<div _ngcontent-c15 innerhtml="

Ever since Elon Musk’s infamous tweet on August 7―“Am considering taking Tesla private at $420. Funding secured.”―there has been mounting pressure from investors for executive-level change at Tesla. The tweet was deemed by the SEC to violate regulation for a public company, leading to a $20 million fine for Tesla and another $20 million for Musk. In addition, Musk was ordered to step down as chairman for three years. (While the fine appears sizable, compared to Musk’s net worth of ~$20 billion, the fine is like a $100 parking ticket for the average American.)

And thus emerges a pertinent debate. Is Musk still suited to lead Tesla, as its ambitious goals will surely only intensify pressure on its executives in the future?

(AP Photo/Chris Carlson)

First, some facts (as of Oct. 8, 2018):

  • Market cap: $45.6 billion 
  • Total number of employees employed by Tesla: 46,000 as of June 2018
  • CEO tenure of Elon Musk: 14 years
  • Revenue: $13.68 billion (trailing twelve months)
  • Operating margin: -16.24% (trailing twelve months)
  • Profit margin: -19.89% 

Tesla is currently operating at a loss. This isn’t all that surprising. The auto sector is a capital-intensive industry. However, Musk has stated that his priority is now to reach sustained profitability and positive cash flow. Is Musk is the right CEO to do it?

To address this question, it is worth analyzing Musk’s assets and liabilities on a point-by-point basis.

  • Asset: Tesla is a story stock. Aswath Damodaran, a finance professor of corporate finance and valuation at NYU Stern School of Business, defines a story stock as a stock “where[by] the story is so dominant in both how people price the stock and what determines its value that the numbers either fade into the background or have only a secondary effect.” Story stocks share three defining characteristics. One, they are usually infant companies, viz. the value is derived from the future growth. Two, they’re targeting a big market. Three, and most important to this discussion, the CEO is woven into the cloth of the company, becoming inextricable from the company’s story. Tesla is a story stock. And Musk is crucial to that story.
  • Asset: Strategy and vision are a critical part of Tesla. Tesla is a young company that is still navigating its path to maturity. Setting strong strategic goals is vital to effectively navigate that path. A Harvard Business Review article cited that strategy comprises 21%, on average, of what CEOs do. It may potentially be a higher figure for growing companies as CEOs direct that growth. And Musk is the engine behind that strategy, a vision that has fueled the success of Tesla for the last decade and a half.
  • Asset: Musk inspires employees. After spending time on-site at Tesla, Tim Urban from Wait but Why reported several discussions with Tesla employees:
    • “Working with him isn’t a comfortable experience, he is never satisfied with himself so he is never really satisfied with anyone around him…the challenge is that he is a machine and the rest of us aren’t.”
    • “Elon wants to know, ‘Why are we not going faster?’ He always wants bigger, better, faster” by the same person who a few minutes later was emphasizing how fair and thoughtful Musk tends to be in handling the terms for a recently fired employee."
    • While many employees cited Musk is not easy to work for, they all agreed they deeply respect him. And respect is, arguably, harder to come by.
  • Liability: Tesla’s operational bloopers. To start, it has often missed production targets, most recently producing only 5,000 of the 6,000 Model 3 units per week. This could be suggestive of systemic operational problems in the organization, speculated to be a symptom of Musk’s inability to delegate. Operational issues are often addressed with Musk stepping in to rectify or accelerate the process.
  • Liability: Tesla’s financial bloopers. The first of which was the acquisition of SolarCity. Conflicts of interest aside, the most glaring problem with this acquisition is its negative cash flow. The financial profile is also unlikely to drastically improve in a sector that lacks product differentiation. Then there was Tesla’s choice of debt to meet its capital requirements. As Damodaran points out, “Tesla’s decision to borrow more than $5 billion was almost incomprehensible, given Tesla’s standing at the time….[T]here was no good reason that could be offered for that borrowing, since none of the usual arguments for debt applied,” (e.g., equity inaccessibility, tax benefits). This brings us to the last point: the debate about taking Tesla private. The financial profile of Tesla does not indicate it is a good candidate to initiate a transition from public to private company. It’s not a mature company and its market price is unlikely to be undervalued compared to its cash flows and earnings, which, to reiterate, are negative.
  • Liability: Recent inconsistent and erratic behavior.

