Elon Musk became the Chief Executive Officer of Twitter on October 27 of this year after successfully completing his $44 billion buyout of the firm.
Earlier in the day, a share of Tesla, an electric vehicle manufacturer that Musk is also the CEO of, reached a high price of $233. This placed it around 33% lower than where it had been when the year had begun. And during the following two months, Tesla’s stock would plunge even more, bringing its loss for the year to an additional…
Introduction
It was inevitable that Tesla’s stock was going to take a significant hit in 2022, given the consistent rise in interest rates over the course of the year and investors’ concern about the possibility of a recession. Both of these factors led to a downward revaluation of high-priced stocks, so it was inevitable that Tesla’s stock was going to take a hit.
However, broad-based worries about the economy are not sufficient to explain why Tesla’s stock price dropped towards the end of the year. The S&P 500, for example, remained relatively unchanged between October 27 and the end of the year, and even the Nasdaq, which is heavily weighted toward technology, fell by just around 5%. Although correlation does not imply causation, it is difficult to resist the conclusion that Musk’s unpredictable and sometimes bizarre stint as CEO of Twitter had a lot to do with why a number of investors ditched their shares in Tesla. This is despite the fact that correlation does not imply causality.
Problem With Twitter
The question of why is an intriguing one. There is no way to refute the fact that Musk’s actions with respect to Twitter have caused significant doubts about his ability to make sound business decisions. He spent much more than was necessary for Twitter, the majority of which came from his personal savings, and he loaded it up with debt, which means that it must make an interest payment of almost one billion dollars each year. He alienated advertisers, which was an odd thing for him to do given that almost all of Twitter’s revenue comes from advertising.
He did this by getting rid of most, if not all, of the site’s content moderation and by tweeting in an oddly careless way. His most famous tweet was a link to a completely made-up story about the attack on Paul Pelosi. He also scrapped most of the content moderation on the site, if not all of it. And although he has reduced expenses at Twitter (mostly by firing the majority of the company’s employees), many of his initiatives have appeared rash and ill-planned, almost as if he has taken the maxim “Move quickly and break things” to heart to an excessive degree.
However, despite the fact that Musk’s adjustments may not have had a positive impact on the core business of Twitter up to this point, none of them had any effect on the economic foundations of Tesla. It continues to be the most successful electric car company in the world. It continues to make a profit and is expanding at a rate that is not too sluggish. So why have investors, in relative terms, been less enthusiastic about it?
Problem with Tesla Inc
To answer this question, you should start by thinking about how, unlike most car companies, most of Tesla’s market capitalization is based on what investors think the company will do in the future. The majority of automakers have price-to-earnings ratios that hover close to 5. Even the world’s most lucrative automobile manufacturer, Toyota, has a price-to-earnings ratio of 10. On the other hand, Tesla began the year 2022 with a P/E ratio of 190, and it still has one of 35 today, despite the fact that its shares dropped by 68%.
This disparity makes some sort of sense when one considers the fact that sales of electric cars are likely to account for a significantly bigger proportion of the entire market for automobiles in the not-too-distant future. But this shows that the value of Tesla depends a lot on what investors think the company will be like in the long run.
And because the valuation of a firm is focused primarily on the long term, even little changes in investor expectations may have a significant effect on the market capitalization of the company (because small changes in, say, expectations of future profit growth compound over time, and add up to big differences in the long term). Therefore, even if investors are just marginally more suspicious of Musk’s business acumen as a result of his time at Twitter, the value of Tesla would still be negatively affected.
There are also very few CEOs in the whole world who have been more closely identified with the company they oversee than Musk has been with Tesla. Because of how closely he has been associated with Tesla, for many people, a bet on Tesla is, in large part, a bet on him. He is so strongly associated with Tesla. As I’ve argued in the past, CEOs tend to have abilities that are domain-specific, which means that just because you aren’t good at running a social media company doesn’t mean you can’t be a good CEO for a manufacturing or engineering company.
With that being said, I don’t think what Musk has done on Twitter really tells us much about the future prospects of Tesla. Nevertheless, there is no denying that the events of the past two months have put a significant dent in the mythology of Musk as some kind of universal business genius. This was bound to hurt Tesla’s stock, given how the mythology played a significant role in the inflation of the company’s valuation.
Final Thoughts
Lastly, one of Tesla’s most important assets is its brand. Despite the fact that the company rarely ever invests any money in advertising, it has established itself as one of the most well-known and valuable consumer brands in the whole world. The reputation of this company was built on the idea that its products were cool, trendy, new, and a bit ahead of their time.
Elon Musk who is now operating Twitter has given the impression of being none of these things. His tweets and the business choices he has made have given him a reputation for being geeky, feverish, and bizarrely reactive. And because of his strong affiliation with Tesla, it will obviously cast a negative light on the firm as well.
When a company’s Chief Executive Officer (CEO) is also in charge of running another company, investors are likely to worry about how the CEO’s time and attention will be split between the two companies.
However, the difficulties that Musk has had on Twitter have had a particularly significant impact since the value of Tesla is so dependent on the future, and more specifically, on the decisions that Musk himself will make moving forward. Musk has said that he would resign from his position as CEO of Twitter as soon as he is able to find someone to take his place. That is probably going to turn out to be beneficial for Twitter. But this will be an even more positive development for Tesla.
