Elon Musk – Why Being An Investor And Businessman Are Joined At The Hip by Jae Jun, Old School Value
“I am a better investor because I am a businessman, and a better businessman because I am an investor” – Buffett
If value and growth are joined at the hip, so is being an investor and businessman.
Most investors focus on stock prices to base their decisions, but when you look at what really drives a company, it’s not earnings or stock prices.
It’s vision and execution which in turn drives cash which drives stock price.
And when you can get beyond the dance that Mr Market pulls on the dance floor, that’s when true investors really shine.
All masters in my mind.
And I bring this up because I just finished a biography on Elon Musk (Elon Musk: Tesla, SpaceX and the Quest for a Fantastic Future) because I wanted to discover what I couldn’t see in his businesses. What is the vision and story that everyone is so compelled with, who is the man driving Tesla and SpaceX?
But one part that I wanted to share quickly was that at the very end, in the appendix, there is an email Musk sent to SpaceX employees addressing grumblings about the company not going public.
And it’s the same mindset that a value investor should have when it comes to the market and investing in businesses.
I’ll let you read it for yourself.
Here’s the excerpt from Ashlee Vance’s biography – Elon Musk: Tesla, SpaceX and the Quest for a Fantastic Future.
Elon Musk’s email to SpaceX employees regarding taking the company public
From: Elon Musk
Date: June 7, 2013, 12:43:06 AM PDT
Subject: Going Public
Per my recent comments, I am increasingly concerned about SpaceX going public before the Mars transport system is in place. Creating the technology needed to establish life on Mars is and always has been the fundamental goal of SpaceX. If being a public company diminishes that likelihood, then we should not do so until Mars is secure. This is something that I am open to reconsidering, but, given my experiences with Tesla and SolarCity, I am hesitant to foist being public on SpaceX, especially given the long term nature of our mission.
Some at SpaceX who have not been through a public company experience may think that being public is desirable. This is not so.Public company stocks, particularly if big step changes in technology are involved, go through extreme volatility, both for reasons of internal execution and for reasons that have nothing to do with anything except the economy. This causes people to be distracted by the manic-depressive nature of the stock instead of creating great products.
It is important to emphasize that Tesla and SolarCity are public because they didn’t have any choice. Their private capital structure was becoming unwieldy and they needed to raise a lot of equity capital. SolarCity also needed to raise a huge amount of debt at the lowest possible interest rate to fund solar leases. The banks who provide that debt wanted SolarCity to have the additional painful scrutiny that comes with being public. Those rules, referred to as Sarbanes-Oxley, essentially result in a tax being levied on company execution by requiring detailed reporting right down to how your meal is expensed during travel and you can be penalized even for minor mistakes.
Yes, But I Could Make More Money If We Were Public
For those who are under the impression that they are so clever that they can outsmart public market investors and would sell SpaceX stock at the “right time,” let me relieve you of any such notion. If you really are better than most hedge fund managers, then there is no need to worry about the value of your SpaceX stock, as you can just invest in other public stocks and make billions of dollars in the market.
If you think: “Ah, but I know what’s really going on at SpaceX and that will give me an edge,” you are also wrong. Selling public company stock with insider knowledge is illegal. As a result, selling public stock is restricted to narrow time windows a few times per year. Even then, you can be prosecuted for insider trading. At Tesla, we had both an employee and an investor go through a grand jury investigation for selling stock over a year ago, despite them doing everything right in both the letter and the spirit of the law. Not fun.
Another thing that happens to public companies is that you become a target of the trial lawyers who create a class action lawsuit by getting someone to buy a few hundred shares and then pretending to sue the company on behalf of all investors for any drop in the stock price. Tesla is going through that right now even though the stock price is relatively high, because the drop in question occurred last year.
It is also not correct to think that because Tesla and SolarCity share prices are on the lofty side right now, that SpaceX would be too. Public companies are judged on quarterly performance. Just because some companies are doing well, doesn’t mean that all would. Both of those companies (Tesla in particular) had great first quarter results. SpaceX did not. In fact, financially speaking, we had an awful first quarter. If we were public, the short sellers would be hitting us over the head with a large stick.
We would also get beaten up every time there was an anomaly on the rocket or spacecraft, as occurred on flight 4 with the engine failure and flight 5 with the Dragon prevalves. Delaying launch of V1.1, which is now over a year behind schedule, would result in particularly severe punishment, as that is our primary revenue driver. Even something as minor as pushing a launch back a few weeks from one quarter to the next gets you a spanking. Tesla vehicle production in Q4 last year was literally only three weeks behind and yet the market response was brutal.
Best Of Both Worlds
My goal at SpaceX is to give you the best aspects of a public and private company. When we do a financing round, the stock price is keyed off of approximately what we would be worth if publicly traded, excluding irrational exuberance or depression, but without the pressure and distraction of being under a hot public spotlight. Rather than have the stock up during one liquidity window and down during another, the goal is a steady upward trend and never to let the share price go below the last round. The end result for you (or an investor in SpaceX) financially will be the same as if we were public and you sold a steady amount of stock every year.
In case you are wondering about a specific number, I can say that I’m confident that our long term stock price will be over $100 if we execute well on Falcon 9 and Dragon. For this to be the case, we must have a steady and rapid cadence of launch that is far better than what we have achieved in the past. We have more work ahead of us than you probably realize.