Blue-Sky Bias

The power of the narrative and questions of credibility at Tesla

December 31st, 2017

By Scott McFarland

Part 1.1: Introduction

Elon Musk’s Tesla, Inc. has bravely pioneered a clean energy revolution, drawing in the majority of major car producers to rush into designing electric vehicles. High hopes for the company’s future are focused around the belief that Tesla will dominate the electric vehicle market and other areas of sustainable energy. While product innovation has led to excitement, the overwhelming optimism surrounding the future of the company is largely built on confidence in Elon Musk’s ability to innovate and solve complex social problems. The CEO’s loudly promoted and ever-changing clean energy vision, as partially outlined in Tesla’s “Master Plans” one and two , has spurred aggressive optimism and speculation over the company’s outlook. Musk is not hesitant to think big, and through his unique ability to captivate and tell a good story, has ensured that continuous hype and suspense over Tesla’s next big idea remain a constant.

As a public company followed closely by the investing community and receiving significant media coverage, a crucial area usually ignored in assessing Tesla’s likelihood of long-term success is credibility of management. Although optimism surrounding the company is largely based on the distant future, one can look to the past at Tesla management’s history to extrapolate and determine if optimistic narratives about Tesla should be simply accepted or more critically assessed. Those excited about Tesla’s outlook should be confident that management has communicated their vision for the future in a consistent, credible way . Questions of this nature are especially important to ask when, unlike ordinary companies where current products and past performance largely drive sentiment, Tesla optimism is abnormally grounded in confidence in the CEO. Given high stakes and the nature of Tesla’s ambitious outlook, credibility needs to be a central tenet in assessing the likelihood that the company will translate its lofty goals and visions into tangible results.

Part 1.2: The Stakes

From an investing perspective, questions of credibility are significant given that investors are long Tesla stock for what they see as a bright Tesla future, rather than for the current business that is losing over $20,000 per car sold. Stakes are high due to where Tesla’s public-market valuation sits — approximately $52 billion, or $685,000 of market capitalization per car sold in 2016, compared to General Motors’ valuation of $5,800 per 2016 car sold. Tesla enthusiasts are optimistic about future businesses and markets that they believe the company will dominate, like the not-yet-existent ride-hailing network that Morgan Stanley outlines as a core investment thesis and an idea already worth $17 billion. The “Tesla Fleet” is one of many exciting ideas lacking details or a timeline.

A valuation reliant on the belief that the company will do big things years from now makes management’s ability to reach targets important. Many other innovative companies, like Uber and Netflix, have also built up pricey valuations that rest on long-term execution and future profitability. The important difference between Tesla and other ambitious companies lies in the challenge that exists in offering credibility to Tesla, due to a wavering record of meeting goals and keeping promises.

Part 1.3: Power of the Narrative

In a world with considerable speculation surrounding innovation and strong demand for social change through technology, forward-looking strategic narratives have become increasingly big drivers in consumer and investor sentiment.

At Tesla, it appears that missteps warranting concerns over trust in management have been consistently overlooked by the investing public, customers, and journalists. Unwavering confidence and patience unique to Tesla speaks to the hunger of these parties to buy into, and perhaps leverage, an ambitious long-term dream, one that has merit from a “social change” perspective. Narratives that attempt to label Tesla as the future of sustainable energy are easy for the ordinary person to understand and get behind, regardless of their level of knowledge. It is a captivating “story” for the mainstream media to pick up to churn out nonstop headlines. It also often gives the investing public leeway and grounds to back up optimistic claims that are rooted in a utopian future people want to believe in. The forward-looking nature of this optimism has led to many inflating the perceived importance of having a long-term view while downplaying the importance of analyzing reality and the current state of the business. The big-picture, idealistic approach to analyzing Tesla continues to prevail in the media and the investing community — an approach that allows biases regarding sustainable energy and social good to creep into a public-company analysis that is usually highly objective and fact-based. Eagerness from these parties to buy into Tesla’s vision for the future has not, to-date, been extended to competitors making similar strides in EVs and battery technology — rather it appears Tesla continues to be exclusively equated with the future of sustainable transport while reaping the benefits and ambitious outlook that accompanies this label.

