Tesla is arguably the most polarizing stock in the market. Bulls call it the future, with an army of passionate fans extolling its products, its CEO Elon Musk, and a stock that’s managed big returns since its 2010 IPO. Bears, on the other hand, are as equally passionate, going so far as to call the company a fraud and possibly the next big financial scandal, reminiscent of Enron, Worldcom, and Wirecard.
Bulls and bears are divided into two separate camps on Twitter, Reddit, and other social platforms, often using two distinct cashtags to pass around information and commentary – $TSLA (for bulls or for general references about the company) and $TSLAQ (for bears or to note any bearish opinions or commentary). (Note: The Q is commonly added to a ticker after a company declares bankruptcy.)
The marching of the bulls
Believers in Tesla largely claim that the company can become much more than a traditional automotive manufacturer and disrupt different businesses in the broader ecosystem of clean energy, a fast-growing market.
Tesla’s inclusion in various ESG indices has aided in passive flows at the same time it’s been included in more traditional indices like the S&P 500.
Since Tesla was added to the S&P 500 on December 21, 2020, its performance relative to the index has been more muted.
Tesla has a lot on its plate in terms of what Musk has said they’re going to do and the market expects a lot. There’s a large amount of growth discounted into the stock price.
At nearly $1 trillion in market cap, that’s stratified territory and comes with a lot of execution risk for a company trading at a massive multiple to sales, let alone earnings (which we’ll get to down below).
More and more investors are going to focus on following through and less on new promises, of which there are many including (but not limited to):
- Cyber Truck
- Full Self-Driving (FSD) development
- Tesla Robot
Tesla’s range of problems run deep from the actions of Musk, the company’s accounting, its autonomous driving claims, quality and customer service issues, unfulfilled promises, misuse of taxpayer money, and more.
“420 funding secured”
On August 7, 2018, Musk tweeted that he had secured funding to take Tesla private.
This caused the stock to shoot up, though Musk’s tweet ultimately ended up being false and geared toward benefiting himself (most of his net worth is tied up in Tesla stock) and hurting his short-selling critics.
Many bears believe that Musk’s vindictiveness toward short-sellers is a red flag. It’s an unusual focus for any CEO and brings up questions why there would be any concern at all.
Enron and Wirecard and other financial frauds were notorious for blaming shorts for their own problems.
It’s the information they expose that’s typically the real headache for corporate wrongdoers, not whatever strategy they might be employing to trade the company in the capital markets.
The SEC charged Musk with securities fraud the following month, ultimately settling for a $20 million fine from Musk and $20 million from Tesla.
Relative to the extent Musk’s tweet manipulated the market and Musk’s own benefit from the tweet, many believed the fine was extremely lenient. Musk later boasted that the infamous tweet was “worth it” on Twitter.
Since, Musk was found in violation of his securities fraud agreement in 2019, leading to a court appearance that ended with the agreement being reworked.
The SEC leaked to the press in June 2021 that Musk continues to violate the order on multiple fronts but believes it’s in a difficult spot to act.
The SEC’s balancing act between punishing securities violations and hurting investors is one it hasn’t mastered.
If unscrupulous actors pick up on this asymmetry it can lead to more difficulty enforcing securities laws that can take just seconds to break (with the information circulating among millions of people instantly) yet potentially take years to prosecute.
Settling for small fines relative to the level of illegal gains and/or overall manipulation is also not a sufficient deterrence mechanism.
Full Self-Driving (FSD)
Tesla’s Full Self-Driving (FSD) software is not self-driving or close to self-driving.
Rather it’s an SAE Level 2 (L2) advanced driver-assistance system (ADAS), far from the L5 designation that constitutes “full autonomy.”
Tesla has consistently placed far behind the pack in its autonomous vehicle technology. According to Guidehouse Insights, it ranks last out of 15 in the autonomous vehicle space and isn’t particularly close to getting out of last place.
It has promised big advances but fails to deliver them.
FSD has been heavily marketed to the public by Musk and Tesla as something close to full self-driving, despite its SAE L2 status. Its public narrative on FSD is largely believed to be a substantial fraction of Tesla’s stock price and its views among many investors that it’s not “just a car company.”
