It’s not a secret that Tesla has had a lot of problems. Whether it be CEO Elon Musk’s erratic public statements, their tendency to miss production targets, or poor earnings reports, the company’s stock has seen a number of sudden, steep sell-offs. After several years of volatility in Tesla stock, it’s not surprising to see companies like Morgan Stanley sour on them as an investment.
“At Morgan Stanley, Adam Jonas cut his price target for the stock by $20 to $260, far below FactSet’s average near $337, while also lowering his estimates for sales volumes, average selling prices, and margins. (Musk said Feb. 28 that Tesla was unlikely to post a first-quarter profit.)” (Source)
Around the same time that Morgan Stanley lowered their expectations for Tesla, Goldman Sachs advised selling Tesla stock , saying that their earnings report and sales would disappoint. (Source)
The indices I work on (FLAGLSX and VCUSX) have held Tesla at 0% for years -- as I explained last year, the core issue was that the structure of the company meant the CEO wasn’t accountable to the board of directors, and the board of directors wasn’t accountable to the shareholders.
“Musk is both Chairman of the Board and CEO at the same time, therefore he leads the entity to which he must report as an employee. […]Tesla also has structural problems when it comes to the board being answerable to shareholders. There are a number of structural impediments to shareholder voting power; for example, no cumulative voting, so it is harder for dissident shareholders to concentrate their support so as to get even minority representation on the board. […] shareholders are impeded in their ability to sell their shares at market value to large investors who could use the shares to challenge management, and owners are prevented from changing by-laws or convening meetings without the permission of the board which is supposed to work for them."
These were already old issues back in May of 2018, and even after direct intervention by the SEC, they haven’t gone away. Musk’s public attitude and the way his company is built have had a material negative impact on people who are invested in Tesla. Our model saw the ways in which Tesla’s managerial structure put the company at risk for major losses, and you’ll see in the chart below that our concerns were justified.
In this chart, we highlighted various times in a 1-year period, from March 2018 to March 2019, where Tesla stock suffered a major drop. In some cases, these drops were caused by bad earnings reports, or mechanical problems with their cars, but in many cases, they are attributable to a careless tweet or other statements made by Elon Musk.
- In March 2018, Tesla fell by 22% in a single month because of a fatal crash involving a Model X car, and a slower-than-expected rate of Model 3 production.
- In June, Tesla rapidly ramped up its Model 3 production to meet their production objectives. Though they eventually met the goal, they ran into several mechanical problems. To make matters worse, on June 18th, Elon Musk said that their computer systems had been compromised by a disgruntled employee.
- This was the start of the Thai scuba diving saga, which culminated with him accusing the leader of the operation of being a pedophile. You can see that for the entire month of July, when this controversy was going on, Tesla’s stock was on a downward trajectory.
- That controversy was immediately followed by another, when Elon Musk suddenly tweeted on August 6th that he was planning to take Tesla private at $420 per share. Later, on August 24th, Musk publicly abandoned the plan. This month-long saga was less-than-profitable for Musk’s company.
- On August 17th, Elon Musk gave an interview to the New York Times in which he described his profound troubles working at Tesla for the past year. The story gave the impression of a desperate situation at the company, in which Musk had to work incredible hours to keep up with expectations. The stock fell 9% in the next session.
- September 6th was the now infamous Elon Musk interview with Joe Rogan, in which Musk smoked marijuana on video. Tesla stock dropped 9% the next day.
- Later in September, the SEC announced that they were suing Musk for his tweet concerning taking Tesla private, sending Tesla down 14%.
- Rumors, later confirmed, of dropping sales for the flagship Model 3 led to over two weeks in which Tesla stock consistently declined.
Does this look like a stable, reliable investment?
This is just an overview of just one year for Tesla, but it illustrates the point. Our model flagged Tesla in several areas related to corporate governance. They were, unsurprisingly, flagged for executive misconduct, having the CEO and the chairman be the same person (this was later forcefully resolved by the SEC), as well as several categories related to shareholder rights and governance. We didn’t just look at the way Elon Musk acts and decide to not invest in Tesla, our model specifically identified the way in which Tesla’s corporate structure violated our principles by making Elon Musk unaccountable to shareholders.