Elon Musk is a charismatic fellow – no question. His desire to “think about the future and not be sad”, as he stated in a recent TED talk, combined with his obvious commitment to turn this goal into a reality is an inspiration that has charmed a lot of people, including investors. It has certainly played a role in boosting the stock price of his EV company, Tesla, which has surged more than 1,800% since the IPO in 2010.
However, this very handsome return for Musk’s faithful followers (an adjective with, in our opinion, appropriate religious overtones) has taken the stock’s valuation to rather extreme levels. Given Tesla has never made a profit, implying a nonsensical infinite PE ratio, most analysts consider other metrics such as market-cap-to-vehicle-sales ratios by which to arrive at a valuation proxy. As outlined in a recent SC Capital research note, based on this ratio, Tesla’s market capitalization is higher than major car manufacturers by a factor of ten – a serious outlier.
Do not get this wrong, one likes Tesla the car. Indeed, one recalls vividly their first time in one. The Parisian taxi driver who picked us up in his new electric ride was more than eager to show us the “ludicrous” acceleration mode – a setting that displayed a nice touch of humour while also being truthful (one had never travelled to Gare du Nord at such speeds before or since). But, liking the car and liking the stock are two different things. Or, at least they should be. This is where the “Musk Magic” comes into play.
Very recently, Tesla’s stock price has come under some downward pressure. In addition to the high valuations, there has been disappointment over Q2 deliveries and renewed concerns about its autonomous driving functionality following a recent crash (Tesla has stated that it has “no reason to believe that the autopilot worked other than designed”) which have offset the positive impetus from strong pre-sales of the new Model 3 entry-level model.
Commenting on the recent move in Tesla’s share price, Musk tweeted the following:
Exhibit 1: A Recent Musk Tweet
This tweet is a very smart move. Why? Because it both acknowledges the current overvaluation of Tesla, so if the stock price slips further Musk can always point out in mitigation that he stated as much, while at the same time providing a compelling narrative as to why the stock price should continue to rise despite current high valuations. He is selling the dream.
Some may well argue that dreams are just fictions and that as such should play little or no role in investment decisions, but they would be wrong. Fictions, or storytelling put another way, are very powerful drivers. In a recent article one discussed the importance of the “narrative fallacy”, but on reading two books (highly recommended), by Yuval Noah Harari – Sapiens and Homo Deus – one realised that one underestimated the important role played by fiction not just in finance but more generally.
As Harari convincingly argues:
“Fiction isn’t bad. It is vital. Without commonly accepted stories about things like money, states or corporations, no complex human society can function.”
However, he also acknowledges that:
“Telling stories is not easy. The difficulty lies not in telling the story, but in convincing everyone else to believe it… Yet when it succeeds, it gives Sapiens immense power, because it enables millions of strangers to cooperate and work towards a common goal.”
It also, as Musk has aptly demonstrated, enables stock prices to overcome the gravity of fundamental valuations and levitate. By convincing everyone that electric cars are inevitable he is helping to create a future whereby his company, Tesla, is a trailblazer and a brand leader, both valuable intangible assets. Whether this is a deliberate ploy by Musk one cannot know, but this doesn’t matter anyway. What matters is whether the rest of the world believes in his version of the future and adjusts their behaviour accordingly. The fact that most other car manufacturers are following Tesla’s lead and developing electric vehicles – Volvo has gone further than most car manufacturers in committing to launch a fully electric or hybrid fleet by 2019 – strongly indicates Musk remains in the narrative driving seat (pun fully intended).
That said, nothing moves in a straight line and presently one is seeing some indications in our crowd-sourced sentiment indicators that public “buy-in” to the Tesla dream is moderating. For a company whose stock price is more impacted than many others by influencing narratives than balance sheet metrics, these trends in crowd behaviour warrant close attention.
Exhibit 2: Crowd-Sourced Sentiment – Tesla
As can be seen in the above exhibit, crowd sentiment towards Tesla bottomed deep in negative territory in August 2016, and then began to rebound sharply. This surge in crowd positivity preceded by a few months a doubling in Tesla’s share price. Interestingly, however, the rebound in crowd sentiment peaked around the turn of the year for mainstream media and a month or so later for social media. The 50% rally in Tesla’s share price since then has not corresponded to further increases in crowd positivity. This slippage sentiment momentum is a warning sign that the recent pullback in the stock price may have further to run.
As to how long, or how far, any correction in Tesla’s share price continues is hard to determine a priori and anyone who tells you otherwise is simply throwing darts at the board with a blindfold on. For us, the most important signal that the downside risks to Tesla’s share price are abating is when crowd Fear – one of the eight primary emotions extracted from the millions of online posts analysed every day – begins to subside.
Looking at the exhibit below, over the past three years there have been two clear spikes (highlighted in red) in Fear sentiment towards Tesla – one in April 2015 and a second in October 2016. The first spike was followed by 35% rebound in Tesla’s stock price, which fully reversed the pullback observed in the final few months of 2014. The second spike peaked a few weeks before the 50%+ rally that saw Tesla hit a new record high. For now, crowd Fear towards Tesla is moderate (but edging higher), suggesting that one is not yet at the point where sentiment conditions are signalling upside potential.
Exhibit 3: Crowd Sourced Fear Sentiment – Tesla
Although one has largely focused on Tesla on this note, it being the easiest way for investors to bet on Musk, his interests clearly go beyond electric cars. In addition to his well-known SpaceX interplanetary project, Hyperloop, SolarCity, The Boring Company (great name) in December 2015 he established – together with Sam Altman of Y Combinator fame – a non-profit AI research company, OpenAI. Given the high degree of interest in artificial intelligence, one should share a few recent thoughts on the subject.
Assuming, of course, Musk is not attempting to use it to build a Matrix-like alternative reality computer simulation that he believes the chance of us NOT living in is “one in billions”, his motivation for this venture is publicly expressed concerns about artificial intelligence. Specifically, how it will evolve and the risks associated with such technologies being concentrated in the hands of a small number of elites (be they individuals, governments or companies). It is, in other words, just another manifestation of his “think about the future and not be sad” goal.
Musk’s concerns about the impact of artificial intelligence (especially when combined with robotics) are not unique to him. They are widely shared and with good reason. One wholeheartedly concurs with the dramatic economic and political implications that could well arise from the increased application of artificial intelligence, a transition that the global populace seems to be very ill-prepared for. The incredible strides in applying artificial intelligence to solve complex problems will put many jobs at risk, particularly those whose main tasks are repetitive or can be systematized to a high degree. (That is a lot of jobs and will almost certainly require very interventionist fiscal transfers – quite possibly via the establishment of universal basic income.)
That said, when thought about at a higher level these new AI applications, impressive though they may be, really only to seek to answer one question – how? For AI to become really powerful and hence a challenge/threat to humanity in the way that the Musks of the world are concerned about – and which would jeopardise the long-dreamed about utopia of the Jetsons – AI systems have to evolve to such a degree that they are able to ask and seek answers to the questions – what? and why? This what people mean by the concept of Artificial General Intelligence or Strong AI.
As/when/if this occurs it will be a life-changing event in its truest meaning. Thankfully, for us humble carbon-based intelligence forms these are much deeper fundamental questions that are difficult, if not impossible, to answer based solely on the application of logic or scientific methods more generally. Beyond this boundary, one necessarily moves into the realms of philosophy and ideology. This is something that probably requires consciousness – a state that one knows very little about and where progress in one’s understanding has been limited despite the best efforts of neuroscientists to analyse the cerebral cortex.
Perhaps, in the end, it is our consciousness rather than our consciences – or Elon Musk – that saves everyone.