Tesla charges around $10,000 per customer for the FSD package despite the product requiring constant driver attention.
Other ADAS systems, like those used by “dinosaur” manufacturers, including General Motors, Ford, Audi, Honda, and others, are further along. And they often come with a vehicle at no additional charge.
Musk has repeatedly said that Tesla vehicles will soon be capable of full autonomy. He originally claimed that 2017 was the timeline on which “full autonomy” would be completed, and at various points saying he was very confident of such.
That never came to pass and progress on the software has been minimal. To regulators, Tesla communicates that it’s only an L2 system and that they don’t expect to make much progress in the near-term.
German authorities and the California DMV have both investigated Tesla’s claims on its autonomous driving software.
What has been marketed to consumers and investors and what’s been told to various authorities and regulatory bodies has continuously been at odds.
Musk has also used FSD claims in other forms.
In April 2019, Musk asserted that Tesla would have one million robotaxis on the road by 2020.
With Tesla’s cash balance dwindling at the time, this assertion helped the company raise capital and avert another potential bankruptcy. (Musk has stated in interviews that Tesla has come close to bankruptcy more than once, including during the Model 3 ramp in late-2018.) Of course, no robotaxis have come to market.
Many argue that using the name Full Self-Driving for the software can lead customers to irresponsibly operate Tesla vehicles, believing its capable of doing more than it can, endangering public safety.
Videos popping up on social media regularly show Tesla vehicles engaging in dangerous driving decisions while FSD is activated.
FSD: Lots of hype, little to stand on
Self-driving cars have received plenty of hype, but they are still far off from being broadly commercialized.
Tesla has shown no sign that it’s even in the hunt.
It has, however, been a big source of misinformation about the technology for PR and stock promotion reasons despite the clear danger to the public for pursuing that narrative.
And even though FSD has not been delivered as a so-called “beta” product – even though it’s not even a beta form of genuine self-driving (L4-L5) – Tesla still books FSD revenue.
Musk’s claims on FSD have drawn comparisons to Elizabeth Holmes’ claims on Theranos’ technology.
In both cases, the products could only do a small fraction of what they promised and could cause harm to the public.
Given FSD’s functionality is nowhere near actual autonomy, how far can it be pushed before regulators crackdown on its use?
What would that mean for Tesla’s ability to charge for the product and the implications for the company’s stock price?
Tesla’s stated range and its real range in its vehicles are different. This has consistently been one of Tesla’s customers’ top complaints.
It may help improve battery life but customers don’t get the range they’re promised.
Tesla’s quality issues range from “whompy” wheels and suspensions, sudden unintended acceleration (SUA), battery fires, thin paint, drooping doors and other poor build quality such as insecure bumper attachments, and other problems.
Part of this issue has been attributed to Tesla building some of its vehicles in a tent at its Fremont factory, primarily using manual labor with poor quality controls.
Tesla has been questioned by many investors over its accounting.
Tesla regularly displays a large accounts receivables balance despite taking cash for its cars upfront. Explanations for its high receivables have ranged from the quarter ending on a weekend to European payment lags to large amounts of regulatory credits being sold.
Investors still aren’t sure how genuine the receivables balance is.
Who owes Tesla billions of dollars at once?
Are they legitimate sales, and what is the breakdown of these sales between core business products (vehicle sales) and non-core (such as regulatory credits)?
Factory opening/expense treatment
When Tesla opened a new factory in Shanghai many questioned how Tesla was able to keep its expenses so low.
How Tesla treats its various expenses more generally has been a consistent concern.
Gross margins are an important part of a “tech” business by showing what kind of economics and scale might be available.
Higher margins can be had if certain costs aren’t accounted for.
Some investors believe that Tesla has inflated gross margins by misclassifying or not accounting for various expenses, possibly by booking them as assets.
For example, if Tesla uses certain standard costs (involved in producing a vehicle) and puts variances to these costs in inventory, it can improve gross margins while increasing its inventory balance.
By playing accounting games, Tesla can give the illusion of scale that isn’t there.
Tesla commonly labels warranty repair work as “goodwill.”
Car manufacturers need to reserve a certain amount of funds for each vehicle to meet warranty expenses.
If warranty provisioning is under what would be appropriate, this can lead to artificially higher gross margins and more profit.
