Elon Derangement Syndrome

If you are looking for takes from a normal you've come to the wrong place.

Here is a seeming contradiction that I plan to resolve before the end of this post:

1. If you are a Tesla-perma-bear, you have probably been wrong about the company’s stock price.

2. If you are a Tesla-perma-bull, then you have probably been wrong about the direction of the actual business.

Shorting Tesla has been a famously futile endeavor. But the Tesla bulls have to keep revising their thesis every year or so. The problem is that the earlier bull case always ends up in the trash can.

In the late 2010s the dominant bull case was that Tesla would be the Apple of cars¹. The bulls claimed that even if Tesla didn’t sell the majority of cars, they would earn the majority of car company profits. Unfortunately, current Tesla profits aren’t worth writing home about².

Then Tesla was going to have a million robotaxis on the road. There would be unlimited demand because the car would drive itself and earn passive income for its owners³.

Then the bulls moved on to ideas like: the Cybertruck would create a halo that would boost Tesla’s other models⁴. That has not happened. The Cybertruck is a niche vehicle that serves mostly as social signal. Also Tesla now sells about the same number of high end cars (Model X, Model S, Cybertruck combined) that they sold eight years ago - despite having more models to sell.

Maybe the most vivid and hilarious illustration of my point is that noted Tesla bull Cathie Wood published a valuation model in 2019. While the market cap of the company has often hit close to her bull case, the performance of the business has basically tracked the bear case.

That’s not all.

Elon Musk has also made predictions about Tesla’s market cap, including in 2015 when he correctly predicted that eventually Tesla would be a $700 billion company. The only problem is that he used a price/earnings multiple of 20 when he made that prediction. The current price/earnings for the company is more than 175. If you use Elon’s 2015 methodology, along with actual trailing 12 months operating metrics for Tesla, you’d get to a market cap of $135 billion. Tesla’s current market cap is roughly $1 trillion.

So the business did worse than he expected and yet the stock did better.

The Tesla bulls and bears engage in daily combat over these issues, but I wanted to start this post by establishing that no one planned for this kind of disparity between earnings and stock price - not even Cathie Wood. Not even Elon Musk.

(Tesla bulls and bears clocking in for the morning shift of flaming each other on the internet).

The interesting thing is that if you make observations like I’ve made above, or write a pretty mild article like Vitaliy Katsenelson did, or re-tweet Tesla FUD on Twitter⁵, then you might be accused of having a weird anti-Elon bias. Or Elon Derangement Syndrome.

So let’s start there first.

That’s a Lot of Deranged Folks Walking Around!

In the time that I have been following Tesla, here are the groups that have been infected by Elon Derangement Syndrome:

• The first Trump admin’s SEC, which sued Musk for securities violations

• The Biden admin’s SEC, which sued Musk for securities violations⁶

• paid hacks for the fossil fuel industry⁷

• Republican leaners⁸

• paid hacks for legacy auto manufacturers⁹

• Cave explorers¹⁰

• People infected with the woke mind virus¹¹

• Democrat leaners¹²

• Sam Harris¹³

• Opponents of free speech maximalism¹⁴

• Opponents of government efficiency¹⁵

Some might say that Elon must be doing something right to have this many people upset with him. But I am not sure that heuristic really works. OJ Simpson also made a lot of people mad… see the problem?

Also, in the time that I have been following Tesla, being an Elon Musk skeptic has gone from a 1% position, to probably something like a 50% position. That’s not an attempt to imply that my position is correct, simply because it’s increasingly popular.

It’s just that when Elon’s critics have been so varied - it’s not credible to dismiss the them due to some vague implied bias.

The other point I need to make is that if your mental model for Elon is roughly predictive, then probably you are not the deranged one. If you knew that DOGE would announce a lot and accomplish a lot lot less, then you had the right mental model.

The World’s Greatest Gambler

In September of 2022 I posted this thread to Twitter. It was the basis of my thesis in the Twitter merger arb. I posted it two weeks before Musk sent a letter to the Twitter board where he agreed to close the deal.

I wrote the thread because people often struggle with whether Musk is the world’s smartest man, or the world’s biggest con artist. However, the way to understand him is as a very high stakes gambler - who is not afraid to have every chip in the pot - and in fact he gets uncomfortable if he isn’t over betting.

After the Twitter closing Walter Isaacson published a biography of Musk which included more gambling anecdotes - including a description of a poker game where Musk martingaled until he won a pot, then left the game.

Capital Markets Miracles Dressed Up as Engineering Miracles

The most common response to any criticism of Musk is:

Yes, but he lands rockets.

On one hand, this is evidence that any watcher of Musk should deal with. On the other hand, if you don’t pay attention to all of the evidence, you are bound to be disappointed.