Uniquely labelled a “good” company with a potential to change the world, skepticism surrounding Tesla is easily refuted and often met with calls of being a luddite. With their leader as the defacto face of sustainable energy and a purpose extending beyond creating shareholder value, those questioning the viability of Tesla goals are generally shot down quickly as being short-sighted thinkers resisting social change. Musk himself recently labelled Tesla short-sellers as “ jerks who want us to die ,” a statement that subtly justifies the notion that inevitable skepticism comes from bad people who do not support the advancement of sustainable energy. In reality, doubts surrounding the feasibility of Musk’s ever-growing sky-high targets are rarely, if ever, related to belief or disbelief in sustainable energy. Concerns about Tesla’s future are predominantly company-specific, often relating to questions about lack of transparency and inconsistent communication from management. Jim Chanos, who predicted Enron’s demise, for example, claims his Tesla short position partially relates to Elon Musk’s “ questionable relationship with the truth .” The increasing power of the narrative, paired with an investing landscape that increasingly rewards ambitious, futuristic visions has largely suppressed and discouraged a more realistic, scrutinizing approach to analyzing superstar companies. This is certainly the case with Tesla.

Musk often takes to Twitter displaying an arduous relationship with Tesla shorts

A more sustainable and increasingly innovative future means more public companies will exist in part to “disrupt” markets and create a social good. Regardless of a company’s purpose, its brand, its products, or its CEO’s name, appropriate managerial conduct should be demanded and expected. Management credibility questions must be fully removed and objectively analyzed independent of other aspects of the business, especially those that look to the future. For example, executional shortcomings are not offset by a company’s potential to create social good and the notion that independent topics of this nature are related should not exist.

Companies with special status like Tesla have used the power of the narrative to their advantage, and it has at times distorted reality and led to shortcomings being ignored or deemed insignificant. In a changing world, innovative products and social change should not come at the expense of appropriate managerial behaviour or credible communication with the public.

Part 2: Guidance problems

Tesla’s approach to providing forward-looking projections to the public has important takeaways from a management credibility perspective. Historically, the guidance section of a company’s quarterly reports has been a place for firms to provide measurable and unambiguous forecasts that can be used as a benchmark for performance and as a realistic glance at a company’s near-term outlook. Public companies can leverage the guidance section of their quarterly reports to help support optimism for upcoming periods. For Tesla, a unique pattern of inaccurate forecasting has emerged in this area after seven years as a public company. With the benefit of hindsight one can, for example, look at Tesla’s Fourth Quarter update from 2015 . In Tesla’s guidance section, investors are told:

“We expect to generate positive net cash flow and achieve non-GAAP profitability for the full-year 2016. . . . We plan to fund about $1.5 billion in capital expenditures without accessing any outside capital other than our existing sources . . . We plan to invest in equipment to support cell production at the Gigafactory, begin installation of Model 3 vehicle production machinery, open about 80 retail locations and service centers, and energize about 300 new Supercharger locations.”

Looking back at these statements regarding 2016, Tesla posted negative free cash flow of $1.03 billion, it did not achieve non-GAAP profitability, it funded its capital expenditures with a large capital raise months later, and the carmaker under-delivered significantly on retail and service locations and Supercharger sites. In the press release’s subsequent paragraphs, Tesla outlined various car delivery, gross margin, and operating expense targets, not one of which was favourably achieved. Of the measurable, forward-looking targets outlined in the press release, a troubling zero of the ten outlined were met by Tesla in 2016.

As readers will likely find out by diving into past Tesla regulatory filings, the company consistently breaks promises on future guidance to the point that it is unlikely Tesla is merely incompetent at forecasting. Musk shrugged off the company’s tendency to be inaccurate recently, saying “ When we make mistakes, it is because we are stupid, not because we are trying to mislead anyone. ” However, Tesla employees are anything but stupid, especially to Musk who insists that Tesla’s employee standards are industry-leading . Of note is that Tesla’s guidance figures are not just simply internal goals used to motivate employees (it is unclear where Musk sets the bar internally), but rather these targets are provided to assist the investing public in its attempt to value the company. While inaccuracies surrounding future expectations are not legally dubious, repeated over-promising and missing expectations gives reason to question whether management should be trusted to set realistic expectations and meet its goals — big or small.

