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John Engle
John Engle
Articles (153) 

Elon Musk and the Terrible, Horrible, No Good, Very Bad Week

Tesla’s CEO faces a deluge of bad publicity, much of it self-inflicted

August 31, 2018 | About:

After abandoning his impulsive and ill-judged effort to take Tesla Inc. (NASDAQ:TSLA) private last week, CEO Elon Musk might have hoped for a respite this week. Alas, he was not so lucky. The last week of August proved to be an unpleasant minefield as a result of Musk’s own actions, as well as continuing issues at his upstart automaker.

Let’s take a look at the public embarrassments that resulted in a terrible, horrible, no good, very bad week for Tesla’s embattled chief executive.

Doubling down on “pedo guy”

Perhaps the week’s most glaring media disaster was Musk’s bizarre choice to double down on his “pedo guy” comments about Vern Unsworth, a British expatriate who helped organize the successful rescue of a Thai soccer team trapped in a flooded cave system. Last month, Unsworth mocked Musk’s efforts to insert himself into the rescue mission with his “mini sub” that he had had his engineers cobble together in the span of a couple days. In response to the critical remarks, Musk took to Twitter to defend his idea – and to call Unsworth a “pedo guy” with no evidence. As we said in a research note at the time, calling a hero a pedophile is never a good idea.

While Musk did eventually issue a half-hearted apology via tweet, it looked like Unsworth would still pursue a defamation suit. Eventually, the media circus died down and no one brought it up again.

That is until Musk was baited into bringing it up again on Twitter. Another user queried his commitment to truth, citing the “pedo guy” accusation. Never one to ignore a troll, Musk struck back with this bizarre response:

"You don’t think it’s strange he hasn’t sued me? He was offered free legal services."

Evidently Musk thought that, because Unsworth had not yet filed lawsuit, it must be because the British cave explorer was, in fact, a pedophile. A bold claim indeed.

Of course, things only got worse for him from there. It was revealed soon after his latest tweet assault that Unsworth’s lawyer had indeed already sent a letter to Musk on Aug. 6. So he either failed to read it or was lying. Either way, he has probably earned himself an even more painful defamation suit.

He swears he’s not erratic

Musk has been cutting an erratic figure in the press over the past few weeks. A teary interview with The New York Times resulted in questions being raised in several publications about the mercurial entrepreneur’s mental state. He tried to push back this week. Through emails sent to reporters at The Wall Street Journal, Musk attempted to explain that his decisions only appear to be erratic because people cannot match his speed:

"Mr. Musk said his actions and rapid decision-making can be misunderstood as erratic behavior. 'It is better to make many decisions per unit time with a slightly higher error rate, than few with a slightly lower error rate,' he said last weekend in a series of emails with The Wall Street Journal, 'because obviously one of your future right decisions can be to reverse an earlier wrong one, provided the earlier one was not catastrophic, which they rarely are.'”

That is an extremely worrying sentiment, and indicative of the decision-making process that left the Model 3 sedan in production hell and has seen Tesla burn through a monumental amount of cash in recent quarters. That slap-dash “we’ll work out the bugs as we go along” attitude is antithetical to efficient and effective manufacturing. If the disasters of the Model 3 ramp have not been enough to shift Musk’s thinking, Tesla is in for a lot more pain.

A dubious grasp of probability

Musk’s emails to the Journal included other windows into his thinking. While attempting to justify his abortive take-private exercise, he turned to probability:

"Mr. Musk, supremely confident, invoked the language of Las Vegas gambling to explain his go-private tweet and subsequent about-face.

;If the odds are probably in your favor, you should make as many decisions as possible within the bounds of what is executable,' Mr. Musk said in emails to the Journal. 'This is like being the house in Vegas. Probability is the most powerful force in the universe, which is why the house always wins. Be the house.'”

It seems Musk either did not think this comparison through, or he does not really understand how probability – or gambling – actually works. He seems to be saying that it is better to attempt essentially any potentially positive action with a decent probability of success, i.e. trying to take Tesla private without any advance planning. But that does not make him (or his company) the house. It just makes him a gambler hoping to extend a hot streak.

Verdict

We have been very critical of Musk and Tesla in a number of research notes. Our core issues lie with an absurd valuation and monumental costs. But the increasingly unhinged behavior of Musk, who is in many ways synonymous with the Tesla brand, creates additional risks to the bull thesis.

No one knows what would happen to the company without Musk at the helm. But no public company can afford to give unchecked power to someone with an increasingly tenuous grasp on reality. While the market seemed willing to give him the benefit of the doubt in the wake of the go-private collapse, shares have begun to drift downward as expectations sour and fears over Musk’s leadership grow.

Staying in business, let alone maintaining a lofty share price, will require decisive and competent action at Tesla. Currently, Muck is not conveying an understanding of the urgency of the situation, nor has he displayed a coherent plan for dealing with Tesla’s compounding problems.

Disclosure: I am/We are short TSLA via long-dated put options.

About the author:

John Engle
John Engle is President of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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