A Balkanisation threat for the Muskonomy

Elon Musk wants you to know he’s a bit bored of cars. He built a ridiculous one but it didn’t make him happy. He turned the EV industry pacesetter into a mass-market producer of generic-vehicle-shaped-objects, which didn’t make him happy. He put the world’s most valuable marque on knick-knacks for the purpose of owning the libs, and it didn’t make him happy.

What might make him happy? Is it money? Per MainFT:

Elon Musk’s xAI is in talks to raise up to $6bn, as the Tesla and X chief looks to global investors, including in Hong Kong, to finance his challenge to Microsoft-backed OpenAI.

The billionaire’s artificial intelligence start-up has courted wealthy individuals and investors around the world in recent weeks, according to multiple people familiar with the matter.

According to four people, these talks have included family offices in Hong Kong, the territory that is increasingly controlled by Beijing.

Three people with knowledge of the talks said Musk hoped to raise as much as $6bn in fresh equity capital for xAI at a proposed valuation of $20bn. However, the people cautioned that negotiations were ongoing and that the Tesla chief was still testing investor appetite for such large sums.

The xAI fundraising runs parallel to Musk’s discussions with the Tesla board over whether his stake in Tesla is big enough to keep his interest.

What happened was that Musk cut his Tesla stake to 21 per cent (including unexercised stock options) by selling $38bn in stock over the past three years, much of which he spent on a vanity website. Now he’s “uncomfortable growing Tesla to be a leader in AI & robotics without having ~25 per cent voting control.”

Where does that leave the Muskonomy, the joined-up vision of Tesla as an alpha nerd-powered zeitgeist conglomerate? The term was coined by Morgan Stanley analyst Adam Jonas, who wrote in December 2021:

What do EVs, autonomy, Dojo, energy storage, solar, Giga-press, humanoids, rockets, sats, tunnels, and brain implants all have in common? If we had to boil it down to one thing, it’s Elon Musk’s desire to colonize Mars. In the process, many of these projects may change how we live life on earth. We think the more investors appreciate this, the more events over the next 12 to 24 months will make sense.

Events over the next 12 to 24 months did not make sense — though Morgan Stanley is reported to be co-ordinating the xAI fundraising, having led the financing group for Musk’s 2022 leveraged buyout of Twitter, so perhaps they use a different definition in 1585 Broadway Avenue.

Let’s cut to Tesla’s Q4, where the carmaker followed a warning of “notably lower” volume growth in 2024 with a conference call that offered investors nothing. There was almost no useful guidance on financials and few reassuring platitudes offered around Musk’s demands for control.

Instead, Musk explained that keeping his attention on Tesla would be for the good of humanity, as it would limit the chance of interference from corporate governance sticklers like Glass Lewis and ISS (“I call them ISIS”).

Twenty-five per cent of voting rights was the right level because it’s enough to repel activism, but “even if I go bonkers and if I’m, like, mad, they can throw me out,” he explained:

I see a path to creating an artificial intelligence and robotics juggernaut of truly immense capability and power. And my concern would be, I don’t want to control it. But if I have so little influence over the company at that stage that I could sort of be voted out by some sort of random shareholder advisory firm.

Trying to get a measure of the AI and robotics juggernaut is tricky. Very little has been communicated through regulatory channels and on most subjects Musk is a free-form improviser.

Here’s what he said when asked about Dojo, Tesla’s plan to make its own AI chip, which Jonas says might be worth $500bn to the company’s enterprise value even though it’s never been mentioned in an SEC filing:

Yeah. GPU is a funny word, like vestigial. [ . . . ] And we’re pursuing the dual path of Nvidia and Dojo. But I would think of Dojo as a long shot. It’s a long shot worth taking because the pay-off is potentially very high. But it’s not something that is a high probability. It’s not like a sure thing at all. It’s a high-risk, high-pay-off program.

Dojo is working, and it is doing training jobs, and we are scaling it up, and we have plans for Dojo 1.5, Dojo 2, Dojo 3, and whatnot. So I think it’s got potential, but I can’t emphasise enough. High risk, high pay-off. So I think it still makes sense given the — even if it’s a low probability of success — I’m laboring the subject. It’s a very interesting program. It has the potential for something special.

On Optimus, Tesla’s prototype helper robot, Musk said it was “an extremely revolutionary product, and something that I think has the potential to far exceed the value of everything else that Tesla combined”. Leaning into the theme, he then said Optimus “has the potential to be the most valuable product of any kind ever, by far.”

Work needs to be done to remove the risk of bad actors uploading malware to Optimus (other executives tried unsuccessfully to steer Musk away from talking about Westworld) but apparently, there’s “a good chance of shipping some number of Optimus units next year.”

Add that one to the list.

Musk’s commentary on things already available was more muted. Progress has been slow on licensing software to other carmakers (“I think they don’t believe [full-self driving is] real quite yet”) and there was no urgency to improve hardware, because current installations are already “quite far ahead of any other company in the world in terms of AI and inference efficiency.” He played down the chance that Tesla will host another AI day, claiming rivals used its last one in September 2022 to steal its “secret sauce”.

The only forecast-relevant guidance came not from Musk but from Vaibhav Taneja, chief financial officer, who said that “to lay the foundation for the next phase of growth”, capital expenditure in 2024 would be “in excess of $10bn”. Previous guidance was for $7bn to $9bn, but it seems mystery boxes are expensive to make.

The stock’s 12.1 per cent drop on Thursday leaves Tesla valued at $572bn, which is still equivalent to about 44 times next year’s earnings. But look at the structure the right way, Musk says, and the market cap might be approximately 400 per cent too low:

Ultimately if we execute on all these things, and it is very hard to do all these things, it’s not a sure thing. But I do see a path where Tesla could one day be the most valuable company in the world. I do emphasise that is not an easy path and a very difficult one, but it is now in the set of possible outcomes and previously I would not have thought it is in the set of possible outcomes.

That’s so long as the moonshots and vapourware stay inside Tesla. But with no detail given what capex is being spent on it’s hard to know how clearly the corporate borders are defined.

“We have confidence in the Tesla team’s ability to spend capex and R&D efficiently in projects that can derive high-growth/positive economic returns,” said Morgan Stanley’s Jonas. “However . . . 

considering investors confront 2024 without any real tangible guidance underpinnings, rising spending levels contribute to the downbeat narrative. [ . . . ] Until Tesla can restore confidence in the growth outlook or can introduce tangible evidence of its real-world AI potential, the stock may continue to test lower near-term trading levels.

So yeah. It’s an interesting moment to be talking to investors about raising $6bn for another Tesla-adjacent side hustle. But at this stage, who’s going to stop him?

Though as a post-publication postscript we are obliged to note:

Further reading:
— Putting a price on Tesla post Musk (FTAV)
— The Tesla financial complex (FT)