The Tesla shadow on Musk’s Twitter play

Musk debuted on the Forbes Billionaires list only about 10 years ago, with a net worth of $2 billion (and ranked 634 globally). His net worth gradually rose to $24.6 billion in 2020, and then shot up to $151 billion in 2021, peaking at $320 billion in November 2021. That mainly reflects the surge in the stock of his electric vehicle company Tesla, up from $29.53 in January 2020 to a high of $407 in November 2021. That’s where Musk’s large fortune comes from.

Musk started at Tesla as an investor, putting in $6.5 million in 2004, before taking over in 2008. Today, it accounts for nearly two-thirds of his net worth. While the surge in Tesla’s stock has happened against the backdrop of the company ramping up EV production and becoming more profitable, Tesla is now the most valuable automobile company. The expectations from Tesla are high.

But the ride ahead can get bumpy. Musk faces legal battles, operational issues and mounting competition from mainstream automobile rivals. Amid all this, can the chaos at Twitter become a distraction?

Legal Snags

MUSK HOLDS 14.1% stake in Tesla, and is the largest shareholder. Since 2012, instead of a salary, Tesla has been compensating Musk with stock options linked to milestones in market capitalization and operations.

The first award was instituted in August 2012, and would give Musk 5% more shares in tranches. The second award was instituted in 2018, and will give him 10% more at an exercise price of $70 per share.

Earlier this month, a US court began hearing a case by a Tesla investor, who contended that Musk used his status as the largest shareholder to dictate terms to the Tesla board. Musk and the board members argue Tesla was on the brink of failure, and that the payout was dependent on achieving targets, which Musk did. A judgement is expected in a few months. Telsa’s share price is now $183, down from $249 on 4 October, when Musk agreed to buy Twitter after months of uncertainty.

Operational Hurdles

THE SURGE in the Tesla stock came amid the company expanding production. Talking about that time, during his court testimony on 16 November, Musk said he underwent great pain to achieve that. “The amount of pain, no words can express,” he said. In the first quarter of 2018, Tesla produced 34,494 vehicles. In the last three quarters, it has averaged about 310,000. During the pandemic, when auto majors were cutting production due to a semiconductor chip shortage, Tesla continued to ramp up since it was producing its own chips, which it started earlier to make chips more energy-efficient.

At the same time, Tesla faces other operational issues, manifesting in automobile recalls across the world. In July, Germany’s road transport watchdog ordered a recall of Tesla models Y and 3 due to a fault in its automatic emergency call system. More recently, Tesla had to recall vehicles in China, Australia and the US.

Rival Attacks

MEANWHILE, COMPETITION is picking up from traditional auto players, driven by several factors. Many national governments are pushing EVs as part of their environmental goals. Prices of key parts are dropping.

According to Bloomberg New Energy Finance, the cost of electric-car batteries is expected to drop to $87 per kilowatt-hour by 2025, from about $176 per kWh now. Bloomberg NEF also estimates that electric cars could outsell petrol/diesel cars by 2040. Traditional auto companies, with established distribution channels and brand recall, are scaling up their EV presence. Tesla is the world’s leading manufacturer of electric cars today. The inherent argument in this valuation is that it will maintain its EV dominance. But as EV goes mainstream, Tesla will be challenged. If the challenge is stiff, Musk, with everything on his plate, will be challenged more.

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