The SEC has accused Elon Musk of fraud and is seeking his removal from Tesla for allegedly misleading shareholders by tweeting Aug. 7 that he had the money to take Tesla private. (James Glover/Reuters)
Reporter

Some investors “buy the business” when they buy a company’s stock. That means the firm is such a cash cow, with a built-in customer base and big barriers to entry, that you can’t miss.

Newspapers were once in this category. Google and Facebook are today.

Then there are people who “buy the manager.” Bet on the executive who runs rings around the competition. Berkshire Hathaway, led by Warren Buffett, springs to mind. Marc Benioff’s Salesforce is another.

Elon Musk’s pioneering electric car company, Tesla, has been a “bet the manager” company for most of its 15-year lifetime.

Musk and his beloved car company have a near-cult-like following. Tesla is a longtime darling of Silicon Valley and those who worship in the church of innovation.

Those who have bought shares of Tesla have invested in its one-man show, starring Musk, the 47-year-old who could be — pick one — a visionary, salesman, enfant terrible, entrepreneur, financial engineer or, according to the SEC, a fraud. His money-losing Palo Alto, Calif., electric-car company has amassed more shareholder value than the 115-year-old auto icon Ford Motor Co.

All without making a dime in profit.

“I’ve always thought of him as a 21st-century P.T. Barnum,” said Morningstar stock analyst David Whiston, referring to the famous promoter who, in 1871, founded what became Ringling Bros. and Barnum & Bailey Circus.

Like President Trump, Musk frequently causes an uproar on Twitter. He’s recommended a flamethrower as the “best way to light your fireplace/BBQ.” He’s needled hedge fund manager David Einhorn by sending him “a box of short shorts,” after Einhorn shorted Tesla stock. And, on April Fools’ Day, he sent a series of tweets suggesting that Tesla was bankrupt — as a prank.

Musk’s tweeting came home to roost last week.

On Thursday, the entrepreneur with an estimated net worth in excess of $20 billion was accused of fraud by the U.S. Securities and Exchange Commission. The SEC is seeking his removal from Tesla for allegedly misleading shareholders by tweeting Aug. 7 that he had the money to take Tesla private.

The complaint does not accuse him of criminal wrongdoing. But it does seek to bar him from serving as an officer or director of any U.S. publicly traded company.

Musk owns nearly 20 percent of Tesla and stands to reap a $55 billion bonus over the next decade if Tesla achieves a mind-bending level of success. (Think Apple-like dominance.)

Whiston said Tesla is not a con. It is not a hoax.

“He is making cars,” he said. “We know that. We see them.”

The company has manufactured more than 300,000 cars since its inception. It employs about 37,500 people. It grossed $11.7 billion last year and posted a loss of about $2 billion. It’s never made a profit since going public June 29, 2010.

Ford Motor, on the other hand, sold 6.6 million vehicles last year — and pulled down $7.6 billion in profit.

Tesla’s stock the day it went public sold for $17 a share. It rocketed to just shy of $400 at one time. The closing price Friday was $264.77, a drop of nearly 14 percent on the day.

With the trouble facing Musk and his company, is it a good value for shareholders?

Morningstar suggests that people consider buying Tesla shares — when the price drops to $89.50 per share.

A significant chunk of the value of the company comes from Musk himself, known as the “Musk premium.”

“A lot of the value in Tesla stock is attributed to him personally,” said Craig Pirrong, a University of Houston finance professor. “Without Musk, it’s a niche car company.”

Musk has a knack for getting attention, whether it’s touting his SpaceX moonshot or promising to save the young soccer team trapped in the Thai underwater caves. (They were saved by Thai navy divers.)

“He is very good at generating publicity for Tesla,” Whiston said. “The media does eat it up and seems to be looking for the next [Apple co-founder] Steve Jobs in the tech world.”

Barclays analyst Brian Johnson put the value of the Musk premium at about $130 per share. The SEC suit could vaporize a lot of that.

“Should the SEC be successful in barring Mr. Musk from serving as an officer or director, investors would focus back on the value of Tesla as a niche automaker, rather than a founder-led likely disrupter of multiple industries,” Johnson wrote in a note to clients.

“There’s no doubt he is a character, and all in all that’s a good thing,” said Robert Cihra, a stock analyst with Guggenheim Partners. “Tesla benefits from it.”

Make that, could benefit.

Cihra has a “buy” rating on Tesla with a target price of $430 per share.

He thinks the company could earn $18 a share in profits within two years. (Tesla lost more than $11 a share last year.) He see’s the long odds, though.

“I am the first one to admit there are a long list of investment risks already with this company, which now have a new one with the SEC civil allegations,” Cihra said. “This is a high-risk, high-reward investment. No two ways about it.”

A lot of that risk comes from Musk’s ambition. He is trying to integrate the entire transportation and energy market, Cihra said. The company makes cars. It manufactures its own lithium-ion batteries. It operates its own vehicles and sales and services network.

“They are trying to execute on so many different levels,” Cihra said. “That’s why the potential opportunity is huge, as well.”

Pirrong sees a lot of downside, too.

“What other shoes remain to drop?” he asked. “There’s an outstanding criminal investigation by the Justice Department. The company is going to need cash to proceed, and this lawsuit is really going to make it difficult for the company to go to the public markets and raise money.”

After Musk tweeted about taking Tesla private, the shareholder lawsuits started rolling in. Tesla is also under federal investigation after deadly accidents with his cars. And the possibility of further investigations exists.

“Is the SEC going to go back and look at other statements he said in the past? We could spend all day talking about dodgy statements,” Pirrong said.

For now, he said, “this stock is radioactive.”