- Musk has a history of cashing out when ventures no longer interest him.
- Musk's statements indicate he's uncomfortable with Tesla stock as an investment.
- Recent statements indicate Musk shares Ben Graham and Warren Buffett's views of the stock market.
- Musk's real plan is to generate cash to fund SpaceX expansion not build car factories.
The Giga Factory plans and the open-source patent offer might be Elon Musk's Tesla Motors (NASDAQ:TSLA) exit strategy. Musk could be hoping to get out of Tesla or at least the car business.
The way he plans to do it is to make Tesla or its electric car business so valuable that somebody else will simply buy it from him. My guess is Musk hopes to do that by making electric cars acceptable to the public and Tesla the premium electric car brand. By giving patents away and making lithium ion batteries cheap, he hopes to lay the groundwork for an electric car industry and leave.
Musk Has a History of Cashing Out
Musk has operated this way in the past; he sold PayPal to eBay Inc. (NASDAQ:EBAY) for $1.5 billion, perhaps out of frustration with the banking industry. Musk also wanted to cash out in order to move onto other ventures he found more interesting, mainly SpaceX.
My guess is that Musk wants to get out of Tesla in much the same way he got out of PayPal. Musk strikes me as a vision and big picture guy, not a details person; Tesla is a business with a lot of details involved.
In recent interviews, Musk has spent most of his time talking about SpaceX and his scheme to build a city on Mars. SpaceX seems to be Musk's major interest, and he may want to devote his time to it and with other projects like the Hyperloop.
Musk has also expressed some frustration with Tesla; he's admitted that he shares the view that Tesla's stock is overvalued. That might frustrate him because it makes Tesla harder to sell as a company by inflating its value. Musk also doesn't like publicly traded companies much; he's kept his pet, SpaceX, private, possibly for that reason.
Another reason Musk is frustrated is that other carmakers haven't followed his lead and started making large numbers of electric cars. Tesla has had to create the market on its own, which involves a lot of time away from SpaceX for Musk.
Elon Musk Is a Ben Graham Disciple?
On June 9, 2014, a rather tired looking Musk even made this statement about the stock market to CNBC: "I mean, as Warren Buffett said, dealing with the market is like dealing with a manic depressive."
Musk doesn't really like the stock market much, and he seems to want to get away from it. The reason he doesn't like the stock market much is that Musk is a long-term thinker. He plans for the long haul; the market is often about the day to day. He doesn't like having his fortune bound up in something that fluctuates so widely. Musk has admitted he is planning for a Mars mission in 2026, and the Giga Factory plans mention car production in 2020.
Mr. Musk doesn't seem to have much love for the auto business; he doesn't like the auto dealers and seems to despise traditional car marketing. He seems uncomfortable getting drawn into the sales carnival in the auto industry and, for that matter, the hype fest around his stock.
He might also have serious problems with Tesla as an investor. Musk's discussion with CNBC sounds like a value investor talking. He's familiar with Warren Buffett and with Ben Graham's classic description of the market as insane.
Some of the numbers certainly justify Musk's skepticism; Tesla's TTM return on equity ratio was -22.96% on March 21, 2014. On the same day, it reported a quarterly free cash flow of -$80.72 million; down from $25.8 million in September 2013 and $40.33 million in December 2013.
Tesla is on very shaky ground, and Musk knows it. He wants to get out or at least reduce his exposure before the house of cards collapses.
Musk's Exit Strategy
Okay, so getting out of Tesla makes a lot of sense for Musk, but what's his exit strategy? My guess is this: Musk hopes to make electric vehicles a viable technology that somebody wants to buy. He also wants to create a new business model that will allow him to profit from electric cars without being in the car business.
Instead of selling cars, Musk wants to sell batteries to carmakers. The Giga Factory would produce the batteries, and the carmakers and other companies that take Musk's patents will use the batteries. Don't be at all surprised if Musk spins the Giga Factory off into a privately owned or publicly traded venture he will control.
The plans for the Giga Factory call for the manufacture of enough batteries for around 500,000 cars. I seriously doubt Musk wants to take on the massive amounts of debt needed to finance the factories needed to build all those cars. Instead, he's hoping that other companies like Ford (NYSE:F) and Nissan (OTCPK:NSANY) will build the cars and he'll provide the batteries.
The market for the batteries could be fairly large; as I've noted elsewhere, the lithium ion batteries could be used in a wide variety of vehicles, including hybrids. Almost every major carmaker is now building a hybrid. Even Volvo (OTC:VOLAF) has started work on one.
Hybrid technology still has some serious problems; Ford recently made cash payments to hybrid buyers because its mileage claims were proven to be inflated. News reports indicate that the C-Max hybrid actually got 43 miles to the gallon, not the 47 Ford was claiming. Tesla's technology might help it achieve its mileage targets.
Musk might also be betting that his other publicly traded company, SolarCity (NASDAQ:SCTY), might increase demand for lithium ion batteries. The Buffalo News reported that SolarCity is planning to turn the Silevo factory in Buffalo into its own version of a Giga Factory.
Musk is hoping that he can produce several streams of revenue out of his Giga Factory's batteries. That way he can generate huge piles of cash he can use for projects like hyperloops and cities on Mars. He may also want to hire a few bodyguards to protect himself from all the disappointed Tesla enthusiasts when they discover that their favorite car brand has been sold to Tata Motors (NYSE:TTM).