Why I Still Believe In Elon Musk

Elon Musk is well known for having a fervent fan base.  His supporters see him as almost infallable.  He is the Golden Child of silicon valley.  I haven’t always been a fan of Elon Musk, but as I have learned more about him, I have decided to drink the Kool Aid, I’ve also put my money where my mouth is and purchased both Tesla and Solar City stock (right before the acquisition proposal), to a tune of roughly 10% of my portfolio.  Currently Tesla and Solar City are burning cash like crazy as Musk builds up scale, and Space X suffered a massive loss when a Falcon 9 carrying a $200 million payload exploded on the launch pad. Despite these calamities I think that Elon Musk will in the long run come out ahead.

My First Impressions Of Elon Musk:

When I first heard of Elon Musk, he was making a luxury car for the super wealthy and had named his company Tesla.  I actually felt like he was cheapening the name of Tesla with what he was doing.  Nikola Tesla truly changed the world more than any other human in history. His mind developed Alternating Current and it’s electric motor,  fluorescent light bulbs, radio control, and he established radio communication before Marconi.  His major vision was to transmit power across the world at no cost to the users.  This dream was never achieved due to lack of funds.

At the time I felt that a guy making cool cars for the wealthy had no business using the Tesla name, as Tesla’s inventions were ground breaking useful tools and gifts to all of mankind. I saw the Tesla Roadster as a toy, and not a serious vehicle. I had not heard Elon Musk’s vision.  Upon further research I have learned that the main thing differentiating Musk and Tesla is funding.  Musk has been able to secure funding for all of his ventures, and has been able to do so without relying on singular benefactors like Tesla was forced to with J.P. Morgan.

Elon Musk Has A Vision:

They say people are not sold on numbers, they are sold on vision.  Long term vision is extremely important for a company to have, and the visions Musk has for his companies are nothing short of amazing.  It’s very interesting to look at the visions of different leaders, both in business and in politics.  It is extremely rare that leaders lay out their visions as goals, as concrete goals with mileposts to hit along the way, and tangible results on the other side.

Tesla and Solar City are two sides to the same coin.  Tesla’s official mission is to “accelerate the world’s transition to sustainable energy”. To do this, Tesla/Solar City is attacking both the supply and the demand side of the equation.  Solar City produces power from the sun, and Tesla produces cars that run completely on electricity, as well as battery packs that can store massive amounts of electricity, both for large scale and consumer applications.

As ambitious as Tesla’s mission is, Space X has a much grander ambition. Space X was started to revolutionize space technology, with the ultimate goal of enabling people to live on other planets. More specifically, Elon Musk wants to build a self sustaining city on Mars of 1 million people, in our lifetime.

Elon Musk Is Not Primarily Motivated By Money:

I’ve always been fascinated by people who are not motivated by money, by people who have a true internal drive for a purpose.  When you truly have more money than you could ever spend it takes a different kind of motivation to work.  Now many people who have large net worths work, but they work at a relatively relaxed pace.  Not Musk.  He sleeps on the office floor.  He is fully consumed with his companies and his plans for the future.

In the very long term earnings are what matters in business, but it is not necessary for young companies with explosive growth to make profits.  Amazon is a perfect example, and I feel like Tesla is following in the footsteps of Amazon.  Rather than making short term profits now, Tesla is investing HEAVILY into technology to be able to make extremely large profits down the road. Amazon had a similar growth strategy.  I expect 2018 to be the year in which the profits start rolling in for Tesla and Solar City.

What really impressed me about Elon Musk as an individual and as a leader was the presentation he made back in August outlining the system architecture for making humans a multi-planetary species.  In the roughly 1 hour presentation when talking about the costs of going to Mars, Elon stated something to the effect of, “I PERSONALLY have no desire to accumulate assets, other than to make this a reality.” Elon essentially pledged his entire personal fortune to the goal of preserving human life in the Universe.

Elon Musk Wants To Change The World, And Save It.