To date, Musk has arguably acted as both an asset and a liability to Tesla. Now let’s take a quick look at where Tesla stands today and what possible challenges it may face going forward.

  • Scale: While revenues have grown, gross profit has plateaued, indicating the costs associated with increased revenues have not scaled, but grown correspondingly. Presumably, efficiency and scale will be introduced with the aid of technological advancements in production, which have yet to materialize effectively to date.
  • Capital needs: Its difficulty in scaling operations so far has an expensive consequence. Tesla will have to secure considerable capital for reinvestment in its business to produce and hit its ambitious production goals (which was once stated as 1 million cars per year by 2020). Furthermore, in one analysis run by Damodaran, he states the ratio of global auto industry sales to invested capital is a meager $1.29. Tesla is well below that at ~$0.20.
  • Business model: Tesla’s business model is predicated on a pyramidal structure truncated in three. At the top of the pyramid sits the Roadster, a car designed for those can spend $100,000 on a motor vehicle. The next tranche is its Model S, a high priced mid-level car (although not quite the Roadster). Lastly, at the bottom of the pyramid is the mass-market car. This tranche, the fattest one to signal volume-play, is the Tesla 3. For many mass-market consumers, Tesla 3 still comes with sticker shock, coming in much higher than its original price of $35,000. Producing the Tesla 3 en masse at a reasonable price will not only be an engineering and operational challenge, but it will also be critical to Tesla’s future success.

Based on the evidence, reasonable cases can be built for or against keeping Elon Musk as the CEO of Tesla. What tilts the scales in favor of keeping him is the rarity of his skillset: the brilliance of his strategic vision.

Bringing in strong operational talent, someone like Gwynne Shotwell, President and COO of SpaceX, could act as a stabilizing force. It’s at least an option worth considering.


Follow Stephanie Denning on Twitter: @stephdenning

And Also Read:

How Jeff Bezos Hires Great People

The Key To Nelson Mandela’s Leadership

PepsiCo’s Indra Nooyi On The Tradeoffs Of Being CEO

” readability=”51.908323281062″>

Ever since Elon Musk’s infamous tweet on August 7―“Am considering taking Tesla private at $420. Funding secured.”―there has been mounting pressure from investors for executive-level change at Tesla. The tweet was deemed by the SEC to violate regulation for a public company, leading to a $20 million fine for Tesla and another $20 million for Musk. In addition, Musk was ordered to step down as chairman for three years. (While the fine appears sizable, compared to Musk’s net worth of ~$20 billion, the fine is like a $100 parking ticket for the average American.)

And thus emerges a pertinent debate. Is Musk still suited to lead Tesla, as its ambitious goals will surely only intensify pressure on its executives in the future?

(AP Photo/Chris Carlson)

First, some facts (as of Oct. 8, 2018):

  • Market cap: $45.6 billion 
  • Total number of employees employed by Tesla: 46,000 as of June 2018
  • CEO tenure of Elon Musk: 14 years
  • Revenue: $13.68 billion (trailing twelve months)
  • Operating margin: -16.24% (trailing twelve months)
  • Profit margin: -19.89% 

Tesla is currently operating at a loss. This isn’t all that surprising. The auto sector is a capital-intensive industry. However, Musk has stated that his priority is now to reach sustained profitability and positive cash flow. Is Musk is the right CEO to do it?

To address this question, it is worth analyzing Musk’s assets and liabilities on a point-by-point basis.