As stated in the previous section on gross margins, Tesla regularly labels warranty-related repair work as “goodwill,” which could be considered a type of expense misclassification.
Deliveries vs. sales
Deliveries are often conflated with sales, but are they the same?
Tesla has played loose with the definition to meet its “deliveries” figures.
But do deliveries mean the full amount of cash received for a vehicle?
Do deliveries include cars delivered to related parties/Tesla subsidiaries and used car vendors (such as Carvana or Carmax)?
Tesla has also been suspected of manipulating the prices of cars sold to Carvana to avoid getting hit on residual lease values and the need to write down inventory.
Tesla’s revenue recognition definition has regularly changed more broadly even outside of deliveries.
Is Tesla cooking the books?
There are many knowledgeable people who have strongly believed so over the years.
But even outside the accounting fraud implications, with the way Tesla does its financial reporting it clearly is not much of a tech company.
It looks very much like a smaller automaker, which typically trade at revenue multiples of less than 1x.
Growing into its valuation with how the company is currently positioned will be a major challenge.
S&P 500 inclusion
S&P inclusion was a major catalyst for Tesla’s stock.
Many investors believe Tesla has not been genuinely profitable and used accounting tricks to receive technical inclusion into passive indexes like the S&P.
One of the S&P 500’s standard criteria for inclusion is four consecutive quarters of profits.
The inclusion in the S&P 500 brought lots of new passive inflows into the stock, given so many investors own “the market” with the S&P being the most common way of doing so as the world’s most popular stock index.
SolarCity related-party buyout
SolarCity was purchased by Tesla when the former was near insolvency in 2016. Musk infamously contrived a “solar shingle” product to help sell the buyout to Tesla shareholders.
That product was fake and the transaction essentially constituted a related-party bailout to protect Musk’s financial interests and those of his extended family (cousins Lyndon and Peter Rive and brother Kimbal Musk).
Many company executives and insiders pledge their assets as collateral to take out loans to fund their lifestyle. If the price of SolarCity collapsed, this could have led to margin calls that could lead to personal financial ruin for those who don’t have adequate liquidity elsewhere to cover them.
Musk has always assumed that selling his vision would be enough to fund his ventures.
And SolarCity was the ultimate confidence game. It required lots of outside financing to keep up its growth, with poor unit economics and poor cash management on top of all that.
Musk had to use his own money, Tesla money, and SpaceX funds to buy SolarCity’s bonds and help save the company by rolling it up inside Tesla.
SolarCity’s performance also fell drastically once bought out.
Tesla focused on bringing its Model 3 to market – something that Musk would later admit nearly bankrupted the company – and Tesla itself didn’t have adequate resources to keep installations anywhere near their previous rate.
SolarCity, of course, was also no longer in the spotlight as a public company and didn’t have a narrative to maintain.
A group of Tesla shareholders later filed a lawsuit alleging that Musk violated his fiduciary duties and used the Tesla-SolarCity deal to enrich himself while knowing that SolarCity was near insolvency.
Musk’s claims of being the “founder” or “co-founder” of Tesla
Elon Musk is not a founder of Tesla. Martin Eberhard and Marc Tarpenning founded Tesla.
Musk came later as an investor and eventually sued to call himself a co-founder.
Musk has a track record of taking credit for other people’s accomplishments and embellishing claims about himself.
PayPal is another example.
Musk’s involvement with PayPal came via Confinity’s purchase of X.com, a project Musk owned equity in. PayPal was Confinity’s product and Musk was not at all involved in PayPal’s original development.
Musk eventually became CEO of PayPal but was fired shortly into his tenure.
Musk’s educational claims
Musk claims to have “dropped out” of a Stanford Ph.D. program. He was never enrolled at Stanford.
Musk also claims to have a Physics Degree from the University of Pennsylvania awarded in 1995. It’s not believed that this degree was ever awarded.
His only known degree is an Economics Degree from the University of Pennsylvania awarded in 1997.
Musk’s public relations focus
Musk is not an engineer (as he frequently claims), a polymath, or someone with much technical talent at all.
Most of Musk’s role in his companies involves marketing and public relations.
This has been true since the beginning of Musk’s involvement with Tesla and in his projects pre-dating the electric car manufacturer.
