A lot has been said about the electric car company Tesla, and its high profile founder and CEO, Elon Musk over the past several years. Some say Musk is a genius; others say he’s a fraud. But regardless of their opinion, the reality is that if Musk can make Tesla a success — and avoid going through a Chapter 11 Bankruptcy filing along the way — he would have to be considered to be among the most elite businessmen in American history.
For all practical purposes, Tesla created the electric car industry. Yes, several of the big three American car companies (as well as many foreign manufactures like Toyota and Honda) had already launched hybrid vehicles prior to Tesla being formed in 2003, and there were even a few half-hearted efforts by some of these companies to launch fully electric vehicles around that time. Yet, most of these were nowhere near practical in terms of power, range, performance or any other factor a real buyer would consider. Rather, they were more along the lines of research projects and publicity stunts — until Tesla came along.
What Musk did was to make the electric vehicle a reality, both in terms of a meaningful product, and in terms of the entire ecosystem (including revolutionary developments in terms of the energy density of the lithium batteries) needed to support that product. In doing so, he forced the rest of the automotive industry to follow suit, and undoubtedly accelerated the progress in the EV space by several years, and maybe by as much as a full decade.
Despite this, lots of people have been betting against Tesla and Musk. The stock has consistently been one of the most shorted stocks on the market, not just by retail investors, but also by heavyweight hedge fund managers like David Einhorn (Greenlight Capital), Jim Chanos (Kynikos Associates) and plenty of others. Of course, Musk’s public battles with (and Tweets against) these short sellers are stuff of legend.
Although Tesla’s lead in the EV space was undoubtedly strong as recently as a few years ago, it has clearly dissipated over the last few years with Honda, Toyota, Ford, GM and even Porsche introducing a host of electric vehicles. Combine this with production problems over the past year, a decrease in demand, layoffs, losing key people to competitors, price cuts and other factors, it is clear that Tesla is obviously in trouble. Musk himself acknowledged as much when he recently sent an internal memo citing the possibility that the company could run out of cash within the next year, even after their recent $2.7 billion capital infusion.
This, of course, has created a frenzy in the stock market, and over the past week, several articles bashing Tesla have appeared in various the financial journals, including Barron’s (https://www.barrons.com/articles/tesla-stock-gm-electric-cars-51558660373) and this one in Bloomberg (The Bursting of the Tesla Stock Bubble), along with dozens of others. At the same time, most major equity analysts who follow the stock (including several perma-bulls) have cut their price targets significantly, in some cases to as low as $10 per share, while many others consider bankruptcy inevitable.
While I have not done nearly enough research on the situation to offer an opinion either way, the key takeaway that I would like to convey here is that bankruptcy is NOT the end of a business; in fact, more often than not, for larger companies, it really is nothing more than a new beginning. I know this because not only have I invested in the securities of distressed companies at distressed prices only see to those securities double or triple in value, but I’ve also worked in the restructuring industry as an advisor to some major corporate bankruptcies at some of the most prestigious firms on Wall Street. Sure, in some cases like Toy’s R Us, the bankruptcy ends up as a liquidation and the company is gone forever, but in plenty of others, the Chapter 11 process is merely a restructuring of the ownership of the company and the amount and form of the outstanding liabilities.
Furthermore, the harsh reality is that virtually every major capital-intensive project over the past two centuries that is disruptive to their industry or era has fallen victim to a Chapter 11 bankruptcy, not because the business itself was not viable, but because the cost of the transformation they were undertaking was far more than they had expected, and the capital structure of the project was simply not sustainable. This includes virtually all major railroads and airlines, the Eurotunnel project, the Iridium satellite network, numerous mega casinos in Las Vegas, Atlantic City and internationally, nuclear energy projects, solar energy projects, so many major oil and gas projects, and a host of others. Not to mention the General Motors and Chrysler bankruptcies during the recession of 2008–2009.
The truth is that if Musk can get through the next few years without going through a Chapter 11 process to relieve the over $10 billion of debt he has accumulated, he will have truly earned his place in business history along with Andrew Carnegie, Nelson Rockefeller, Charles Schwab, and so many others. However, regardless of what happens to the company, Musk should be hailed as a visionary for launching the electric car industry, as well as championing the development of lithium batteries with energy densities orders of magnitude greater that what had existed before. Either way, his contributions to society are truly admirable, and the more entrepreneurs we have with big dreams, the better off we’ll all be in the long run.