I buy in to the biggest long term mission of Elon’ Musk’s life, and that is the goal of establishing a colony on Mars.  This sounds like a bad sci-fi movie, but it is the conceivably the most important step in human history.  Man, has existed for just over 1 million years.  Man in the form of modern humans has existed for around 200,000 years.  All of recorded history spans only 5,000 years.  Man first flew 113 years ago and landed a man on the moon 47 years ago.  In roughly 10 years man will land on Mars. Mass extinctions have happened on this planet many times.  Giving man two places to live is a hedge against an extinction level event on Earth. If you buy into the premises that extinction level events have happened on this planet in the past and will occur in the future, and that intelligent life is probably rare in the universe and should be preserved, then it is only logical that we do what is necessary to make humans a multi planetary species.

Why Establish A Colony On Mars?

If a variety of calamaties befall Earth, the population could become extinct.  This would be “bad”.  It’s the classic “All your eggs in one basket” concept.  By establishing a colony on another planet we ensure the survival of our species if doom befalls our home planet.  Now the next challenge to Humanity is leaving our solar system and establishing colonies elsewhere in the galaxy.  There are plenty of problems that if they happen to Earth will also affect Mars.  With going to Mars technologies have to be developed that will also make missions to outside our solar system more feasible in the future.  One of those developments is reusable rockets, which will ultimately make space travel very inexpensive compared to where it is now.

Space X:

Besides the obvious platform for the long term colonization of Mars, Space X is perhaps the most innovative company in the Musk portfolio.

  • Spake X designs and manufactures virtually every part of their rockets in the United States, while other companies are using Russian rockets which were designed during the early years of the space race.
  • Space X has developed the Merlin Engine and the Raptor Engine, which are the most advanced and powerful engines pound for pound ever developed.
  • Space X has challenged the military industrial complex and won.  Space X has won contracts with both NASA and the Department of Defense.
  • Space X has developed rocket re-usability, with bringing 6 first stage rockets back to Earth to date.
  • Space X has designed, built, and will soon launch the most powerful rocket in human history with the exception of the Saturn V rocket that took man to the moon (Falcon Heavy).
  • Space X has built a customer base so massive that even with weekly flights starting in 2018 they will be oversold.
  • Space X will be the first private company to put a man in Space.

Satellite Constellation:  The satellite constellation builds directly on Nikola Tesla’s legacy of wireless transmission of power, but instead of power, it will be information, and instead of transmitters on the Earth, they will be in the sky.  Because Space X can launch things into space very inexpensively, it only make sense to launch their own satellites. The constellation will include roughly 4425 satellites in Low Earth Orbit . Not only will this bring high speed internet to every corner of the Earth, it will also allow people who are stuck with Comcast or Time Warner Cable an alternative.   This satellite network would include more satellites than what are currently in orbit today.

The explosion of the Falcon 9 on the launch pad in September will no doubt be a major setback to the timeline of these endeavors, but it will not stop Space X.  The Falcon 9 still has a 93% success rate, and now that the cause has been determined and fixed business will resume.  The launch complex was I’m sure extensively damaged, which will take several months to repair, however Space X has access to other launch pads and can continue to launch rockets before pad 40 is restored to operability, most notably, Pad 39A at Kennedy Space Center, which Space X is scheduled to have operational this month.  Pad 39A will be able to launch Falcon 9, Falcon Heavy, and eventually the Interplanetary Transport System.

Working our way back, I also believe in virtually all of the other ideas that Elon Musk has for changing the world here on Earth.

Solar City And Tesla:

I have a slight homesteader/prepper streak in me and love the idea of self sufficiency.  Although I make my money by working for central power stations, I see a large benefit for homes to be off grid from power the same way most rural homes are off grid from city water systems with a well and a septic tank.  The vision of Solar City is to make this an easier and more cost effective practice. Solar city primarily pitches grid tied systems that can benefit from net metering, but making grid tied solar electricity systems easier to install also makes off grid systems easier and cheaper to install.