The following 2006 emails show his strong focus on his external perception and how he’s portrayed in the news media:
Tesla’s media strategy has strongly revolved around cultivating relationships with journalists who extol the company and can help effectively do a lot of Tesla’s marketing work for them.
Musk’s promotion of cryptocurrency and broader market manipulation
Musk has not only talked up Tesla’s stock to the point of securities fraud but also dabbled into the lightly regulated world of cryptocurrency.
Musk has been a frequent promoter of bitcoin, dogecoin, Floki, and other altcoins through his Twitter account, making tweets that are intended to boost the price of various speculative cryptocurrencies.
Critics often point out that Musk’s cryptocurrency tweets often make indirect references to the name of the “coin” he’s looking to manipulate and profit from.
Examples include posting a picture of a dog that’s supposedly named after an altcoin or altering popular song lyrics to fit in the cryptocurrency’s name.
This enables Musk to get his message across – manipulating his current cryptocurrency of interest – but also theoretically providing cover to avoid potential legal charges of market manipulation. He can claim he was innocently tweeting and not encouraging anyone to buy the altcoins outright.
Musk’s bitcoin promotion using Tesla
In February 2021, Tesla announced in an SEC filing that it had put part of its cash reserves into bitcoin. It then used Musk’s social media influence and the media to help bring up its price.
Some also argue that bitcoin was used as a distraction from other bad news surrounding the company (covered more in the next section).
The company also told customers it could pay for vehicles in bitcoin after they had bought the cryptocurrency knowing it would help its price.
Some criticized Tesla’s stance on bitcoin since it markets itself as an environmentally friendly and sustainable energy company, given bitcoin’s energy demands.
Tesla would later reverse its stance on accepting bitcoin as payment, with Musk citing the energy-intensive nature to “mine” more of them.
However, bitcoin’s energy demands have been known for years. It’s been one of the cryptocurrency’s principal criticisms.
This led critics to accuse Tesla and Musk of opportunistically engaging in market manipulation and not being honest with the public about their real intentions, then inauthentically hiding behind environmentalism and “the mission” as a way to walk back after it had successfully used the cryptocurrency to suit its own financial interests.
Musk’s distraction tactics
Musk has frequently used distraction tactics to deflect attention away from various problems going on at Tesla.
When China reprimanded Tesla for poor quality control and customer service, Musk announced that it was buying $1.5 billion worth of bitcoin.
This story took off and the China problems were put on the backburner.
Similarly, Musk claimed that he had added “Technoking” to his title at Tesla and made CFO Zach Kirkhorn “Master of Coin.”
Media widely reported on these changes and less so on negative stories circulating.
In September 2018, Musk smoked marijuana on-camera in an interview with Joe Rogan.
It would be revealed the next morning that the company’s chief accounting officer had resigned after just a few weeks of holding the position.
The media carried the marijuana story heavily and scarcely covered the mysterious, lightning-quick departure of the company’s top accounting executive.
When Musk has donated to politicians he once enlisted the help of the head of the Sierra Club to deflect criticism. Another time, Musk tried to conceal his donations by misrepresenting his profession as a member of the US Secret Service.
During “AI Day,” Musk had a person come on-stage to dance in a robot costume.
This garnered significant attention in the mainstream and social media and helped deflect from problems regarding FSD, crash investigations, and important information on how Tesla collects its autonomous driving data.
Musk’s bullying and threats toward skeptics, critics, and whistleblowers
Musk’s dishonesty and bullying of critics, whistleblowers, short-sellers, and journalists have increased skepticism surrounding the company.
Montana Skeptic, a popular Tesla critic, was threatened with legal action by Musk after his identity was exposed. This increasingly mobilized online communities of skeptics and critics.
TSLAQ – an online community of critics and fraud deterrence advocates with a special focus on Tesla – ballooned in size.
Additional cases against Randeep Hothi, Martin Tripp, and others have further emboldened skeptics who believe that Musk’s treatment of critics illustrates his insecurity, narcissism, paranoia, and sociopathy, and shows that he has matters he wants concealed from the public.
Tesla’s poor environmental record
Tesla has dozens of environmental violations at its Fremont factory alone, a consequence of its manufacturing operations.
