Wednesday’s earnings report was a bust for Tesla. The company reported a huge loss of $702 million and missed revenue expectations.
In the conference call that followed, forlorn Tesla boss Elon Musk mused about taking Tesla private again:
“I would prefer we were private, but unfortunately I think the ship, that ship, has sailed.”
Elon Musk desperately wants to pull Tesla off the stock market and return it to private investors. And he’s right. Going private is exactly what Tesla needs right now to avoid a death spiral.
“Taking Tesla private… funding secured”
Musk first hinted about his ambition to take Tesla private in August 2018. In a now infamous tweet, he said “Am thinking about taking Tesla private at $420. Funding secured.”
Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk) August 7, 2018
The tweet landed him in hot water with the Securities and Exchange Commission (SEC). The Commission accused Musk of fraud, claiming the “funding secured” tweet was “false and misleading.”
3 reasons Tesla should be a private company
Although Musk is resigned to keeping Tesla public, it’s the wrong decision for three reasons:
- Tesla is forced to perform to an arbitrary quarterly earnings cycle rather than focusing on long-term ambition.
- Tesla is open to short-sellers which ravage Tesla and its stock (and Musk can’t stop baiting them).
- Tesla still operates like a startup. It needs time to experiment and mature.
Let’s go through them one at a time.
1. Tesla should focus long-term, not quarterly reports
Being public means delivering knock-out performances every single quarter. But a company like Tesla should be looking five years in the future.
Listening to Wednesday’s earnings call, you could sense this conflict in Musk’s delivery:
“If we were to fully optimize for profitability in Q2, I think we could do it, but then we would be unable to unwind this crazy wave of deliveries.”
Rather than focusing on Tesla’s long-term strategy, Musk is being forced to think about how to appease investors in the next three months.
Stock price is noise generated by commercial investors scratching their heads because they don't get what he's trying to do. Main reason Tesla should've been private, but here we are. It's not just about profits, although they are of course essential.
— Mark B (@voytechs) April 25, 2019
Going private would allow Tesla to ditch the quarterly pressures and get back its ambitious roots. Elon Musk himself admitted:
“Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term.”
2. Short-sellers ravage Tesla on public markets
Tesla is notoriously one of the most shorted stocks on the market. There is an entire community on Twitter dedicated to betting against Tesla, known as $TESLAQ.
The sheer volume of shorts means there’s an incentive to find and spread negative angles on Tesla for financial gain. As one analyst explains:
“[Short sellers] puts downward pressure on the stock, and that’s not good, when your daily report card is the stock price.”
Elon Musk’s war with #Tesla's short sellers just got weirder as shorts rise again. The electric carmaker claims a California man who it says is part of an online group of short sellers has been stalking its Fremont factory and harassing its employees. https://t.co/s9YMZBU1QN pic.twitter.com/vhp95qOHSh
— Holger Zschaepitz (@Schuldensuehner) April 22, 2019
More importantly, Elon Musk gets massively distracted by short-sellers. He constantly baits them and interacts with them.
The constant obsession with short-sellers and stock price volatility is pulling Elon Musk’s attention in all the wrong directions.
Oh and uh short burn of the century comin soon. Flamethrowers should arrive just in time.
— Elon Musk (@elonmusk) May 4, 2018
3. Tesla still operates like a startup
Companies typically go public when they are sufficiently grown, stable, and somewhat predictable.
While Tesla is a large, well-capitalized company, it still operates like a startup. Its forecasts are volatile and unpredictable. Tesla constantly shifts focus and explores new directions in a mission to define the future of driving.
Going public means there’s less freedom to experiment which is Tesla’s modus operandi.
Ultimately, Tesla should go private while it hones and defines the company. And as Elon Musk said, the company could return to the public markets at a later date:
“In the future, once Tesla enters a phase of slower, more predictable growth, it will likely make sense to return to the public markets.”