Solar City has bought and developed new solar panel technology that produces more power per sq. foot, and has a longer lifespan than other solar panels.  With a $700 million investment in a Gigafactory in Buffalo NY, solar city should be able to drive down costs substantially, making solar panels more feasible across larger areas of the United States.  When solar panels are used in conjunction with a Tesla Powerwall battery, then it is possible for a home to be completely off grid by using power even when the sun isn’t shining. The initial capacity of the Solar City Gigafactory is reported to be 1 GW per year, and can ultimately reach 5 GW per year. The new solar roofs that Solar City has developed are nothing short of amazing, but since they seem to be designed to replace higher end roofing,  I think it will still be a while before they can take on the asphalt shingle roof business on cost, but once that happens Solar City will be in an amazing position.

Electric Cars are or course also part of this vision.  I certainly don’t want to sound like a tree hugging hippy when I criticize fossil fuels, but fossil fuels are not a long term sustainable source of energy. Eventually the cost of oil will increase as it becomes harder and harder to find. This may take over a hundred years, but just like with our original source of oil, Whale’s, eventually a market replacement will have to occur, and the idea of fueling Earth’s vehicles with electricity rather than internal combustion of fossil fuels is very appealing.  The best part of electric cars is that with a substantial solar power system at home the car can be fueled by the sun for free.

Note: Even electric cars that are powered by coal power plants are still much more efficient that gasoline powered cars. This is because the fuel burned in central power plants is used more efficiently to produce electricity than the internal combustion engine produces power.

Tesla bears say that Tesla is greatly overvalued given its large debt balance and high P/E ratio for a car company. Tesla may be overvalued, for where it is today, but in 5 years, the 2016 price will look like a steal.  Yes Tesla has a lot of debt, they built a car company from the ground up, that doesn’t happen cheap, and hasn’t happened in a long time.  Tesla also isn’t a car company any more than Amazon is an e-commerce company.  Tesla’s has far more revenue streams than just building and selling cars.  Tesla has battery storage, solar panels, solar roofs, and soon will have an autonomous version of Uber.  Tesla also can sell battery packs to other car companies.  These are all revenue streams that no other car companies have.  Oh…and Tesla also has one huge cash advantage that literally no other car company can touch…They spend nothing on advertising to drive sales.  Tesla has more demand than it can produce, which is a great problem to have.

The Future

I feel like Elon Musk today is where J. D. Rockafeller was at the turn of the century.  J.D. Rockafeller had built his empire on oil…oil for kerosene for lamps.  Right before the car came into widespread use with using an oil byproduct as fuel, that he had previously been burning off as waste.  All of Elon Musk’s companies will hit their stride in 2018.

  • The Tesla Gigafactory will be fully operational.
  • The Solar City Gigafactory will be operational, although not yet at max capacity.
  • The Texas Boca Chica launch facility will be operational.
  • Tesla Will Produce 500,000 vehicles per year.
  • Space X will launch approx. 1 rocket per week between it’s 3 locations.

Ownership:

Another aspect of Elon Musk that I admire is how well he has held on to shares of his companies. He owns 27% of Tesla, 22.5% of solar city (pre-merger) and 54% of Space X with 78% of the voting rights.  In 2014 Musk predicted that by 2025 Tesla could be worth $700 Billion.  If this were to occur, Musk would become the richest man on Earth, just from his ownership in Tesla, which would be worth around $189 Billion.

It’s also not outlandish to expect Space X to grow to being worth hundreds of billions of dollars either.  Some extreme back of the envelope calculations:  1 launch a week at an average price of $75 Million equates to roughly $4 Billion in revenue. Assuming a very healthy 50% profit margin and a 20X P/E ratio, Space X could be worth $40 Billion.  If they could launch 1 rocket a week from all 3 launch pads, this would then triple to $120 Billion, adding billions to Elon Musk’s net worth.  The main problem for Space X is the ability to launch rockets frequently.  3 Space ports might not do it,  it will be interesting to see if Space X starts building multiple space ports after the Boca Chica Spaceport is operational.

For more on Elon Musk’s plans for world domination, check out this amazingly detailed series on Wait, But Why. 

What do you think of Elon Musk?  Do you think he’s a visionary that can greatly change the world for the better, a magician pulling the wool over investors eyes, or somewhere in between?

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. Check out the Action Economics archives section for all past posts.

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