Since Tesla became a publicly traded company on June 29, 2010, the benchmark S&P 500 has managed a nearly 300% gain. Not too shabby considering the broader market averages closer to a 10% annual average total return, including dividends. But for Tesla and its faithful shareholders, a 300% gain would be mere peanuts. Shares of the promising EV maker have catapulted higher by almost 19,000% since its initial public offering a little over 12 years ago.
Tesla has captivated the hearts of investors due to a variety of factors. For one, the electrification of consumer and enterprise fleets is a multidecade process that should lead to sustainable double-digit growth. The auto industry has been yearning for a sustained catalyst for more than two decades, and it's finally found one with the push to greener-energy alternatives in most developed countries.
Additionally, Tesla has dazzled by becoming the first automaker to build itself from the ground up to mass production in over 50 years. Not only is the company on pace to surpass 1 million EVs produced and delivered in 2022 in spite of numerous supply chain challenges, but Tesla has decisively pushed into the recurring profit column. Over the past five quarters, it's produced a generally accepted accounting principles (GAAP) profit of between $1.14 billion and $3.32 billion.
And, of course, the investing community has fallen head over heels for Tesla CEO Elon Musk. His vision for the company has produced four currently selling EVs (the affordable Model 3 sedan, premium Model S sedan, luxury Model X SUV, and more compact Model Y SUV) and led to the diversification of Tesla's operations to include solar panel installation and energy storage products.
Later this week, on August 25, Tesla will enact its shareholder-approved 3-for-1 stock split, which is a necessary move to make its shares more nominally affordable for everyday investors following a huge run-up since the COVID-19 pandemic began.
Elon Musk is, hands down, the greatest risk/liability to Tesla stock
You might be under the impression that things are going swimmingly for Tesla -- but this couldn't be further from the truth. While the company is facing a number of headwinds, including semiconductor chip and general parts shortages, production slowdowns at the Shanghai gigafactory tied to COVID-19 lockdowns in China, historically high inflation eating away at its automotive gross margin, and increased competition from new and legacy auto stocks, there is no greater potential land mine for Tesla stock, in my view, than Elon Musk.
Musk represents a legal, financial, and operating risk to Tesla's ability to succeed, which could ultimately torpedo the company's stock and loyal shareholder base.
Musk's legal troubles are becoming all too commonplace (and distracting)
Normally, CEOs of publicly traded companies make their appearance during quarterly conference calls, annual meetings, and potentially during the unveiling of key products or services. They're not the focus of attention. With Elon Musk, being the center of attention has almost become paramount. The problem is that it's drawn the ire of regulators on more than one occasion.
Am considering taking Tesla private at $420. Funding secured.-- Elon Musk (@elonmusk) August 7, 2018
As an example, Tesla's leader found himself in hot water after tweeting in 2018, "Am considering taking Tesla private at $420. Funding secured." In 2020, a U.S. judge found that there was nothing concrete about the "funding" to take Tesla private, which means Musk made statements that materially misled investors.
The Twitter (TWTR) debacle has added more fuel to the fire. First, Elon Musk began buying a sizable stake in social media platform Twitter in January of this year. Trading regulations require an investor to notify the Securities and Exchange Commission (SEC) via filings within 10 days when they reach a 5% stake in a public company. Musk's filing with the SEC came about three weeks after hitting the 5% threshold. By not notifying the SEC in a timely manner, Musk was able to build a much larger position at a lower average cost before Twitter's stock ultimately popped on news of his 9.2% stake.
Musk drew further ire after announcing a $44 billion buyout of Twitter in April, then backing out of the deal in early July on the premise that Twitter wouldn't provide him with accurate bot/spam account data. Twitter's board plans to force Musk to move forward with his merger agreement through legal proceedings.
While Elon Musk evokes dollar signs in the eyes of litigators, he's become nothing short of a headache and distraction for Tesla as a whole.
Elon Musk's unconventional leadership has led to near-financial ruin and costly mistakes
Top-notch CEOs steer their ship with a clear vision for the future and a concrete financial strategy to get their company from Point A to B. As for Elon Musk, his financial prowess seems to involve "winging it" more often than not.
In November 2020, Musk took to Twitter to answer a user question about how close Tesla was to bankruptcy when the company spent years ramping the more-affordable Model 3 sedan to mass production. Musk's response: "Closest we got was about a month."
Closest we got was about a month. The Model 3 ramp was extreme stress & pain for a long time -- from mid 2017 to mid 2019. Production & logistics hell.-- Elon Musk (@elonmusk) November 3, 2020
Think about this for a moment: Tesla was apparently just a month away from going under, yet no specific SEC filings or comments were made at the time from Tesla, signaling its palpable financial struggles or proximity as a going concern. This was a company worth between $35 billion and $65 billion between mid-2017 and mid-2019 -- the time frame cited by Musk in his tweet -- that was seemingly on the brink of bankruptcy, and both shareholders and Wall Street were completely in the dark about it.
Musk's fascination with cryptocurrencies has also hurt the company. Adding $1.5 billion of Bitcoin to Tesla's balance sheet in early 2021 has resulted in fair-value adjustments to the downside as the company's remaining digital assets -- Tesla disposed of 75% of its remaining Bitcoin during the second quarter -- have lost value. This could also include meme token Dogecoin, which Musk pumped repeatedly on Twitter in 2021. Dogecoin has shed roughly 90% of its value since he appeared on Saturday Night Live in May 2021 as the "Dogefather." Tesla accepts DOGE as a form of payment for select merchandise.
Musk's empty promises are a serious concern
But the most egregious flaw with Elon Musk's leadership is, arguably, the empty promises he offers his faithful shareholder base. While it's not out of the realm of possibilities for a publicly traded company to miss a deadline when launching a new product or service, Musk has made missing deadlines a virtual guarantee as CEO of Tesla.
In no particular order, here's an extensive list of Musk's empty promises:
- Since 2014, Musk has claimed that autonomous full self-driving (FSD) was anywhere from one year to three years away. It's 2022, and Tesla is nowhere closer to providing a higher level of FSD autonomy for its EVs than it was eight years ago.
- During Tesla's fourth-quarter 2021 earnings call this past January, Musk noted that both the Cybertruck (unveiled in 2019) and Roadster (unveiled as a concept in November 2017), which were slated to go into production in late 2021 and 2022, respectively, would be delayed, at minimum, until 2023.
- In October 2019, Musk proclaimed that "Next year for sure, we will have over a million robotaxis on the road." Though Musk has cited regulatory holdups as the snag, not a single robotaxi is currently on the road.
- Musk confirmed in October 2020 that the Austin gigafactory would open in late July 2021. The gigafactory officially opened on April 7, 2022, after multiple delays.
- To add to the above, the Berlin, Germany gigafactory, also slated to open in 2021, opened its doors in March 2022.
- The Tesla Semi was unveiled in November 2017, faced numerous years of delays, and is slated to start production in 2023.
- The aforementioned ramp-up of Model 3 sedans proved far slower than Musk anticipated. While he originally called for 20,000 Model 3 EVs to be produced per month by December 2017, the company produced only 1,550 Model 3 EVs in the entire fourth quarter of 2017.
Mind you, these are only some of Musk's prognostications that ultimately proved to be hot air. It's become almost impossible to take what Elon Musk says or forecasts at face value.
A CEO should be a stabilizing force that oversees strategy and allows their company's operating performance to do the talking. As long as he remains CEO, Elon Musk looks to be nothing short of a potential land mine for Tesla stock.