In 2015 Musk claimed that by 2020 most Teslas would probably have a range of 700 miles. This turned out to be not even close. The longest range Tesla now can go about 350 miles on a charge.

The important thing to consider is that dropping a 700 mile EV on the market would be like an atomic bomb for the car industry. That’s still the case even five years after the end date on Musk’s original prediction. It’s a goal that’s worth pursuing. When Musk made the comment, he should have been in a position to know more about EV range than anyone else. But it ended up a wild miss.

This is a common occurrence with Musk.

Promise a miracle.

Deliver a shrug emoji.

There are other similar examples. In the time since Spacex landed its first rocket, here are some big ideas that have been promoted by Musk¹⁶:

• A solar roof that would look just like a normal roof, and would be as cost effective as the combined price of a new roof plus solar.

• A car factory that would be so highly automated that you couldn’t have humans on the production line.

• A tunnel in Las Vegas that would transport passengers, in driverless cars, at 155 miles per hour.

• A Tesla Roadster with Spacex cold gas thrusters that would allow the car to hover.

Unfortunately, the only items on the list that have materialized were delivered void of magic.

Tesla has a solar roof. It’s not the one that was shown at the demo, and the economics aren’t close. Although, fans of government efficiency will be happy to know that for the types of people who can afford $90k solar installs, the tax credits on these things can be insane!

After the claims of the factory “alien dreadnought,” Tesla resorted to building cars by hand… in a tent that had been hastily assembled in the parking lot.

The Boring Company built a tunnel in Las Vegas, the cars go 35 miles per hour, and they have human drivers. The net effect is dedicated Uber lanes, built for $27M a mile.

The Roadster 2 is nowhere to be found, cold gas thrusters or otherwise.

So to return to the “Elon lands rockets, ergo…” problem that I mentioned above, of course if you want to handicap Musk’s ability to deliver any promise, then it makes sense to consider past achievements. But there’s more evidence available than the rocket example.

Although it’s also fair to say that some of Musk’s achievements create the opposite problem for bears. They have to take their mental model where Elon is pure charlatan, and then shoehorn in the fact that he can build a distributed network of electric chargers, or catch rockets out of the air.

But this polarized dissonance among the groups is why I’m writing this piece.

I don’t think you need to struggle to hold these ideas in your head if you just say that Elon is very great at capital markets, and he is very mixed on products.

It’s a simple explanation that will fit all of the facts.

Then if you look at Spacex you can say sure, they are worth nearly half a trillion dollars. They also only have a reported $15B a year in total revenue. And they do catch rockets out of the air. They also blow them to smithereens leaving a debris field scattered over multiple countries. The capital markets side - i.e. raising money for the idea, and then delivering returns to shareholders - is pretty much unprecedented.

I also realize that being able to constantly raise money for an idea is going to help with the underlying engineering problem. But money thrown at a problem is not equal to solving it.

Now What?

To get back to the point I made at the beginning of this post, the reason the bulls have been wrong about the direction of the Tesla business is because they have been overly credulous of the big claims of Elon Musk. The reason the bears have been wrong about the direction of the Tesla stock price is because they have not given enough respect to Musk’s talent for capital markets. When you bet against the stock, you have to consider the possibility that the guy you’re betting against could fake a product reveal in order to beat you.

This brings me to the current state of the Tesla stock and business.

1. The car sales are under increasing pressure.

2. The government money spigot is also under increasing pressure.

3. The robotaxi rollout in Austin does not look like something that will yield a real business any time soon¹⁷.

4. Tesla could be a money losing car company by early 2026.

5. Robots are going to be pretty competitive.

6. It’s conventional wisdom that you can’t short Tesla.

I don’t think that Elon’s response to these storm clouds brewing will be to simply be sad about it. I think he’ll do something.

The short list I can think of is:

1. Just leave Tesla. Declare victory for overseeing the launch of the robotaxi. Claim political bias is the reason to leave, and that car sales will improve without the lightning rod at the top of the company. Kalshi has it at about 12%-ish. It seems lower than that. Maybe 5% or so.

2. Combine Tesla with xAI and promote the combined companies to AI-thirsty retail investors. Musk biographer Walt Isaacson has said that he thinks this will happen. I also think it will happen, although I’m not sure about the timing. I tend to think it will happen when Musk can’t avoid it any longer and he needs the combined “Robotaxis, AI, robots!!!!” stock pump that will solve narrative problems for both companies. It would also be helpful to Musk if the valuation of xAI can be pushed as high as possible, because then the combination will deliver to Musk the ownership share he has said he wants. If it happens I suspect that Tesla stock would trade up in the near term. Then where would pressure on the stock come from? Well all of those narrative dreams are related to actual businesses, which are in pretty competitive fields.