While every event differs, it was recently discovered that Canadian health food chain Freshii, similar to Tesla, had been overstating the company’s near-term outlook via guidance figures — resulting in a 40% decline in their share price as analysts immediately called management credibility into question . To contrast, when repeated overstatements of near-term outlook are made by Tesla, the investing public and media have either fully ignored it or have generally labelled the problem as Musk being “ambitious” or simply “late”, instead choosing to reiterate views of optimism by emphasizing their belief that Tesla’s long-term outlook remains intact. It should be questioned whether approaches to analysis of this nature take long-termism too far to the point that it is perhaps often being used simply as a vehicle to write off failures or problems. Although usually encouraged, a long-term approach can be dangerous when the future it concerns is wildly uncertain, or if used simply as an excuse to employ idealistic thinking. Regardless of their perceived materiality, frequent guidance overstatements are misleading events that can hurt investors and paint a misleading picture to the broader public, and should be labelled as such.

This favourable treatment surrounding guidance speaks to strong narratives that Tesla’s value is not about the “now”, and that distrusting Elon Musk’s plans for the future due to short-term hiccups would be foolish and shows a refusal to buy into the dream of a sustainable future. Many equity research analysts with Buy ratings on Tesla stock believe that Musk’s promise for 500,000 cars sold in 2018 is a drastic overstatement (some believe by over 50%), but they have not historically addressed the various issues of this nature from a credibility standpoint. The significance of these missteps and communication inconsistencies has not been a material, needle-moving concern for the investing public or the media to-date, rather deemed an insignificant bump in the road on Tesla’s journey to changing the world.

Part 3: Capital Raises

As one might expect, misleading communication extends beyond easily monitored figures and can be found in other aspects of how Tesla operates, one being capital raising activities and forecasting cash needs. Despite questionable communication in this arena, Tesla has not received any considerable pushback from the investing community. In fact, their stock tends to trade higher in periods after capital raises contrary to what one might expect. Additionally, appetite to fund Tesla capital raises has remained strong as investors stay content to fund the business when called upon.

Musk’s original “ Secret Master Plan ” stated that financing for Tesla cars would come from each previous car; Model S sales would generate cash to finance the Model X, the X would finance the 3, and so on. Instead, financing for each car has come solely from investors, supported by enthusiasm about the company’s future. Tesla has thus developed a reliance on raising capital from public markets to finance operations. Communication regarding capital raises is important, signalling a company’s upcoming capital needs or near-term cash-burn rates in the absence of free cash flow. Investors are typically concerned about upcoming increases in a company’s share count or debt load that accompany a capital raise.

Forecasting upcoming cash needs in the Q4 2015 Tesla press release , Tesla explained that it was not planning on accessing any outside capital to finance capital spending in the upcoming year. Within three months, Tesla then announced a $1.4 billion capital raise. The company then used stock to purchase SolarCity months later, diluting Tesla’s share count an additional 9%. In September of 2016, Musk stated, “ our current financial plan does not require any capital raise for Model 3 at all .” Within the year, Tesla then raised capital twice for Model 3 cash needs — one combined offering and one debt offering. In fact, back in 2012, Elon Musk even tried to convince investors that Tesla would never tap the public markets for cash again, saying “ I feel confident saying that Tesla does not need to ever raise another financing round. ” Since that statement, there have been seven capital raises from Tesla totalling over $11 billion raised, indicating that comments regarding capital raises and cash needs will more likely than not mislead public markets.

While issues like product demand or foreign exchange risks might be difficult to forecast, credible managers should understand a company’s near-term cash needs enough to know whether it will run out of money within the coming months. Tesla management has consistently and severely under-forecasted its near-term capital raising needs.

Management is likely aware of the drastic consequences that would accompany a negative sentiment shift from the capital markets given Tesla’s reliance on patience and enthusiasm from investors to fund operations in the absence of free cash flow. If not for other reasons, Tesla should avoid inconsistent communication regarding capital raises for fear of losing access to this seemingly never-ending supply of capital.

The pattern of consistent denials of a need to raise cash, followed in short order by capital raises without justified backlash by mainstream media or the public markets illustrates the unique patience exhibited towards Tesla management. It speaks to trust in Elon Musk’s vision and the strong appetite to buy into something so aspirational that significant communication missteps along the way are effectively deemed immaterial so long as the “big picture” remains intact. Tesla, it appears, has been given a “hall pass” to act inappropriately in many critical managerial functions because, unlike in an ordinary business, areas like transparency surrounding the funding of business operations are perhaps perceived as insignificant relative to Tesla’s ultimate destination.

