Hubris, Tesla and Exploding Pigeons.

Blain’s Morning Porridge – June 22 2022: Hubris, Tesla and Exploding Pigeons.

“Hubris – excessive pride or defiance of the gods – inevitably leads to nemesis.

This morning – Would a Tesla survive a Kamikaze Pigeon attack? Tesla remains the tech stock that’s defying the ongoing valuations reality. Why? Because Musk still controls the narrative – and that may be about to change.

But first:

On Saturday 25^th June I shall be racing in the world-famous Round The Island Yacht Race on behalf of Walking With The Wounded. It will be a day spent navigating my yacht, Batfish 5, around The Isle of Wight in Southern England in the company of some 1100 other boats. I’ve put together a crew of colleagues from Shard Capital and experienced sailors for the day. While it should be great fun, the aim is to put a couple of thousand pounds in the pocket of the charity to support wounded members of the UK’s Armed Forces. Please visit:  https://www.justgiving.com/fundraising/Bill-Blain1 if you care to support this deserving charity by making a donation.

Yesterday was midsummer, and the start of the UK’s Summer of Strife – which promises to morph into the Autumn of Awfulness – as UK workers strike for wage rises to address inflation. The trains were all off so I drove up to London. After taking out a mortgage to fill the tank, I faced a three-hour crawl up to The Smoke, £85 to park for 6 hours, and a three-hour crawl back, all to speak at the Euromoney Global Borrowers conference – but absolutely worth it to hear some fascinating panel discussions!

The drive was not improved when I was attacked by a Kamikaze Pigeon on the A40 West Way. If crashed through the front grill of my Range Rover, making a big bird shaped hole, before exploding on the Radiator, and taking out the air conditioning. It was like something out a Tarantino movie. Messy and who knew a pigeon had so much blood..

No doubt someone will tell me front grills are another inherent weakness of Internal Combustion Engine cars.. How much better a day I would have had if I had driven there and back on a nice Tesla.. Ha, ha! On the way back there were an awful lot of them waiting around the charge points at the service station.

Back in the real world: Tesla

I did promise some further thoughts on the world’s most valuable auto-maker last week. Tesla is the top performing component of the Blain’s Investment Idiot ETF (IOT) – its only down 41% since its high last November. I admit Tesla is a real firm, making real profits – but it’s not worth $760 bln! Maybe $70 bln… at a stretch. Its P/E remains nearly 100x – which is simply daft.

But Tesla is not about numbers. It’s about the power of narrative and belief. I wonder if that’s about to wobble. There are number of issues coming to a head around its extraordinary CEO, its treatment of staff and its ESG credentials.. which is why this morning’s Porridge is all about Hubris.

I’ve been reading through the latest fanboy postings that pose as research on Tesla. Apparently, Tesla hiking its prices by at least $6k per vehicle is nothing to do with soaring component prices and the stratospheric cost of lithium. (Buying a top of the range Tesla is now comparable to buying a proper really nice sports car.. but what would people say about your environmental credentials if you did?) The price hikes are all about positively exploiting demand – 10 months to get a new one – but demonstrating the price inelasticity of the brand! Really? Apparently.

There is a lot of apparently this morning.

As for Tesla sacking 10% of its workers without due process or regard for Federal Law on notice to employees, while moving more shop-floor jobs to monthly contracts – that’s, apparently, equally positive, demonstrating the firm controls the narrative and can respond to changing input prices by changing its production costs to match. (How very Victorian of them…)

Last week, SpaceX, terminated with immediate effect, a number of workers who had the ungrateful gall to write an open letter critical of Elon Musk’s behaviour on Twitter. The employee letter said the firm was failing to live up to its “No Asshole” motto, and was an increasingly hostile environment. The whip-wielding CEO terminated them all with prejudice saying the open letter made other staff “uncomfortable and bullied”, while telling everyone else to work harder or face consequences. I think she models herself on the Elizabeth Holmes character from Dropout. Really? Thot-crime by salaried wage-slaves should be punished to the nth degree. Indeed. Apparently.

Rules, Laws, Corporate Governance.. these are for the little people. They, apparently, don’t apply to the god-like genius who runs the most successful auto-company, the firm about to take us to Mars, and soon… (well maybe not), control our narrative by running Twitter.

Whatever next will Elon do? He’s a genius you know – so we keep being told.

