The Elon Paradox

We’ll again start with a disclosure: I don’t care for Elon Musk, the person. I am a believer in ideas like paying it forward, and that we all emit either positive or negative energy into the world, making it a better or worse place. There is a pretty substantial trail of ruin in Elon’s wake. 

That said, I do have great respect for Elon Musk the businessman. He has built a substantial empire from the ground up in areas that conventional wisdom believed such endeavors were doomed to fail. Critics scream about luck, fraud, and duplicity. I won’t begin to assure you that every moment of Elon’s career has been pure. But I would also note that I believe few titans are lilywhite and all corporate success stories involve some amount of luck. To throw out everything Elon has done to deception is naïve at best. 

I say all of this because Elon is, if nothing else, a lightning rod. It seems few who know of him at all have no opinion on him. And so whatever you say about him short of the extremes is likely to invoke a harsh reaction from both those for and those against. So I might as well get my cards out on the table before making an outlandish claim of my own. 

I think we’re nearing the point where Elon Musk steps down as CEO of Tesla. I believe it is the best possible course of action for the long term success of the company. I also believe it is the worst-case scenario for holders of the stock. 

This is the Elon Paradox.

Building cars is really hard. Capital intensive, labor intensive, with years of R&D before a product ever hits the market and generates revenue. Building electric vehicles when Tesla started was even harder, because you also had to create a market and persuade a skeptical consumer.

Some (myself included) said such a thing would be impossible. Elon did it. That is an accomplishment few can match, and no one can take away from him. I don’t think 99% of corporate CEOs could have pulled that off, and again, no, screaming “fraud!!!” does not just close that circle.

By that measure, Elon has been a great CEO for Tesla. But the funny thing about humans is few, if any of us, are good at everything. 

Elon is a visionary. He is inspirational. He willed his industry into being by the sheer force of his charisma. Those are amazing skills. Where Elon lacks is in attention to detail. Tesla over the years has rarely launched a product on time. Quality has always been inconsistent, and that seems to be continuing. His wild fantasies about manufacturing efficiencies have proven to be mostly rehashing what the industry is already doing, or cost prohibitive. He doesn’t seem to manage people well. His attention is, to be kind, pulled in different directions.

In short, Tesla needs someone to do the boring stuff. The grind. 

The CEO that managed to create Tesla and the entire electric vehicle industry is ill-suited to actually run a maturing automaker. In the coming years Tesla will face difficult, but seemingly mundane, decisions about manufacturing capacity, supply chains, and model refreshes that are far from Elon’s areas of expertise. Sure, he could learn how to do these things. But he’s also spending a lot of time on rocketry, brain implants, tunneling, dancing robots, and tweeting. And Elon doesn’t strike me as the type to proactively acknowledge his shortcomings and work diligently to improve on them.

Tesla has reached a point where it needs less of a visionary, and more of a manager.

But here’s the rub: Tesla also boasts a mind-numbing valuation. Its market cap is routinely the sum of the rest of the industry combined. The stock trades at more than 70 times earnings, or more than $300,000 for every $100,000 vehicle the company hopes to sell in 2023. To be old fashioned about it, at these numbers it will take nearly a century for Tesla to generate its market cap in earnings. 

You can tell me that part of that multiple has to do with excitement about self-driving cars and triangle trucks and dancing robots and supercomputing prowess. And to some extent you are correct. But truth is a lot of that is the Elon premium. He who opines on that glorious future. 

Should Elon step down tomorrow, I suspect the stock would fall significantly. And even if his replacement is successful in making the company more efficient, getting product roadmaps sorted, and securing its future, it will likely take years if not longer to see current multiples reappear. 

So it is that the very thing that could help solidify Tesla’s place as a major automaker with staying power would also (perhaps permanently) harm shareholders. 

Is it worth it? 

The thing about any good paradox is, the answer is never obvious.

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