Does it make sense that Elon Musk collects 56,000 million?

On March 10, 2020, Berkshire Hathaway CEO Warren Buffett granted a interview Andy Serwer, the director of Yahoo Finance. The world was shocked by the explosion of the coronavirus, which was going to keep us confined for the next few months, and after commenting that “if you live long enough you end up seeing everything in the markets” and that the only precaution he had taken was “drink a little more of Coca-Cola” (the third largest turnout of his portfolio, after Apple and Bank of America), the magician from Omaha began to answer questions about specific investments.

He said he was not worried about Wells Fargo shares, although they had accumulated a 40% drop in the year, and it must be said that time has proved him right: the bank has recovered 56% since then. He also admitted that alternative energy was “the future,” but that you couldn’t change “the fundamentals of the world” overnight and he, just in case, had just thrown $10 billion into Occidental Petroleum. The barrel, remember, had fallen to 30 dollars and today is around 95.

Then Serwer asked him what he thought of Elon Musk And if I would put money in Tesla. Buffett laughed before answering.

“Try to provoke me,” he said. And he added later: “I’m going to say that [Musk] does extraordinary things.

“Do you know him?” The interviewer tried another route.

—Sure, he joined the Giving Pledge a few years ago. [literalmente, La Promesa de Dar, una iniciativa para que los ricos donen sus fortunas a obras filantrópicas]. I’ve seen him once or twice, and talked to him, but not for long.

—And would you invest in Tesla? Serwer insisted.

Size Matters

Everything at Tesla is huge. The last thing we know is that a shareholder has denounced the management because it is going to pay Musk 56,000 million dollars. It is “the largest compensation in the history of humanity,” according to the complainants, and in any case, a scandalous amount, with which Musk could liquidate buying twitter and he would still have 12,000 million left over.

In principle, everything was done with light and stenographers, and it is enough to go to the newspaper library to verify it. In March 2018, CNBC explained in quite detail the plan of stock options and further argued that Musk did not have it easy. Among other goals, should bring Tesla’s capitalization to 650,000 million (the GDP of Sweden, more or less) when it barely reached 52,000 million at that time (the GDP of Azerbaijan).

Musk not only complied, but went too far and included Tesla for a few months in the select club of giants that are worth more than a trillion dollars: Apple (2.37 billion), Saudi Aramco (1,975), Microsoft (1,809), Alphabet (1,249) and Amazon (1,013). At one point, was worth as much as the 12 largest car manufacturers combined: Toyota, Volkswagen, Daimler, General Motors, BMW, Honda, Stellantis, Ford, SAIC, Ferrari, Nissan and Renault.

Magical realism

This does not fail to repel common sense. How many cars does Tesla sell? in 2021 it did not reach a million units, well below Toyota’s 9.6 million or Volkswagen’s 8.9. In fact, it is not even listed among the 15 largest manufacturers in the world. why is it worth then the triple qorand Toyota and almost seven times more than Volkswagen?

The short explanation is given by financiers Jed Dorsheimer of Canacord Genuity and Adam Jonas of Morgan Stanley in The Economist. “Both,” explains the magazine in an article titled Tesla’s magical realism, “compare Tesla to Apple […] to illustrate how Musk could create a lucrative ecosystem of mutually reinforcing devices and services.” According to this reasoning, investors would not be looking so much at the car business as at “the promise of other more nebulous, but potentially more profitable, related to the software”.

royal realism

Professor at New York University’s Stern School of Business, Aswath Damodaran, he does not believe that there is any need to resort to any magical realism. In a post published in November 2021, At the top of Tesla’s capitalization, it reiterated that its core business was still car sales, but it had managed to multiply the industry’s rickety margins. How?

First, has a lighter cost structure, a distribution model that does without dealers and a greater willingness to supplement their income with other products and services.

Tesla has also benefited from powerful tailwinds, like the avalanche of public aid to decarbonise transport; the explosion of companies car sharing, whose fleets are mostly electric, and the massive assumption by funds and banks of ESG criteria (environmental, social and good governance, for its acronym in English).

Musk’s own personality, whose outbursts scare the conventional investor, has spawned a community of believers who have blindly followed him through the harsh desert crossing.

And the Oscar goes to… Elon Musk!

Finally, Damodaran highlights how The covid, which has been an ordeal for the rest of the brands, has revealed itself to be a blessing for Musk. The crisis has effectively punished indebted firms, with large facilities and generous dividend policies, that is, traditional manufacturers. “If there was a casting to pick the covid winner,” Damodaran writes, “would be a lot like Tesla.” He has emerged from the pandemic as a strong leader, but enough to cost a trillion dollars?

Damodaran did not think so. He was leaning more towards the 692,000 million dollars (about 100,000 million more than what it is worth today). To Analyst Paul Allison you get a similar number. He calculates that within 10 years some 45 million electric cars will be sold in the world and, with Tesla maintaining the same market share (20%) and the same operating margin (17%), it will close 2032 with 91,000 million electric cars. ebitda (earnings before interest, taxes, depreciation and amortization).

With this result and once the pertinent adjustments have been made, Allison estimates that the company would even be cheap on the stock market. For Musk, in any case, it is enough to maintain the capitalization one year above 350,000 million to receive the last tranche of his huge package of stock options.

The old wizard is wrong. Or not?

Despite all of the above, Warren Buffett was adamant at Yahoo Finance.

—And would you invest in Tesla? Serwer insisted.

“No,” he replied, considering the matter closed.

He is known to be one of those conventional investors who is frightened by Musk’s outbursts (which, if you have noticed, he very diplomatically calls in the interview “extraordinary things”). And since, on the other hand, Buffett is aware that the electric vehicle is here to stay, he has sought another, more boring supplier: the Chinese BYD, of which owns about 7%.

It is true that, in between, the spectacular leap starring Tesla has been lost, whose share price was around $35 in March 2020. But don’t grieve for the old wizard either. He hasn’t been too bad. In fact, Berkshire Hathaway is worth today 90,000 million more than Tesla.

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Does it make sense that Elon Musk collects 56,000 million?