Electric vehicles. What a fascinating market. The sector is a bright shining beacon of inventiveness and innovation and is going to save the planet – ahem. As long as you aren’t worried about the tech sector meltdown, batteries just being energy storage rather than magic dilithium crystals from Star Trek, lithium being 4.5 times the price it was this time last year… and, the reality Lithium production and recycling is about as environmentally friendly as a Texan oil baron from the 1980s…

There are now a host of new companies producing EVs – Lucid, Rivian, Nio, Li and umpteen others. The old established gas-guzzler auto-firms have invested billions to build increasingly refined EVs. Every firm now entering the sector claims their product to be better, a different price point, or more suitable – building on what Tesla created, each refining and rewriting the EV narrative to make themselves appear a better investment bet. They all want a share of the EV pie. You would think that would impact Tesla. Nope. Apparently not.

Despite the increased competition – Tesla remains the most valuable auto stock on the planet.. I am told that’s because it’s not a car company.. its big disruptive tech, it’s about batteries, it’s about energy, it’s about self-driving taxis, its whatever its about… Mostly I’m told it’s because Elon Musk is an engineering and entrepreneurial genius.

It’s because Tesla is going to be dominant in so many areas that it trades at 100 time P/E. That is why the most profitable Auto-manufacturer on the planet might make multipale times the profit of Tesla (Toyota made over $25 bln profit last year) but trades on a multiple less than 9 times P/E.

Really? Yes. Really.

My view.. for it is worth, is Tesla may now be a profitable company – on the back of selling regulatory credits as much as cars, but it is a fail across every single decency metric there is. I am told decency counts for nothing in markets. But it does. ESG is now a regulated thing. Tesla should be uninvestible:

• E = Lithium Batteries will not save the planet and have massive environmental costs
• S = Tesla’s treatment of employees is a massive social fail
• G = Telsa repeatedly demonstrates abhorrent corporate governance

I increasingly see the narrative that’s been encouraged around Lithium batteries as one of compliant greenwashing, from a social perspective Musk’s attitude to people and staff is medieval, and the lack of corporate governance across the firm is shocking – witness Musk and the SEC as just one aspect.

Personally, I have lost an “opportunity-fortune” on Telsa by disinvesting years ago and missing about a billion dollars of upside. I sold because of Musk’s appalling treatment of people who dared criticise him. I decided he wasn’t the kind of chap I wanted to invest in. I’ve spent my whole career in finance recycling one critical lesson – if you don’t trust the management.. SELL.

My decision to sell was morally correct. It was a massive financial mistake.

Whatever I think of Elon Musk is unimportant. The market has bought his extraordinary success story. How Musk successfully navigated near bankruptcy, a lack of profitably, and spun the narrative has been extraordinary. Tesla was about to go bust in 2018. Yet, a few months later it had accumulated a multi-trillion war-chest after issuing stock at exactly the right moment.

How has he done it?

By controlling the narrative.

Even though Tesla was missing every promise, and wasn’t making many cars, Musk swung the narrative, successfully establishing the perception his failing start-up would be the ultimate winner among all auto-manufacturers and that EVs are far more than EVs. Encouraging the belief it was far more than just an auto maker is the key to its extraordinary multiples.

Musk’s key strength is understanding narrative. His goal is to dominate it and use it. He sets his own rules and follows no agenda but his own. It’s made him the richest person on the planet. Whoop, whoop…. Whoop.!

How does Musk remain so in control of his narrative?

Cathie Wood, founder of Ark Invest, might have seen her personal fortune slashed during the tech selloff, but she’s back big on Telsa – buying 3000 shares last week. If anyone gets the magic of Tesla… its Cathie Wood. After all she told us: “We’ve done the research on what ride-sharing profitability potentially could add… it’s a much more profitable business than electric vehicles.. a very good bridge to their autonomous strategy..” Blah, blah, blabbity blah blah.. She said all that over a year ago.

Musk first mentioned self driving in 2013 and has been promising autonomous driving since 2015, when he said it was 2 years away. He’s been charging buyers for automated driving since he unveiled Autopilot 2.0 in 2016. He has promised to deliver it multiple times; in by 2017, by 2018, by 2019 (when drivers would be able to sleep in their cars..) Today… 6-years later, Teslas can do what any other Level 2 autonomous cars can do; lane centre, cruise control and self-parking. It is said to still be years away for Level 5 autonomy.

