Discover more from Margins by Ranjan Roy and Can Duruk
Elon's Giant Package
A mini-grand theory on what he's up to with Twitter
Ranjan here. As we enter what seems to be week 6,942 of the Musk-Twitter reality show, I’m going to try to present a theory on what he’s really up to. I’ll admit, when this saga started I assumed Elon’s intentions were just shitpost performance art. However, the more you look at the Twitter take-private in the context of Tesla, the SEC, and the current overall market, it does feel like it’s part of a bigger plan.
As I go to publish, I see Twitter-Elon might be a done deal. This post is certainly a bit speculative and rambling, but here goes.
A running theory of mine is that, in January 2018, Tesla ceased to be an electric vehicle company and transformed itself into a financial vehicle of sorts. That was when Tesla’s board announced a new pay package that was called “audacious” and “breathtaking.” This NYTimes headline captured it.
Musk would bet his entire compensation on hitting very specific milestones. One layer of milestones was purely on increasing the market cap of Tesla. The other was around revenue and Adjusted EBITDA. This Fortune piece is the best breakdown I’ve read that outlines the exact potential scenarios (the image below is from the SEC filing):
There were 12 total tranches to be unlocked that required a combination of market cap increases and other operational results. Let’s remember, this was only four years ago and Tesla was worth around $60 billion, and Musk’s net worth was around $12 billion.
The idea that the company would 11x its market cap was called ‘laughable’:
If Mr. Musk were somehow to increase the value of Tesla to $650 billion — a figure many experts would contend is laughably impossible and would make Tesla one of the five largest companies in the United States, based on current valuations — his stock award could be worth as much as $55 billion (assuming the company does not issue any more shares over the next decade, which is unrealistic).
The package was so aggressive that in the summer of 2018 there was a shareholder class-action lawsuit over it that is going to trial soon, yet now it’s almost complete.
One can certainly draw a hero’s journey to draw from this. In early 2018, when that comp package was agreed to, there was plenty of doubt whether Tesla could scale its manufacturing capacity. Elon has repeatedly said Tesla was on the verge of bankruptcy, yet over the next months and years, Tesla stabilized and grew. It went from producing around ~90k cars a quarter in 2018, to nearly 300k last quarter. Revenue ~5x’ed from~ $12 billion to $54 billion. It produced nearly 1 million cars in 2021.
Something else happened at the same time. The stock price went to the moon and blew through market capitalization tranches that seemed impossible. There are two charts I look at when thinking about Tesla’s recent history. One that made Elon a ‘very rich guy’ and the next that made him ‘world’s richest human’.
The first was the stock move from mid-2019 to Feb 2020, right before the pandemic. This was the normal “Tesla is a company that will be an EV market leader” move. The company had shown it wasn’t going to collapse. It was becoming more clear the SEC wouldn’t really hammer down on Elon, even after the Sept 2018 settlement. Musk was making gigantic promises, like 1 million Tesla robotaxis operational by 2020.
Big promises coupled with near-term operational results made for a solid combination, and the stock more than doubled from when the pay package was set. In any normal market this would be…fine. This was the “normal company stock rise”.
Then March 2020 hit, and like so much else, things got crazy.
The stock jumped almost 1000% in a matter of months. Yes, the company was growing reasonably well, but the degree of the move will certainly be studied for years to come. This was also the time we started seeing TSLA stock splits and Cathie Wood touting touting wild price targets. You started to constantly hear “Tesla is actually a battery company” or “Tesla is also an insurance company.” It’s always easy to back a story into a stock price.
Sure, the early phase of the pandemic was the stupidest, most amazing time ever for markets. We had our Zooms and Shopifys and AMCs and Gamestops, and every other story we’ll never forget. But none of those stories had an audacious underlying pay package that would create the world’s richest man.
A Grand Theory of Early 2022 Elon
Can we all just take a moment to together process how wild this is - just two years after crafting the boldest pay plan ever, in a span of nine of the most wild, chaotic months for both society and financial markets, Elon became the world’s richest person (Note 1). This has to be the most rapid accumulation of wealth in human history (are there any historical equivalents, maybe a Sumerian king or something?)
And this sets the stage for my mini-grand theory on what is happening right now with the Twitter acquisition:
Musk recognizes his Twitter account and unfettered access to it are vital to his current and future business interests.
He also wants to neuter the SEC.
The pay package is near completion and it’s time to think about the next one.
He knew Q1 would be a banger for TSLA. It’s always nice to make a play from a position of strength.
But this might also be the rosiest time ever for Tesla.
And even if Tesla stays on a roll, it’s difficult to imagine significant upside for TSLA, the stock.
