Is Tesla a car company, or a casino?

Elon Musk became the world’s richest man on 7 January, when a further increase in Tesla’s galloping stock price increased his net worth to $195bn (£141bn). “How strange,” he tweeted.

He’s not the only person who finds this odd. In 2020, Tesla delivered fewer than 500,000 cars, but it added almost $750bn to its market value. General Motors sold 2.5 million vehicles in 2020 and has more than $200bn in assets, but its market capitalisation is a small fraction of Tesla’s, at $62bn. At its current price-to-earnings ratio it would take Tesla almost 1,600 years to make as much money as the stock market has invested in it.

Why are so many people investing so much money in Tesla? The pandemic is one factor; during lockdown, millions of people switched to betting on stocks, using trading apps such as Robinhood. Some have put this down to the lack of sports to gamble on, but the disease itself may also be fuelling speculation. In his book Irrational Exuberance (2000), the economist and Nobel laureate Robert Shiller examines the role of “attention cascades” in driving market volatility and points to research that suggests large moves in prices are more likely to happen in times of national crisis.

Shiller also compares the spread of ideas about stock prices to the infection rate of a disease, and concludes that “the likelihood of any event affecting market prices is enhanced if there is a good, vivid, tellable story about the event”. There is no company and no CEO in the market with a story as vivid or tellable as that of Elon Musk. 

[see also: The world’s richest man has never had it so good]

Born in Pretoria, South Africa, in 1971, Musk has said of his childhood that he was “raised by books”, among them the sci-fi novels of Isaac Asimov. He was bullied at school so viciously that, aged 12, he spent two weeks in hospital recovering from injuries that his father said left him barely recognisable. He left for Canada aged 17 and moved to the US three years later to study physics and economics. In the 1990s he built two digital businesses, Zip2 and (which would become Paypal) and sold them. In both cases, Musk made tens of millions of dollars, not from profits but from owning stock.  

The people Musk hates, the bullies who can still hurt the world’s richest man, are short sellers. Rather than buying stock as an investment in itself, short sellers pay for a contract to sell stock at an agreed price at a later date and, if the stock is worth less at that point, pocket the difference. These “contracts for difference” are effectively bets against company, because they pay out when the company’s value falls.

Musk told an interviewer in 2017 that short sellers were “jerks who want us to die”.  By “us”, he meant all of us: the human race. Musk’s is the most ambitious sales pitch any CEO has ever made. The selling of cars is almost incidental to Tesla: Musk’s aim for the company is to bring about a global transition to clean energy. His aim for SpaceX is that it will allow the human race to survive the next extinction event by spreading to other planets. 

Is this Messianic confidence real, or part of a strategy to profit from attention cascades? Like Donald Trump, Musk uses Twitter in a way that almost no one else would dare to copy, with similarly dramatic results. When he tweeted in September 2018 that he had “funding secured” to take the company private at $420 a share (“420” is popular slang for smoking cannabis in the US), Musk was sued by the Securities and Exchange Commission and Tesla was fined $20m. In May this year, he wiped 10 per cent off the value of the company – an estimated $14bn – by tweeting: “Tesla stock price too high IMO [in my opinion]”. Such antics would be unthinkable of most CEOs, but they have made Musk the hero of the “investor bros” who spent 2020 watching their Tesla investments balloon. Many who ploughed their savings in early have become “Teslanaires”.

To a sceptic with a copy of Irrational Exuberance, such narratives – ordinary people becoming millionaires by believing in a man who wants to save humanity from itself – are exactly the kind of “vivid, tellable” stories that create what Shiller calls a “naturally occurring Ponzi process” – a feedback loop whereby the stock keeps rising as more and more people join and spread the word to others who will pump it still further.

[see also: Why deep-sea mining is risky for everyone]

Tesla’s five-for-one stock split in August is a sign that it has an appetite for more investors. The company stated that the split was aimed “to make stock ownership more accessible”, but the apps used by amateur investors already offer fractional trading (Robinhood will sell a millionth of a share). But it certainly makes Tesla look cheaper, especially to new investors who might only recently have heard about the opportunity to make money from it. 

Then again, Musk is gambling alongside his investors, having sold, he claims, almost all of his possessions to commit to the company. And with the Joe Biden administration committed to vast investment in renewable energy and a market yet to conquer, there is reason for optimism. Tesla could remain a stampeding bull, or it could be the company that exemplifies the madness before the crash. No one will know until it has happened. What is certain is that Elon Musk is a more interesting person to occupy capitalism’s top spot than Jeff Bezos, and that the people investing in him are doing so for a better reason: not merely for returns, but out of a sense that the sci-fi future they were once promised could happen yet.    

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