The Musk Fanboys say Telsa’s self-drive must be the best because of all the info and data Tesla has been capturing on how its cars are driven. That data apparently makes the company worth so much more….. Tesla’s competitors all use Lidar (“stupid, expensive and unnecessary,” said Musk), to teach their cars to drive and have created accurate maps.  Everyone now agrees, Tesla does not lead the race to autonomous driving.

Nor does it lead in Batteries.

The thing about Lithium Electric Batteries – they are easy. The rechargeable household battery is 50 year-old tech. Car batteries are basically lots of Duracell-bunny batteries hooked up together. There are new, cleaner, simpler battery technologies like Sodium, Graphene and Carbon-Ion coming through, but they are less energy dense and still require lots of serious, complex and difficult science and engineering work to make them realistic alternatives.

Musk does not do difficult science or engineering. He bought his way into Tesla. He innovated existing tech to present lithium batteries as shiny and new disruptive tech. It’s succeeded as a marketing exercise. (Musk’s real legacy to the EV sector will be in car design and the integration of electric motors, but that doesn’t fit his narrative of presenting Telsa as far more than just a vehicle assembler.)

For all the things Musk has done, perhaps the most extraordinary is that he still dominates EVs to the extent he does. Market History suggests the usual fate for any firm that invents, innovates and defines a whole new sector is to be swamped by the competition it creates for itself: witness the Wright Brothers in aviation.

Let me go off on a tangent here: I suspect Musk knows the history of early aviation. There are two stories:

My dad visited the Wright Brother’s hometown of Dayton, Ohio. He concluded it was no surprise they built the first successful powered aircraft. In 1903 the Wright Brothers won global plaudits for the first ever powered flight. They then totally failed to establish their primacy. Instead, they buried themselves to improve their plane and secure patents. They didn’t grab potentially lucrative military contracts, or join the frenzy of newspaper sponsored aviation challenges that swept the globe.

The narrative quickly moved on. By 1906 Paris had become the centre of the aviation world. In 1910 Bleriot crossed the English Chanel while Americans like Glen Curtis were undercutting the Wrights efforts to monetise their planes. 7 years after Kittyhawk (scene of the first flight) there were dozens of aviation companies competing for every conceivable aviation first in terms of speed, distance, and altitude. The Wrights won none of them.

Instead, they tried to sue over patents – a singularly unsuccessful notion as Europe rearmed ahead of war. Wrights lost the plot as aircraft went from string and sealing wax to sleek killing machines in just a few years. Wilbur died of typhoid and Orville sold the company for $1.5mm in 1915. Whatever, the brothers were extraordinary and brilliant engineers.

In contrast, the UK motorcycle entrepreneur Tommy Sopwith got bitten early by the aviation bug and got Aviation Licence No 31 in 2010. Within 2 years he was winning orders from the Army, and by 1918 he’d built his fortune selling over 8000 Pups, Tripehounds, Snipes and Camels to the Royal Flying Corps. He then declared himself bankrupt to avoid a crushing tax bill, and sold out (actually rebranding) as Hawker before going on to make multiple attempts to win the America’s Cup yachting trophy for the UK.

Tommy Sopwith remained active in Hawker as chairman, overseeing generations of UK fighters from the Camel, the Hurricane, the Hunter, and the Harrier into his 90s, and died the great man of aviation in 1989 aged 101. Hawker was one of just many UK aviation success stories – Supermarine, Avro, De Havilland, and others – but Sopwith was extraordinary. I’m pretty sure he must have been something of a rogue, but a respected one.

Wright and Sopwith created aviation, building planes and an industry.

Musk is also extraordinary. He clearly doesn’t want to fail, like the Wright Brothers, or to just be a successful entrepreneur like Tommy. He wants to dominate and retain the narrative lead. He isn’t like us. It’s not what he’s got. It’s what he hasn’t.

What he hasn’t got is the ability to run everything. Nor would he have the money if Tesla was just an auto company. Whatever Musk would like us believe about the narrative he has built around himself, Telsa will still have to obey the law of Supply Chains. SpaceX requires a fine understanding and compromise with gravity. Twitter will need the trust of its users.

Hubris… it’s a thing.

Out of time, back to the day job, and about to remove pigeon bits from the car…

Bill Blain

Strategist – Shard Capital