Part 4: Autopilot

Image done by Chelsea Saunders

In addition to misleading communication regarding capital raises and guidance, Tesla has also obfuscated its development of autonomous driving technology. The company’s semi-autonomous driving technology, branded as Autopilot, is a crucial part of the company’s story and an area where many believe Tesla leads the car industry. Questionable communication from Tesla has led to reality distortion in this area.

Mobileye, which previously made the Autopilot software, exited their partnership with Tesla in 2016, citing safety concerns regarding the use of Autopilot hands-free , a sentiment that had reportedly been echoed by engineers within Tesla. Following the Mobileye breakup, Tesla scrambled to replace the technology. In October 2016, Musk rolled out “Hardware 2.0” claiming that every Tesla would now come equipped with hardware capable of eventual fully autonomous, Level 5 self-driving . Musk subsequently rolled out the $5,000 “Enhanced Autopilot” add-on option for all Teslas, their in-house software replacement for the lost Mobileye technology, and began offering a “Full Self Driving” feature for $8,000 despite this functionality not yet existing. This rollout announcement was accompanied by a misleading demo video of a Tesla autonomously driving through a parking lot, as if to tell customers that the arrival of fully autonomous driving was imminent — which is exactly how many interpreted it.

Musk claimed that the new Enhanced Autopilot option, now costing double the old Mobileye version, would reach parity with the Mobileye technology by the end of 2016, and promised that its capabilities would surpass that of the old technology in the months following . However, seven months into 2017, Bloomberg test-drove a Tesla and claimed that “ the overall experience still wasn’t as good as the original with Mobileye, ” while also claiming in a recent October article that the new software still has not reached parity with the old, a full year after Musk’s rollout and claims. Key features promised by the end of 2016, such as vehicle type differentiation, better steering on tight roads, and automated lane changes on the highway have still not been rolled out as promised, according to The Verge . In November, Tesla admitted that the new system has still not reached feature parity and gave no concrete updated timeline. In true Tesla fashion, the company continues to reiterate that the final Autopilot 2.0 product will exceed customer expectations, while missing multiple interim targets along the way.

Despite the aforementioned setbacks, Musk says Tesla will likely have Level 5 fully autonomous driving , meaning no steering wheel required, by 2019. The leap to Level 5 autonomy is a significant one, and one that other automakers set a more conservative timeline on. This claim, coupled with Tesla assuring that all new vehicles are now equipped with hardware sufficient for Level 5, is questionable. Nvidia, which supplies Tesla’s current AI computing hardware for self-driving, the Drive PX, recently announced the 2019 release of the big brother to this system, the Drive PX Pegasus. Nvidia calls Pegasus their very first platform capable of Level 5 autonomy , implying by deduction that Tesla’s current hardware is not at all capable of full autonomy like Musk has promised.

Promotional materials for Tesla’s autonomous offering. Source: company website

Tesla’s approach to self-driving technology choices further brings the validity of its claims into question. Unlike most automakers developing autonomous vehicles, Tesla does not use the costly LIDAR (Light Detection and Ranging) technology which Musk has called unnecessary for autonomous driving. Most disagree with Tesla’s approach; Richard Wallace of the Center for Automotive Research believes “i t’s going to be proven that you do need LIDAR in the mix, ” explaining that cameras and radar can fail on their own and are likely not sufficient for full self-driving. A less neutral observer, Scott Miller of General Motors, called Musk “ full of crap ” on Hardware 2.0 capabilities, saying that full Level 5 autonomy is “ not physically possible ” with Tesla’s hardware offering of only cameras and radars. To contrast, GM’s current autonomous solution includes LIDAR and various redundancy systems which he insists are necessary for Level 5 autonomy. Furthermore, Miller believes that it will be 10 to 15 years until a completely autonomous vehicle will be available for purchase to consumers, contrasting Musk’s claim that its arrival is imminent for Tesla. Many believe GM and others including Google’s Waymo, who have achieved Level 4 autonomy versus Tesla’s current Level 2, are ahead of Tesla in autonomous driving technology, despite statements from Tesla and mainstream media narratives that lead people to believe Tesla leads the race.

