The Tesla Director’s Dilemma
Will they fire Elon Musk?
Over the past ten years or so, Elon Musk has given the Tesla board plenty of reasons to fire him.
The “420 funding secured” tweet would certainly have led to the dismissal of most public company CEOs, as would the use of company funds to bail out a failing family solar business.
Few CEOs would have survived the “horse for a hand job” scandal, and many would have struggled to retain their position after the company spent four years developing a product as thoroughly awful as the Cybertruck.
Not many boards would have tolerated Musk’s conflicts of interest, his absence from the company, or his use of company resources in his outside ventures.
But Tesla’s board has always had an excuse. Musk has, until now, had strong support among the shareholders. The vote last year, to reinstate his massive bonus is proof of this support. He threatened to quit, and the shareholders agreed to a massive share dilution to make sure that he stayed.
Any attempt to fire Elon Musk as Tesla CEO would have resulted in a proxy fight at the shareholder level and the inevitable reinstatement of Musk to his former position. The board, in that situation was powerless, and content to remain powerless and enrich themselves by selling Tesla shares at regular intervals.
However, there can be no doubt that Musk’s recent behavior has irreparably damaged the Tesla brand. His right leaning policies and support for Donald Trump have turned off many Tesla customers. Sales are down almost 50% year to date in Europe and 8% in China. Figures for US sales are not available but are unlikely to be positive given the unprecedented backlash against Musk’s antics at DOGE.
Every weekend, protests are happening at Tesla sales centers across the country, some have even erupted into violence and vandalism, with Tesla vehicles being set on fire in France and in the USA.
Owning a Tesla has become a badge of shame, some Tesla owners are even disguising their cars with insignia of other companies, many have sold their vehicle and vow never to buy another.
Tesla will never recover from this brand destruction.
Will the board act to reign in Elon Musk? The share price has been hit hard by Musk’s actions, does he still have enough shareholder support to win a proxy fight?
The board is trapped in a dilemma of their own making. Having rubber stamped all of Musk’s decisions over the last decade while gorging themselves on stock options, they are now faced with the distinct possibility of a massive shareholder class action lawsuit if Tesla shares continue to slide and they continue to ignore Musk’s antics.
Despite a drop of more than 50% since their high of last December, Tesla shares are still massively overvalued compared to their peers in the automotive industry. A price/earnings ratio in line with Toyota or BMW would place a value of less than $15/share on Tesla’s automotive business.
The utility scale battery business is the only part of the business showing significant growth. Tesla has approximately 15% of the global market which is fast becoming a low margin commodity business. It’s closest competitor, Chinese supplier Sungrow, has a similar market share, a similar growth profile, and a market cap of 140 billion CNY. That’s about $20 billion USD, equivalent to $6/share if the same multiple is applied to Tesla’s battery business.
The total value of Tesla’s existing business amounts to $21/share, without even considering the lack of growth and the rapidly declining margins.
Tesla’s share price is entirely supported by Elon Musk’s vision of a world in which future generations are ferried around in self driving taxis while humanoid robots stay at home doing the washing up. It’s a vision that Musk has sold to the market but has so far failed to deliver.
Tesla has been promising a self driving car for almost a decade, with very little apparent progress. Its attempts have been sabotaged by Musk himself who insists on a vision only system that many experts claim will never function at the level needed for unsupervised driving. Delays are blamed on an elusive and vague “regulatory approval” that other companies such as Waymo seem to be able to get with no problems.
The robot concept seems equally fantastic, the only progress we have seen was faked at the robotaxi reveal event, when the robots serving at the bar were found to be operated behind the scenes by humans. An engineer from the robotics division admitted in one of the earnings calls that they hadn’t at the time, been able to get the robot to do anything useful.
However, if Musk goes, the future vision that is supporting Tesla’s share price goes with him. He is also likely to sell his 400 million shares which would inevitably collapse the share price.
Tesla’s board has nowhere to go, Musk is slowly destroying the company, but if they fire him, it will probably destroy the company even faster.
I expect, based on their previous actions, or lack of action, they will do nothing.