Musk going after Twitter is not about distraction; it’s diversification. The past few months have all been Elon putting together the pieces for what’s next, and he’s doing it from a position of strength. It’s like a super-charged Solarcity acquisition, where varying business interests will converge in unexpected ways. We just learned Musk was registering properties to make a “super-company” called X Holdings.
Twitter is all about what comes after Tesla. What it exactly looks like, I have no idea, but it’s important to at least ask why is this all happening right now.
Theory Element #1 - Tweeting is Existential
Okay, we all know he tweets a lot but this first piece starts with how much Musk tweets per month. I found this dataset on Kaggle for all Elon tweets by month from 2010 to March 2021:
The first thing that jumped out was that spike in the spring of 2013. A quick search led to headlines like “Tesla stock up 40% this week” from CNN in May 2013. Then, in the summer of 2018, you see a manic spike in tweeting behavior, from which we never look back (Note 3).
Elon has since paid fines over his tweeting. He had to get a Twitter baby-sitter. Through it all, he never stopped tweeting. Ever since the Spring of 2013, it was clear Tesla’s business results and Musk’s tweeting could have a self-reinforcing impact, and that virtuous cycle only became more clear in recent years. Shortly after Musk signed his giant package, the really high-volume tweeting began, and the rest is wealth accumulation history.
It’s conventional wisdom that Musk’s Twitter account transforms the unit economics of Tesla by allowing zero expenses on conventional brand marketing and PR. But the power of his tweeting also lowers his cost of capital, drives corporate partnerships, muscles regulatory pressure, is a recruiting tool, and touches every other element of Tesla, the business (not to mention every other business interest he owns).
Elon understands his access to tweeting is existential to every element of his business. It’s the difference between him being Phil Knight or Michael Dell-rich, to becoming the richest person in the world in nine short months.
Nothing works without his Twitter account.
Theory Plank #2 - Kill the SEC
In early March, I was ranting that it was very odd that Elon Musk was escalating his battle with the SEC. Tesla’s business was as solid as ever and the SEC had been completely hands-off. My hot take at the time was maybe there was a threat of Musk being deplatformed by the SEC, and this was all pre-emptive.
We’ve since learned the timing at least confirms something very strategic. Elon started buying shares in TWTR at the end of January. At same time, he began this legal escalation with the SEC. One involved SEC filings while the other involved lengthy legal motions, but they were both happening in exact parallel.
I believe a large part of this is Elon making a move to make sure his Twitter account cannot be limited, and certainly, never banned.
He’s already argued the SEC was limiting his free speech when it ‘restricted’ his tweeting. He’s concurrently framed the entire purchase of Twitter under some nebulous vision of free speech. From both a timing and strategic perspective, the two moves almost certainly had to be done in tandem.
There once was the possibility the SEC could become far more aggressive in controlling Musk’s account. Judgments were being passed and things were getting hairier for Elon. If someone used their Twitter account to repeatedly break securities laws, it still doesn’t strike me as a stretch regulators would revoke your access.
After the past few weeks, can you imagine the public outcry if regulators tried imposing any limits at all? Even if he doesn’t end up owning Twitter, could you imagine Ron DeSantis if Elon was forced to take down a tweet? Now just imagine he does end up owning Twitter and taking it private. Musk can break every securities law related to public communication ever invented, and at worst, he’ll be fined relative pennies. If the GOP wins back Congress, could you imagine any regulator going after Elon if he reinstates Trump?
If Twitter is existential to his overall business interests and his account feels threatened in any way, $46 billion for Twitter is a bargain for maintaining, and increasing, his $270 billion net worth.
Theory Element #3 - The Next Package
Tesla just had an amazing Q1 earnings report, and it unlocked compensation tranches 9 to 11 of the original 12. Longtime Tesla bulls like Dan Ives are already dreaming about how giant the next package might be and this is critical - everyone has to be thinking about the next compensation package.
For the next iteration, Musk’s path to trillionaire is likely not through Tesla or TSLA. Just think about how many things have worked out perfectly for TSLA over the past few years:
The regulatory climate under Trump was non-existent (yet, even then, the SEC went after him). Now the NHTSA, the NTSB, the SEC, and even the FTC are all looking to become more aggressive. Even regarding public opinion, the entire regulatory climate has changed.
The COVID bump and entire memestock climate driven by ZIRP and a million other factors is done with.
There was virtually no true EV competition a few years ago. Now, Ford has already beaten Tesla in delivering a truck, and it’s clear every other car company is moving quickly.
Tesla has shown an amazing ability to extract free cash flow from its customers. It received an estimated $2 billion in pure cash from people paying for a Full Self-Driving subscription, and even millions in cash infusions from Cybertruck and other unfulfilled vehicle deposits.
It’s still receiving $1.5 billion in regulatory credits from other auto companies. All these channels of pure profit can’t last forever.