Perhaps those skeptical of Tesla’s self-driving claims have reason to be. It was recently reported that, despite the outlined Level 5-capable hardware promises, the company is now taking steps to hedge against the possibility that it was over-promising. Tesla is now working on a new hardware suite with more computing power for autonomous driving, for the “ highly unlikely ” scenario that Hardware 2.0 is not sufficient for Level 5 autonomy, according to the company. The company may be second-guessing its claims and perhaps was, once again, too aggressive in its initial promises. If Tesla’s concerns about this scenario become a reality, it would be responsible for another broken Autopilot promise and potential liability.

Some may brush off broken Autopilot promises and deceit as simply Tesla setting the bar too high or “minor setbacks”. One cannot, however, ignore Musk’s record when it comes to Tesla self-driving claims. In 2015 Musk told Fortune, “ I think we will have complete autonomy in approximately two years ”, then in 2016 told the Guardian that he considers autonomous driving a “ solved problem ,” saying “ I think we are probably less than two years away .” Regarding reaching Level 5 autonomy, Musk stated again in April 2017, “ I think that is about two years [away] ,” then in December 2017 Musk updated this prediction again to a further two years away , subtly pushing back the aggressive timeline further. Musk continues to roll forward this questionable statement each year while selling products on the premise that they will soon have Level 5 autonomy, as the only automaker currently selling a fully self-driving software feature — despite the functionality not yet existing. Tesla even promised a fully autonomous Tesla demo journey from LA to NYC by the end of 2017. This is another Tesla claim that received a plethora of positive media attention but will almost certainly not be executed as promised based on the state of Tesla’s autonomous driving capabilities.

While mainstream media headlines predominantly speak to Tesla’s industry-leading progress in self-driving, a deeper dive shows that Tesla’s self-driving narratives should continue to be critically assessed. It appears their projections are much more optimistic than competitors, many of whom have shown similar, if not better progress through the use of joint ventures, higher capital spending, and premium technology choices. The manner in which companies bring autonomous technology to market has large implications for public safety. Rushing the technology to market or lacking transparent communication in the interest of being a first-mover, or to satisfy investors, can put the public in danger. Tesla should be forthright about autonomous driving technology — where it stands currently, near-term goals, and where it will end up. The mainstream media should more critically analyze outlandish Musk Autopilot claims to assess their feasibility through the use of research and fact, rather than simply regurgitating his statements into headlines.

Part 5: Model 3

Tesla faces lofty expectations for its new mass-market Model 3 sedan, with many calling it Tesla’s “iPhone moment” and speculating on its potential to drive Tesla to profitability. The carmaker’s long-term success relies on their ability to branch out of the luxury segment and sell mass-market cars. Optimism surrounding Tesla’s first high-volume car rests on its ability to achieve a successful production ramp. Tesla’s proposed Model 3 production increase from a projected 30,000 Model 3s in 2017 to 400,000 in 2018 would imply an unprecedented production increase for an automaker. The Model 3 went into production in July of this year, Musk nicknaming its production factory the “Alien Dreadnaught,” a production process he says will become fully automated to support high volumes. Since the Model 3’s rollout party in July, speculation has occurred over what Tesla meant when it said “production” had commenced.

“It’s important to understand that our production ramp will follow an S-Curve” — Elon Musk. This graph, lacking quantification, depicts the “exponential” growth that the Model 3 production ramp is expected to soon achieve.

In September of 2017, Tesla produced 260 Model 3s, roughly five times short of their goal of 1500. The company initially blamed the miss on “production bottlenecks” without giving details. It appears that over the past few months while Tesla tried to promote the narrative that a production ramp-up was imminent and that highly automated production had commenced, the company has been trying to debug the automated assembly line to make it functional. Despite production officially starting in July, many assembly lines were reportedly not installed until September. The Wall Street Journal recently reported that, as of October, “ major portions ” of the car were still being made by hand, away from the automated line. In response, Tesla attacked WSJ’s “journalistic integrity” while Elon Musk posted videos on social media of one functioning subsystem in the production line; neither response actually refuted any of WSJ’s claims. Musk, weeks later, effectively validated these claims when he talked about how current Model 3 production is heavily reliant on manual labour in the absence of automation, calling the process “ really inefficient ” because the systems are not designed to be manually operated. A source close to Tesla’s production operations who had inspected car plants all over the world told the Financial Times, “I have never seen so much manual labour on a line.” This early look into Model 3 production was surprising for the company Musk has vowed will become “the best manufacturer on earth,“ and that supposedly possesses the “machine that will build the machine.”

