Ford has to ramp down the ICE related investments. It’s a terrible burden that Tesla does not have. On the other side of the coin Tesla is busy reinventing the transportation business with SuperChargers, FSD, Robo-taxis, tunnels (The Boring Company), World AI spilling over into humanoid robots, no dealers, insurance float to fund investments, and more. All this is missing in your valuation.

The Captain

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Tesla produced 305,840 vehicles in the fourth quarter of 2021 which confirms capacity to make at least 1.2 million vehicles per year. Ford produced 1,104,000 vehicles in 4Q2021 and 3,942,000 vehicles for the year 2021, roughly 4 times the capacity of Tesla from the assembly line back through supply chains. Worldwide production for Toyota was 2,077,000 for 4Q2021 and 8,234,000 vehicles for the year 2021, roughly 6.8 times that of Tesla. Ford employs 183,000 workers and has a market capitalization of $59 billion. Toyota employs 371,365 workers and has a market capitalization of $233 billion. Tesla employs 99,290 workers and has a market capitalization of $906 billion.

Thinking of those numbers in ratio terms, the ratios of capitalization to production capacity unit are:

Tesla – 906000000000 / 1200000 = $755,000
Ford – 59000000000 / 3942000 = $14,967
Toyota – 233000000000 / 8234000 = $28,297

I didn’t check your MATH but assume that you are CORRECT.
However, did you conveniently forget to step back and look at the slightly larger picture?
Tesla just opened TWO new factories that will more than double (maybe triple) their production capacity. Their growth RATE is staggering compared to Ford and Toyota. Maybe you should do the MATH on that as well in order to have a better understanding of why their stock price is so high.

Also, you forgot to take into account the fact that Tesla also owns and operates its equivalent of dealerships and service centers which Ford and Toyota do not. About half of the margin on selling a Ford or Toyota goes to the dealers.

Mike

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Your comments regarding Twitter aren’t really relevant, as it’s not about the money.

That’s probably the truth. Doesn’t seem likely that Musk is better off moving $8 billion of his net worth out of Tesla into Twitter. If you had to pick which of those two companies to put a big investment into, I doubt too many people would have chosen TWTR.

Albaby

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Doesn’t seem likely that Musk is better off moving $8 billion of his net worth out of Tesla into Twitter.

$8 billion out of Tesla
$4 billion to the tax man
$4 billion to Elon

The Captain
hates paying taxes, but what can you do?

$8 billion out of Tesla
$4 billion to the tax man
$4 billion to Elon

Makes it even less likely that this move could ever make Musk wealthier. So it mustn’t be the money.

BTW, between this and the $15 billion (or more) he paid in taxes last year, I wonder if Musk will end up making the largest federal income tax payment over any two year period of any individual. We’ll never know of course, but I recall Zuck’s big tax bill a while back when he had to exercise some FB options was only a few billion - and it was thought to be one of the biggest in history back then.

Albaby

$8 billion out of Tesla
$4 billion to the tax man

Depends quite a bit on what the basis was for the shares he sold. The ones acquired recently due to exercising options were already taxed on gains last year. And the stock is down since he exercised, so no capital gains tax if that’s the case.

-IGU-
(familiar with paying >50% taxes due to one time outsize capital gains)

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Depends quite a bit on what the basis was for the shares he sold.

Fair point!

The ones acquired recently due to exercising options were already taxed on gains last year.

When Musk exercised options at the end of last year he paid over 50% in taxes, federal and state.

The Captain

1 Like