2022 has not been kind to Musk’s Tesla. Exxon is catching up

JUST TWO MONTHS AGO, Elon Musk speculated that Tesla, Inc. would eventually be worth twice as much as Saudi Arabian Oil Co. — AKA Saudi Aramco, AKA the biggest listed company in the world with a market capitalization (then) of $2.1 trillion. As it turns out, the more relevant comparison is with a somewhat smaller oil major.

The symbolism of Tesla’s electrified market cap surpassing that of Big Oil stalwart Exxon Mobil Corp. in June 2020 was inescapable. By the beginning of this year, Tesla was 350% bigger than Exxon. Yet a lot has happened in the intervening (almost) 12 months and especially the last (almost) two months. Russia invaded Ukraine, sending oil markets crazy (good for Exxon). And then Musk invaded Twitter, Inc., sending everyone crazy (not so good for Tesla). On Thursday evening, the platform hosted yet more convulsions as Musk suspended the accounts of several journalists on dubious grounds and deployed, with his unique phrasing, the term “assassination coordinates.”

Today, Tesla is only 16% bigger than Exxon. The symbolism can be overplayed. Oil consumption didn’t end in 2020 and electric vehicles (EVs) aren’t heading into the ditch today. Across those 30 months, however, it is worth noting that Exxon’s rehabilitation owes something to the unlikely success of an activist fund. Engine No. 1 LLC capitalized on investor disenchantment with Exxon’s high spending and weak returns to force board and strategy changes. Oil’s revival explains much of Exxon’s rally since then, but renewed capital discipline has also been crucial. The stock hit an all-time peak last month.

Under normal circumstances, one might entertain the possibility of an activist tilting at Tesla today. About $740 billion of value has evaporated in the course of just over a year. The chief executive, for all his genius reputation, overpaid for Twitter, tried to wriggle out of the deal, and then was forced to buy it. Along the way, he has sold a ton of Tesla stock and may yet leverage some of his remaining stake to refinance Twitter’s debt. He also risks burdening Tesla’s brand with his seemingly pathological desire to provoke on the platform. Musk has often boasted that Tesla never pays for advertising and it is now perhaps getting more free advertising than ever — just maybe not the best kind. That is particularly unhelpful at a time when Tesla is suddenly having to do what ordinary carmakers have always done: ease off production and offer incentives to manage softer demand. Meanwhile, long-laggardly rivals are now launching highly-regarded electric models of their own.

But Tesla isn’t Exxon. Exxon has a functioning board of directors with which to engage and, while he wields considerable power, no-one would say the company’s fate is tied inextricably to that of its Chairman and CEO Darren Woods. Don’t get me wrong: Tesla does have a board. But the fact that, apart from Musk himself, the longest-serving member on that board is his own brother rather says it all.

While Musk’s stake in the company has been reduced to about 13%, that number is mostly irrelevant. He is synonymous with Tesla. Belief in his genius has played a crucial role in Tesla getting to where it is; he’s celebrated when the company succeeds and deployed in the face of any setback. Musk is simultaneously Tesla’s greatest asset and gravest risk. Besides inviting the inevitable online backlash, any activist seeking to change Musk’s mind would be on a fool’s errand anyway. And any activist seeking to actually remove him would have to ask: How much is an electric car maker shorn of Musk’s aura really worth?

This gets at the real problem facing Tesla investors today. The ratio to Exxon is, symbolism aside, meaningless; the more pertinent consideration is how Tesla’s valuation compares to the wider market. The wipeout in Tesla’s stock this year reflects a collapse in its forward price/earnings multiple from more than 130 times to 29 times. That has taken the stock’s premium to the S&P 500 down from 524% to 70%.

So, cheaper. Tough to call a 70% premium cheap, though; the aura is dimmed but still quite bright. I can’t see Warren Buffett swooping in at these prices, put it that way.

You know who else isn’t swooping in? Musk. We are just two months on from him holding out the prospect of Tesla’s valuation swelling to more than $4 trillion, and it has since shrunk to more like one eighth of that. And yet Musk chose this week — just ahead of a cloudy quarter ending, note — to dump another $3.6 billion worth of what should be, by his logic, an ever more undervalued stock. Should Tesla’s shareholders decide to take him at his deeds, rather than his words (or tweets) that premium still has ample room to fall further.

BLOOMBERG OPINION