The Model 3 approach to-date is rare among automakers, who usually have their production line fully automated by the time production starts and the car is on sale. Hand building cars away from the line usually only takes place in a modern-day automaker’s pre-production phase. The inefficient and costly retroactive process of using manual labour due to non-functioning automation may have been taken solely to reassure the investing public that “production” was on schedule. A more logistically and economically rational approach would involve steps like standard practice pre-production assembly line testing, which Tesla skipped, and waiting until the production line is fully functional to enter production, but perhaps Tesla prefers the positive optics associated with commencing “production.” Instead of making the decision that promotes long-term value, it is possible that Tesla elected to worry about keeping investors temporarily satisfied by rushing the car into the production phase.

Third Quarter Earnings

On Tesla’s recent Third Quarter earnings conference call , it said that the company’s original goal of 5,000 Model 3s per week by the end of 2017 is no longer attainable. Tesla also fully removed a previous target of 10,000 cars per week by the end of 2018, despite previous Musk statements that there was “ zero concern ” that this target would be met. Despite Tesla implying that it had necessary production capabilities to reach the aforementioned Model 3 targets, the company stated it will need to expand current production capacity just to achieve the 10,000 weekly car rate originally promised. Creating even more confusion, Musk also retroactively stated that management will decide at a later date whether it wants to increase capacity to meet the goal that Musk had originally labelled a certainty. Upon addressing production woes, Musk blamed a subcontractor, stating that no fundamental production issues exist, but saying it is “ difficult to predict how long it will take for bottlenecks to clear or when new ones will appear. ” This leaves the state of the Model 3 production process unclear at a time when an imminent production ramp-up is required to meet Musk’s extremely aggressive production numbers. In true Tesla fashion, between the press release and earnings call many Model 3 questions were raised while old ones went unanswered.

Musk takes to Twitter in an attempt to reassure investors and customers on the Model 3 production ramp-up. This production rate target has since been pushed back into 2018.

Recent delivery figures suggest Tesla Model 3 sales will likely total less than 5,000 cars in 2017, versus Musk’s original claim that this figure would be between 100,000 and 200,000. Many, including Musk, insist that missed Model 3 targets and a delayed timeline are a blip in the radar or immaterial relative to the car’s long-term volumes. Further delays, however, and the potential revelation that Musk has been actively overstating the Model 3’s outlook would have a materially negative effect on Tesla management’s perceived trustworthiness. The idea that Tesla has misled the public on the all-important Model 3 would likely receive significant backlash relative to past managerial missteps and shortcomings due to the importance of the car to Tesla’s long-term story. Furthermore, commonly referenced far-fetched narratives like, for example, the belief that Tesla is closest to launching an autonomous taxi network , heavily rely on a successful entry into the mass-market. While Musk’s efforts to keep the focus on the horizon have sufficed and distracted amidst past missteps, Model 3 misstatements and failures are more significant as this car is expected to establish Tesla in the mass-market and supposedly drive the company to profitability.

Investors and customers alike may not view Model 3 misstatements as being paramount to the long-term story of Tesla, but it is yet another sign that much of the forward-looking aspects of what we hear from the company might be extremely unreliable and for purposes other than giving the public a transparent look into Tesla’s future.

Conclusion

Despite Tesla’s proven inability to deliver on its short-term goals, many are trusting the company to execute the crucial steps required to succeed and achieve eventual profitability — something that still lacks a clear timeline despite claims from Tesla and Musk dating back to 2012 that suggested profits were imminent. It would be irresponsible, however, to simply use the Tesla brand or Musk’s name as a basis for repeatedly giving management a long leash and the “benefit of the doubt.” Musk continues to sell dreams to investors through ideas like the “Tesla Fleet”, consistently bold claims about future products with unrealistic timelines, and statements that lead people to believe Tesla significantly leads in areas like autonomy and battery technology. This has enabled irresponsible long-term thinking, while valid concerns about the now — topics like the Model 3, highly-capitalized competition, Tesla’s current financial state, and corporate governance — are downplayed. Without the Tesla name and ambitious narratives relating to the future, it is unlikely that attempts to distort reality by parading “Musk’s dream” would be tolerated to this extent. Given the company’s record on forecasting and meeting its own objectives, the investing public would be wise to critically assess and question Tesla’s communication and the prevailing narrative at every turn.