I actually have been trying to think of other alternatives but I just don’t think that Elon’s other moves would address the magnitude of the current problems. For instance, they did just deliver a car to a customer fully autonomously, which is a neat stunt¹⁸. But who cares? You can either operate the robotaxi network you promised, or you can’t. I just don’t think that small time bait and switches will get there.

I’m trying to think about what Elon might do because I am particularly attracted to the fact that conventional wisdom says you can’t short Tesla. The fundamentals of the company would be pretty appealing to short if you weren’t up against Stock Pump Jesus.

I’m still open to other ideas. But whatever he does has to be big…

[I have no idea when you might be reading this post, so it would be impossible for me to say whether I am long, short, or completely out of Tesla as a result of these ideas.]

1. You can actually see in their car lineup that Tesla also thought they would be the Apple of cars. They have a very sparse lineup, but they built enough factories to manufacture about twice as many of these cars as they actually need to. They did not expect to run into diminishing sales as the number grew.

2. Their earnings are about half of Hyundai’s, which has about 1/20th the market cap of Tesla. Hyundai also owns the robotics company Boston Dynamics in case you care.

3. There are a lot of tiny thorny logistical problems with this idea - like are you going to let your car pick up drunk people at night, then hose out the puke before you take it to work in the morning? But we didn’t have to bother with the small problems. Tesla hasn’t solved the big ones.

4. Some bulls were intellectually honest enough to admit that the Apple of cars thesis had failed, and in fact Tesla did need to boost the rest of their long-in-the-tooth car lineup.

5. I do.

6. And they said bipartisanism was dead!

7. If you have paid attention to Musk’s foray into politics then you might recognize the claim that all opponents are paid by shadowy interests. Back in the day the critics were called “fossil fuel merchants of doubt.” I am not aware of any evidence that early Tesla critics were actually paid by the fossil fuel industry. However, these ad hominem attacks of Tesla critics have been going on since it has been a public company.

8. In the early days of TSLAQ - which is the online group of Tesla critics, named Q because a Q gets appended to a stock ticker during bankruptcy - it was much more common to encounter Republican leaning critics. I suspect this was in part due to the subsidies that Tesla relied on, and in part because Republicans are much more likely to be sympathetic to fossil fuels. In fact one of the most outspoken critics, Montana Skeptic, is very much a trad Republican.

9. They probably get together with the fossil fuel merchants of doubt and have unholy pagan orgies to celebrate the internal combustion engine.

10. Before anyone was aware of the scumbag tendencies, Elon asserted without evidence that one of the people involved in the Thai cave rescue was a pedophile. Then he hired a private investigator to go dig up some evidence to cure this unsupported claim. That attempt did not succeed.

11. After more than a decade of wearing the team colors of the left, Elon flipped sides. His comments about the woke mind virus made his earlier attempts to court proponents of DEI and LGBTQ+ groups seem less than sincere.

12. No big deal because the Republican voters in Oklahoma City will buy enough Teslas to offset the lost Dems in Los Angeles… right? Right?

13. Sam Harris has been hated by both the left and the right at various times. Interestingly, Harris’ account of his falling out with Musk includes mention that Musk reneged on a bet… which somewhat undermines the point I make about Musk’s gambling bona fides. Although free rolls are an edge too… so…

14. Most people who started paying attention to Musk after his rightward turn have no idea that at one point he tried to get a Tesla critic fired simply for words that the critic had written about the company. It was the same Montana Skeptic I mention above. There is a stable dynamic in Musk criticism which is that Elon often attempts to invoke a shield as sort of a trump card against critics - i.e. they must hate me because I am so free speech - when his claim to the position he is trying to occupy is dubious at best.

15. I was surprised that anyone believed DOGE could accomplish it’s stated goals, since putting Elon in charge of government efficiency would be similar to putting a fox in charge of hen house security. This is a guy that collected $295 million in government handouts for a battery swap technology the company never offered. The battery swap story was originally broken by Edward Niedermeyer.

16. Hat tip to elonmusk.today for documenting these.

17. They probably have fewer than 20 cars, driving only Tesla influencers, and there are safety monitors in the front seat… also the safety monitors have already had to jump in the driver’s seat… lol…In any case, instead of having a debate about whether Tesla’s approach to autonomy is the right one, we can just pay attention to the rate of change in unsupervised robotaxis on the road. When Tesla increases the number of cars by a lot they will be subjecting themselves to more embarrassing videos, more crashes, more liability etc. So they will only do that when they have the goods. We don’t need to have an endless debate about LIDAR or anything else. We can just watch the rate of change.

18. They have been performing stunts like this pretty much always. Including the “Paint it Black” video which probably qualifies as another faked product launch.