  • Asset: Tesla is a story stock. Aswath Damodaran, a finance professor of corporate finance and valuation at NYU Stern School of Business, defines a story stock as a stock “where[by] the story is so dominant in both how people price the stock and what determines its value that the numbers either fade into the background or have only a secondary effect.” Story stocks share three defining characteristics. One, they are usually infant companies, viz. the value is derived from the future growth. Two, they’re targeting a big market. Three, and most important to this discussion, the CEO is woven into the cloth of the company, becoming inextricable from the company’s story. Tesla is a story stock. And Musk is crucial to that story.
  • Asset: Strategy and vision are a critical part of Tesla. Tesla is a young company that is still navigating its path to maturity. Setting strong strategic goals is vital to effectively navigate that path. A Harvard Business Review article cited that strategy comprises 21%, on average, of what CEOs do. It may potentially be a higher figure for growing companies as CEOs direct that growth. And Musk is the engine behind that strategy, a vision that has fueled the success of Tesla for the last decade and a half.
  • Asset: Musk inspires employees. After spending time on-site at Tesla, Tim Urban from Wait but Why reported several discussions with Tesla employees:
    • “Working with him isn’t a comfortable experience, he is never satisfied with himself so he is never really satisfied with anyone around him…the challenge is that he is a machine and the rest of us aren’t.”
    • “Elon wants to know, ‘Why are we not going faster?’ He always wants bigger, better, faster” by the same person who a few minutes later was emphasizing how fair and thoughtful Musk tends to be in handling the terms for a recently fired employee.”
    • While many employees cited Musk is not easy to work for, they all agreed they deeply respect him. And respect is, arguably, harder to come by.
  • Liability: Tesla’s operational bloopers. To start, it has often missed production targets, most recently producing only 5,000 of the 6,000 Model 3 units per week. This could be suggestive of systemic operational problems in the organization, speculated to be a symptom of Musk’s inability to delegate. Operational issues are often addressed with Musk stepping in to rectify or accelerate the process.
  • Liability: Tesla’s financial bloopers. The first of which was the acquisition of SolarCity. Conflicts of interest aside, the most glaring problem with this acquisition is its negative cash flow. The financial profile is also unlikely to drastically improve in a sector that lacks product differentiation. Then there was Tesla’s choice of debt to meet its capital requirements. As Damodaran points out, “Tesla’s decision to borrow more than $5 billion was almost incomprehensible, given Tesla’s standing at the time….[T]here was no good reason that could be offered for that borrowing, since none of the usual arguments for debt applied,” (e.g., equity inaccessibility, tax benefits). This brings us to the last point: the debate about taking Tesla private. The financial profile of Tesla does not indicate it is a good candidate to initiate a transition from public to private company. It’s not a mature company and its market price is unlikely to be undervalued compared to its cash flows and earnings, which, to reiterate, are negative.
  • Liability: Recent inconsistent and erratic behavior.

To date, Musk has arguably acted as both an asset and a liability to Tesla. Now let’s take a quick look at where Tesla stands today and what possible challenges it may face going forward.

  • Scale: While revenues have grown, gross profit has plateaued, indicating the costs associated with increased revenues have not scaled, but grown correspondingly. Presumably, efficiency and scale will be introduced with the aid of technological advancements in production, which have yet to materialize effectively to date.
  • Capital needs: Its difficulty in scaling operations so far has an expensive consequence. Tesla will have to secure considerable capital for reinvestment in its business to produce and hit its ambitious production goals (which was once stated as 1 million cars per year by 2020). Furthermore, in one analysis run by Damodaran, he states the ratio of global auto industry sales to invested capital is a meager $1.29. Tesla is well below that at ~$0.20.
  • Business model: Tesla’s business model is predicated on a pyramidal structure truncated in three. At the top of the pyramid sits the Roadster, a car designed for those can spend $100,000 on a motor vehicle. The next tranche is its Model S, a high priced mid-level car (although not quite the Roadster). Lastly, at the bottom of the pyramid is the mass-market car. This tranche, the fattest one to signal volume-play, is the Tesla 3. For many mass-market consumers, Tesla 3 still comes with sticker shock, coming in much higher than its original price of $35,000. Producing the Tesla 3 en masse at a reasonable price will not only be an engineering and operational challenge, but it will also be critical to Tesla’s future success.

Based on the evidence, reasonable cases can be built for or against keeping Elon Musk as the CEO of Tesla. What tilts the scales in favor of keeping him is the rarity of his skillset: the brilliance of his strategic vision.

Bringing in strong operational talent, someone like Gwynne Shotwell, President and COO of SpaceX, could act as a stabilizing force. It’s at least an option worth considering.


Follow Stephanie Denning on Twitter: @stephdenning

And Also Read:

How Jeff Bezos Hires Great People

The Key To Nelson Mandela’s Leadership

PepsiCo’s Indra Nooyi On The Tradeoffs Of Being CEO