Hedge fund manager David Einhorn recently questioned the current viability of value investing , pointing to the fact that maybe the modern-day investor effectively ignores fundamentals — things like financials or valuations — and instead simply evaluates companies on their ability to “disrupt” markets and provide “social change.” While Einhorn’s comments are far-fetched, they partially explain the aspects of today’s investing environment that have led to Tesla’s sky-high valuation and optimism. It is apparent that Tesla has uniquely leveraged its position as a disruptor and provider of “social change” to drive positive investor sentiment and distract from a complicated reality. In the process, other factors usually heavily weighted in analyzing value have been largely overlooked or ignored. For example, it is common for equity research analysts to raise Tesla’s price target while simultaneously decreasing their forward earnings estimates for the company — an abnormal practice that illustrates the lack of weight the investing public has put on traditional approaches to valuing and analyzing the company. Disruption and social change, while admirable, on their own do not necessarily create direct value from a financial perspective — this should be considered when an investment thesis is largely grounded in these characteristics, or when it becomes apparent that perceived societal merits are driving investor sentiment in a company.

In a technologically evolving world where innovation will play a role in driving social change, public companies like Tesla will increasingly release products that will tout a utopian future. It is apparent that the public has grown highly patient and friendly towards these companies. Tesla’s unique “perks” as a public company are certainly desirable — unrestricted access to frequent capital, the widely held notion that it is “not a car company”, a friendly mainstream media, a public following of loyal evangelists, and seemingly unconditional patience and forgiveness from the investing public. As innovation and social change begin to appear more frequently in tandem, loud Tesla-like futuristic visions and storylines will likely only become more commonplace, and more powerful as the public’s fixation on innovation grows even further.

In an environment where many public companies may lean to actively selling a “story” about the future of their company rather than simply falling back on existing product or service offerings, inflated future outlooks will only become more prevalent. Public markets have become significantly more tolerant of large money-losing technology companies in recent years — where aggressive leveraging of compelling narratives is likely to take place in the absence of profitability. While some may effectively be able to weed out what at times can lead to overhype and reality distortion, the public and vulnerable retail investors remain likely to buy into idealistic narratives like, for example, Snapchat’s vow to “reinvent the camera” and “improve the way people live.” In an investing environment where the narrative can trump reality, fundamental value is not necessarily driving prices higher, and if taken to the extreme, detachment of this nature can mislead various stakeholders and create unsustainable overvaluation in sectors or markets.

It is worth considering further implications of technological change and the public’s propensity to simply applaud potential “disruption” rather than assessing the feasibility of bold claims. As technology ventures into new and evolving areas, firms developing supposedly revolutionary technologies may obtain favourable information asymmetry, or merely a strong knowledge advantage, over customers and investors to whom advances in newborn technologies, like AI for example, will be largely foreign. This would theoretically lead to the opportunity to more easily promote a rosy outlook or inflate future expectations, with firms operating on the leading edge in uncharted areas of technology. For example, a public company developing blockchain technology could likely inflate, through legal means, its implications and advantages to a public that may largely lack access to adequate information regarding an evolving, and at times opaque, technology. Under these circumstances, transparency must be promoted and enforced through regulation to ensure credible forward-looking communication from public companies. It is perhaps time to consider whether non-financial, but market-moving, items beyond the scope of financial statements should be audited or require greater standards and formal disclosure — in Tesla’s case things like publicly touted product reservation and deposit figures, production rate capability claims, and most importantly bold claims about unreleased products that lack sufficient evidence . Beyond strong regulation, two-sided public markets and groups with the discipline to remain objective and skeptical can continue to assist in questioning the prevailing narrative and ensuring extraordinary claims are not accepted without extraordinary evidence.

Time will tell whether Tesla will execute and grow into sky-high expectations over the long-term. Nevertheless, the company’s efforts have gone far in advancing the future of sustainable energy by jumpstarting an electric vehicle revolution. To Musk’s credit, his showmanship and constant media presence has helped pressure carmakers to make significant investments into electric vehicles. In this respect, Tesla has fulfilled its purpose and mission statement, which is to “accelerate the world’s transition to sustainable energy.” Musk, who is admittedly more concerned about the advancement of sustainable energy than the success of Tesla, has admirably created a business with a primary purpose uniquely extending beyond creating shareholder value. From a social good perspective, he should be praised for his work at Tesla to-date and his other innovative ventures, which seem to grow with each day.