Elon Musk has managed to walk the tightrope with the Chinese government but this certainly won’t last forever and they will start promoting domestic competitors (this WSJ piece and this Bloomberg piece are great on the topic).
Tesla is not a monopoly. The company could very likely hit a few million cars, stay a key EV player in the years to come, but the stock could still remain trading sideways. This Q1 feels like a high point where everything came together, perfectly. Musk knew this would be a blowout quarter, and started putting in motion some kind of plan in January.
Theory Element #4 - The Imagination Deficit
In 2019, when Musk was promising robotaxis in a year, it really captured people’s imaginations. Nowadays, it just doesn’t feel like anyone other than Cathie Wood & team are pretending to take those magical, futuristic business lines seriously (yes, ARK’s new model says robotaxis will be 62% of total Tesla revenue by 2026).
Even that whole dancing robot thing showed the difficulty of capturing our collective imagination. For those unfamiliar, last November Tesla announced a humanoid robot thing. The presentation ended with a guy in a robot suit dancing (yes, this is real):
On the recent earnings call, Musk gave a half-hearted statement about how this theoretical line of humanoid robots could be worth more than electric vehicles for Tesla. The whole thing has honestly felt a bit routine. I’ve watched this stuff for years, and maybe it’s overall Elon-promise fatigue, but a lot of these moonshot proclamations have started to feel a bit throwaway - from Elon, from the fanboys, from the press, from the entire infrastructure that once was manic over them.
However, the Twitter thing really lit a fire. Maybe Musk was really going to join the Board and be a cooperative part-owner, but the moment he saw the energy the potential purchase generated, he went all in. Musk buying Twitter has generated the conversational energy that rockets and robots once did.
Theory Element #5 - They’re already selling
All great entrepreneurs are always thinking about that next channel of growth. Elon has incredible entrepreneurial instincts, and he has to recognize it won’t come from Tesla. Whatever compensation scheme is concocted, there will never be another confluence of factors that can come together to prop up TSLA and reward Musk in the way that he was.
And here’s the thing - they’re already selling TSLA. Elon sold $16 billion of the stock last year (some of it would’ve been to pay taxes on options, but he did minimize that bill with a $5.7 billion donation to charities that remain unnamed). It’s not just Elon. His brother Kimbal sold a bunch at $1229 and is now under investigation for insider trading for the transaction.
Cathie Wood and ARK are selling too. While putting out a report with a price target of $4,600 for TSLA, they’ve been taking profits and trimming their TSLA position in their flagship ARKK fund from almost 4 million shares to less than 1 million. One of the biggest cheerleaders for Tesla is publicly saying the stock will quadruple, while cutting their holdings by 75%.
And you can’t blame anyone for selling. When a stock is up 1700% (from Jan 2018) and facing an onslaught of legal, competitive, and internal challenges, it’s certainly okay to take profit.
My mini-grand theory is that this entire sequence of events: The Twitter purchase, the SEC escalation, Tesla’s blowout quarter - it’s all about the next giant package. Musk saw an opportunity at the beginning of the year. Tesla’s business was on a roll, his pay package was almost complete, the SEC was threatening his Twitter account, and Tesla’s stock had stalled out for six months. Every great entrepreneur understands the importance of momentum and he decided to capitalize on this confluence of events.
At first, I was skeptical Musk was serious about buying Twitter, but I’m genuinely starting to believe it’s part of a larger strategy. We’re starting to see more pieces. The potential new “super-company”. He just raised a bunch of money for the Boring Company. Twitter is now both a potentially undervalued financial asset, a political asset, and a marketing tool. I think we’ll soon see something incredibly audacious, and breathtaking pay package that is far more creative and corporate boundary-crossing than what we saw in 2018.
Note 1: It’s always weird to me how casually news stories drop in the “world’s richest man” detail.
Given how journalists excitedly parse every Elvis lyric or even fire emoji tweets at length, it still blows my mind that no one touched the most rapid accumulation of wealth in human history. Just read this cut-and-paste piece from Jan 7, 2021 from the NY Times, and think about it relative to the endless typing taking place over the past few weeks.
Note 2: The dataset I used only had Musk tweets and didn’t include replies. Given how integral the stan elevation reply technique has become for Elon, I’d be really curious if anyone has this data.
Note 3: My writing and ranting has often led to me being labeled an Elon-hater, but for me, he’s the embodiment of “don’t hate the player, hate the game.” It’s the game, with it’s lack of regulation, the emerging market-ification of U.S. financial markets, the weakness of traditional journalism to hold the unconventional to account, and so much more that I hate. I really believe Elon is doing what most entrepreneurs would do, and he’s doing it well. Why stop if no one is stopping you?