Analysis: Is Tesla a cash cow, or simply a handful of beans?
It is an axiom of market capitalism that things are worth, in terms of money, what people will pay for them. But this seemingly straightforward matter, known as price discovery, is actually quite complicated, because buyers are those most complex and inscrutable of creatures: human beings.
Simple example: How much is a baseball worth? According to Google, an official Major League ball in a plastic box commands about $15, though ordinary practice balls can be had for much less. A ball signed in 1939 by 11 of the 12 then-living original Hall of Fame inductees, however, just sold for $623,369.
A great deal of experiment and research would be necessary to tease apart the tangle of values constituting the roughly $623,354 difference. Is one ball with 11 autographs worth more than 11 balls with one autograph? Does the missing 12th autograph, and the poignant story behind it, add or subtract from the value? I imagine the owner displaying the treasure and saying, "You know why Lou Gehrig isn't on there? Because he was at the Mayo Clinic being treated for ALS." Did the buyer derive a competitive thrill from winning one of the highest-priced pieces of sports memorabilia on record?
Which brings me to Elon Musk and the car company he founded, Tesla Inc. As I write this, Tesla is worth about $60 billion, according to investors - the price per share multiplied by the number of shares outstanding. That's what people will pay right now.
Yet the value of Tesla is one of the most hotly debated topics in business, because the beliefs and expectations that determine that stock price appear to be as mysteriously human as treasured ink on an old baseball. At $60 billion, Tesla is priced nearly 20 percent higher than General Motors and more than 50 percent higher than Ford.
Now, GM is a global behemoth that shipped 9 million vehicles last year, and Ford has made the most popular vehicle in the United States for the past 35 years, the F-series pickup truck. Both companies earn profits in the billions. Tesla, by contrast, makes a relatively small number of very cool electric cars - a market likely to grow but also to become more competitive. And Tesla has losses in the billions.
There's a hint of "Jack and the Beanstalk" to the notion that anyone would trade a cash cow such as GM for Tesla's magic beans. Nonbelievers of this story include a plague of short-side speculators, market gamblers placing bets that Tesla's highflying stock will crash. Yet Musk insists, on Twitter and more formally, that there is a golden goose in Tesla's future and that the stock is actually selling too cheaply.
Musk is pitching the idea of taking the company private via a gamble of his own. According to a statement posted Monday on the Tesla website's blog, he would like to convert Tesla's stock from public to private shares worth $420 each. Public shareholders who don't want to own private shares at that price can take the money instead.
The proposed $420 per share is roughly 20 percent higher than Tesla commands today. Yet Musk predicts that most shareholders will hang on to their stock rather than cash out, thus limiting the total amount he and his potential partners (more on them in a moment) would need to shell out to get free of the pesky public markets and their skeptical short sellers.
If that's true, it would be a puzzling example of faulty price discovery. As of this writing, investors won't pay above $360 per share, and hordes of shorts are betting that the stock will fall from there. What would inspire shareholders to value it above $420?
Key to the deal, Musk says, would be Saudi Arabia, which is looking to diversify its assets beyond the ocean of oil under its desert. Time will show whether the kingdom is indeed willing to finance Musk's plan, but if it does, Saudi involvement might have more to do with the Tesla fuel supply - its batteries and solar cells - than with the cars themselves. The Saudis might see Tesla as an energy play.
Others might hold on to Tesla stock as a status symbol, a trendy talisman signifying membership in the cult of Musk, whose futuristic riffs about green dwellings, hyperloop travel and colonies on Mars inspire legions of devotees.
People who think Tesla is overvalued, and I am emphatically one, strive to see things as they are. We focus on how difficult it is to create a global manufacturer as efficient and reliable as BMW or Toyota - which Tesla must do to fulfill its ambitions. We picture how intensely competitive the electric-car sector is becoming. But Musk's audience scoffs at difficulty and feeds on the improbable.
And it's hard to put a price on dreams.