Tesla has co-opted clean energy as its supposed mission but it’s more for public relations than an actual reality.
Will Tesla bears ultimately win?
Will Tesla grow into its extreme valuation or will gravity eventually win out?
Said one investment manager, who is short Tesla through a mix of various put spreads, designed to bet against the company in a limited-risk way:
“Ultimately it comes down to economics. The bulls are betting on Tesla becoming the next big tech company or somehow think it already is one. But the basic reality is that it’s fundamentally a smaller car manufacturer and one that needs lots and lots of capital to expand. That’s why Musk is obsessed with the stock price. It’s the company’s ultimate currency and effectively its most important product. And there’s the self-interest component too since most of his net worth is in Tesla stock. Effectively his public image is wrapped up in it.”
On their current operations:
“Doing what they do profitably is an even bigger challenge. Musk can raise money but he’s a terrible capital allocator and overall operations guy. Tesla claims profitability in their financial statements but a big part of that is regulatory credits and their accounting is suspect. They’re still losing money and the public’s vision of what the company could become is totally divorced from what the company actually is and whatever realistic path they have to get there. They’ll continue to sell stock as long as it stays high and because of the fact that their operational cash flow is still so bad.”
Can Tesla sustain its valuation?
“In the short-term. And the short-term can mean years. The market is also beefed up through huge amounts of monetary and fiscal stimulus, which is especially good for riskier equities like Tesla.”
In the long-term?
“In the long-term, whenever that is, it’s going to be difficult because Musk drums up these narratives that put a long tail on this con. He’ll promise things out a few years and when nothing happens, everyone forgets about what he lied about years earlier and he’ll just keep pushing the timelines on various promises out.”
What kind of progress does it need to make to grow into its valuation?
“When you’re valued like Tesla, even at these elevated multiples, you should theoretically be generating at least $50 billion a year in legitimate earnings within a few years. They’re not even there in terms of revenue and it’s intrinsically a very thin to no margin business. The claim that they’re a tech company has little to no grounding in reality. [Full Self Driving] is a terrible product even compared to what legacy automakers have. It’s arguable whether they should even be allowed to sell it with how dangerous it is to the public. And their marketing of it is extremely deceitful. It’s just there to promote the stock price.”
The most worrying part of being short Tesla:
“Put spreads provide convexity but the timing element is a big one. Musk has successfully gotten Wall Street to focus so far out on the future that the actual pedestrian state of the business and poor financials don’t matter to them. Storytelling still matters a lot more than economic reality. But I think it will be harder as time goes on if more people critically scrutinize the narrative. And that tends to be the way these things go because you can only fight reality for so long. They’ll look at the ways the company is stalling and even losing market share in key regions. And start realizing that their tech is basically Theranos 2.0. That’s why Musk is so paranoid about managing the information that’s out there publicly. When Musk is doing something weird like smoking a joint in a very public way or having an actor do a dance routine in a robot suit, look carefully if it isn’t already obvious because there’s probably something else he doesn’t want you to see.”
On regulatory and legal risk:
“Regulatory and legal risk is a big one, which can come from different angles like the NHTSA, SEC, DOJ, or others. But they’ve been impotent so far and Musk will continue to break as many rules and laws as he needs to keep the wheels spinning.”
Why don’t regulators act if there’s this much malfeasance going on?
“I think the stock falling apart and naively enthusiastic investors waking up to all the nonsense they’ve been fed will be what gets regulators to eventually act. But of course only well after the fact. It’s always like that. Look at Wirecard. BaFin protected them because of how successful and innovative they supposedly were. Not because they were but because of the public narrative.”
Will it require a bear market?
“Maybe, but not necessarily. A lot of frauds finally collapse when the rest of the market falls. That’s what happened with Madoff. Look at Enron and companies like Tyco and Worldcom. All collapsed during really bad bear markets. Tesla has almost gone bankrupt multiple times and that’s been during really strong bull markets. Despite all the private capital from selling dreams and all the government subsidies, it’s still a manufacturing business that’s not very well-run.”
So it just comes down to money?
