Elon Musk has been deemed the next Steve Jobs, Superman, one of this century’s most brilliant minds, and the inspiration behind fiction character Tony Stark. He is the founder of four companies, he strives to bring sustainable transport to the masses, and he is shooting rockets into space. Not to mention the fact that Tesla’s stock price has augmented over 10,000% since the company went public in 2010.
But this past Wednesday, during Tesla’s 4Q 2014 Financial Results Q&A conference call, the beloved Elon Musk seriously lost his cool.
In fact, lost his cool might be an understatement. Specifically, Musk declared his employees brain dead as he delivered the disappointing news that Tesla fell short on expected sales, earnings, and cash flow figures. When questioned about Tesla’s manufacturing issues and feeble revenue, Musk inexplicably responded, “It was physically impossible due to a combination of customers being on vacation, severe winter weather and shipping problems.” Excuse me? Apparently if you plan to purchase a Tesla car, you must put any vacation on hold for a year or so.
The reality of the situation is that Musk blamed Tesla’s negative performance on his employees and customers. [Watch conference call here!]
Jim Cramer’s Mad Money Wall of Shame
And if Musk doesn’t clean up his act, he’s gunning for a front row spot.
What exactly is the Wall of Shame? On August 17th, 2006, Jim Cramer (host of CNBC’s Mad Money and Co-Founder and Chairman of TheStreet.com, Inc.) inaugurated the first round of CEO’s onto the Wall of Shame. “It was his list of CEOs he thinks are so bad they bring their stocks down just by occupying a corner office. If these leaders of ill repute were to leave their respective jobs to spend more time with their families, Cramer figured the stocks would bounce back.” (CNBC).
Fast forward to present day. Cramer has held a healthy degree of skepticism towards Tesla for the past few years, deeming TSLA a “cult stock”, such that rise and decline in stock price is based on the latest media gossip rather than valuation.
And in fact, not too long ago, a mere ten-word tweet on behalf of Elon Musk increased Tesla’s stock price 6% ($2 billion) in just one week.
“Are you lazy or just incompetent? Do I need to go down and get the certificate that says I’m CEO of the company to get you to stop challenging me on this?” – Jeff Bezos, CEO Amazon, when speaking to his employees.
Musk’s latest behavior seems to closely resemble that of Amazon’s leader, Jeff Bezos. “If an employee does not have the right answers or tries to bluff, or takes credit for someone else’s work, or exhibits a whiff of internal policies, uncertainty, or frailty in the heat of battle – a blood vessel in Bezo’s forehead bulges and his filter falls away.” (Businessweek).
The vital question that must be asked is whether or not there is a threshold of brash behavior on behalf of CEOs that will be tolerated before employees, investors, and customers start retaliating.
Cramer would argue yes.
What’s interesting about Cramer’s Wall of Shame is the implication of a strong negative correlation between hotheaded CEOs and company value.
Yet, the hotheadedness and intimidating manner that has seemingly worked for Bezos since he founded Amazon does not necessarily translate into success for Musk.
For starters, Amazon and Tesla operate under two vastly different business models.
Amazon quickly became a high volume, low-cost producer in the online commerce sector. Moreover, the company has never needed to raise outside capital to finance its growth, and thus investor opinion has been irrelevant. Interestingly, Amazon has operated near break-even profitability since its origin (1994), but in the twenty years since inception, the company has still managed to grow to $89 billion in revenue as of EOY 2014. And according to the teachings of renowned economist Michael Porter, if the low-cost producer is not required to display a profit, such company holds an insurmountable competitive advantage.
The fact that Amazon could grow independent of outside capital may seem paradoxical. Examination of the balance sheet reveals the secret sauce. To be exact, assets of $50 billion, retained earnings of $2 billion, and minimal debt as of year end 2014. Any capital raised post-IPO has been from employees exercising low-cost stock options.
Moreover, Amazon pays its suppliers in 75 days, yet turns inventories 12 times a year. In other words, the company receives cash every 30 days, an entire 45 days before it pays suppliers. Amazon generates cash flow even while unprofitable. In fact, the more Amazon sells, the greater the free cash flow.
In contrast, Tesla resides in a capital asset intensive industry. The more Tesla sells, the lower its cash flow. Additional vehicles require costly production equipment, inventory, and receivable financing. Importantly, the company has been, and will be, dependent on the generosity of investors as it continues to grow. If said investors become less enamored with Musk, the company will enter into a death spiral, unable to attract the capital necessary to grow. Not to mention the fact that low oil prices and possibly fleeting government subsidies exist as a colossal hurdle to battery-powered transit.
My money’s still on Musk. For now, Tesla seems to have retained its glitter. The company sports a 100 P/E of 2015 earnings, even with the recent 5% decline in value from a disappointing quarter. Nonetheless, if Musk doesn’t start considering all stakeholders instead of narrowly focusing on customers, Tesla could be in serious danger.
Musk cannot afford the arrogance of a Jeff Bezos – Tesla’s business model simply cannot support it.