“Exactly. He has a huge cult of retail investors on his side. If the stock gains are from fraud, that’s irrelevant. They seem real and as long as they keep coming they’ll stand by him. Investment banks want capital raising fees. So they’ll write obsequious nonsense about the company to be on the good side of management teams to get a shot at all the money at stake. Sell-side equity research is just marketing for the investment bankers. Auditors have conflicts of interest. They’re getting paid good money by the company they’re supposedly checking. Wirecard’s regulators Ernst & Young couldn’t even verify a basic cash balance. That tells you all you need to know about how bad the supposed safeguards truly are. Just go down the list of interested parties… attorneys, accountants, even some people on the inside. The vested interests are enormous, so there’s a huge incentive not to uncover fraud. And people also look at stock prices to verify the so-called truth about a company. If it gets this big, it can’t be a fraud, right? Even though it got that big because of the fraud itself. That’s how Worldcom and Enron became such incredible stories when they unraveled.”
On Musk himself:
“He has a good feel for marketing and public relations but he’s honestly quite bad at business. As for his character, he’s a charlatan and an egomaniac with no conscience. He acts like he cares about the environment, clean energy, and supposedly saving humanity. But those are just tales to further his own self-promotion and interests. Pursuing supposedly noble goals makes it easier for him to get away with fraud. He’s the ultimate rent-seeking con man. It’s a pattern of behavior going all the way back to when he first got into business, grossly exaggerating and lying about what he’s done and what he’s going to do.”
Is Musk likely to see a similar fate to other corporate fraudsters?
“He’s gotten in trouble with the law before but not to the point where it’s gotten him barred or faced criminal charges. At least not yet. The SEC had him on the ropes before and wanted him out of Tesla but let him go with a paltry fine. And not with the stock this high still. The stock is his best defense. Any narrative, virtuous cause, and fantasy he can use to sell himself, he’ll do it. If a law stands in his way, he’ll ignore it or break it and dare authorities to do something about it. He’s literally told regulators to suck his [appendage] on Twitter and taunted them in other ways. At the end of the day, it’s a lot easier to pump financial assets than create real output in excess of the resources you consume. He’s taken white-collar crime to a whole new level.”
Regardless of how this story plays out, Tesla is one of the more intriguing stories in the capital markets.
Elon Musk has committed fraud in the past and Musk and Tesla has been credibly accused of various other forms of fraud.
Bulls believe it’s the future and that Musk is single-handedly pulling forward the future.
Many critics take great umbrage with Musk’s character, believing Tesla’s CEO is an insecure narcissist and defiant sociopath with an uncontrollable ego who is only looking to enrich himself and expand his power and influence.
While Musk has had brushes with the law in the past, bulls dismissed them as missteps and/or no big deal.
Bears view them as just a slice of Musk’s overall fraudulent conduct and a repeated pattern of behavior.
As the Wirecard scandal showed, executives of companies that are widely believed to be engaging in fraudulent activities will go to any length to maintain the narrative surrounding the company.
They largely believe it’s indicative that Musk is an Elizabeth Holmes-like phony who’s in it purely for self-interest, all while hiding behind environmental and other supposedly virtuous narratives to get away with it, pretending to act in the greater interests of society while acting in his own.
Bears generally are convinced that Tesla is terribly overvalued or an outright fraud on many levels with rampant bogus narratives (largely designed to boost the stock) to go along with dubious accounting and financial reporting.
Skeptics believe the company is heavily a stock promote and, in reality, a mediocre to bad business with very little production relative to its valuation.
Tesla’s financials currently suggest it’s nowhere near a company that should come close to a trillion-dollar valuation, let alone a business that has good economics at any level.
Is Tesla the next big financial scandal that could lead to a watershed moment on corporate fraud and regulatory failure with big implications for securities laws, capital markets oversight, transportation safety, consumer protection, among other matters?
Or is it genuinely a next-gen company that can start to fulfill its many promises required to keep up and/or even expand its valuation?
With Tesla, it really comes down to a matter of faith. It’s the market’s ultimate “trust me” story.
It’s a matter of whether you believe in Musk’s vision and ability to make due on the various promises. If so, it will need to grow significantly and in a way that sustainably generates lots of true earnings.
So far, Musk’s main success has been in tricking people into thinking he’s a successful visionary entrepreneur, while in reality selling hopes and dreams he has little intent or ability to follow through on.