September 17, 2018
What We’re Reading This Week
There is a lot here. I mean…a…lot. But true to form, I am only going to talk about the parts that particularly interest me. I am not going to write about Elon Musk mentioning his intention to take Tesla private, despite lacking the necessary funding. I’m also not going to write about why the SEC might have a problem with the CEO of a large public company making materially relevant comments that could affect the stock’s price without doing the appropriate diligence. I am going to write about Musk’s war on the short-selling community, hollow threats of going private notwithstanding.
The CEO of Tesla has had some really…interesting(?) responses to short sellers. Maybe the most concerning occurred last month when some loyal Tesla fans outed an anonymous Tesla detractor, the “Montana Skeptic.” The “Skeptic” previously wrote for the online publication, Seeking Alpha, and was an outspoken critic of the carmaker. Once his identity was made public (via Twitter…were else? We are talking about Musk, after all) Elon Musk made a call to the guy’s boss. Musk didn’t call someone at Seeking Alpha, he called the writer’s boss at his real job and threatened to sue. Yikes. However, I said all of that to get to this: most recently Musk tweeted a response to a story about a hedge fund manager shorting Tesla stock and losing money. Musk stated he would “send (him) a box of shorts to comfort him through this difficult time.”
Is that a thing?!? I mean, it has a small amount of cleverness to it. Like, a really small amount. You don’t really see a lot of homograph work like this in other arenas. It might be nice. Maybe the next time a baseball player does something with a bat, people should mail him…a box of dead bats? I don’t know, email me better ideas.
Anyway, the great part of the story is that several weeks later the hedge fund manager actually received a box of shorts from Musk! I have so many questions. Did Musk pick out the shorts himself? Did he get the sizes right? How many shorts is the right number of shorts? Does he mail you pants if you’re long on the stock? Of course, things also took an odd turn when Musk tweeted for the shorter to “put them on and post a selfie.” That’s not a joke, he seriously said that. Remember, this is the CEO of a $60 billion company. As funny as I find this, I can’t help but feel like he has more important things to do.
A few weeks ago Apple became the first company to reach a $1 trillion valuation. Other tech mega giants are not far behind as Amazon, Alphabet, and Microsoft are all worth more than $800 billion. To me, this is less a story about huge market caps and more of a story about inflation. Of course, you could always play this fun game to see just how much a trillion really is. I don’t want to ignore the commercial and financial success of the company; Apple has worked hard and has created great products. In turn, it has marketed itself well and experienced outsized growth. However, as each day goes by and the cost of goods and services rises, we will continue to reach new market highs and new eye-popping market caps. Oh, there’s also this game. A trillion is a lot of money.
Some people think that Apple got there through stock buybacks, but this feels spurious. Buybacks are a great way for a company to return more value to its shareholders, not through larger market caps but by reducing the number of shares. The formula looks like this (simplified):
Stock Price X Number of Shares = Market Cap
For example, $214.69 X 4,915,138,000 = $1,055,230,977,220
See? It’s very simple. You could argue that those numbers come from other data like inventories, future cashflows, etc., but at the end of the day the company’s value is a direct representation of the outstanding shares and their value. When a company buys back shares, it reduces the number of shares outstanding but the market cap remains relatively intact and per share value increases. One hundred shares valued at $100 equals a $10,000 value. Reducing the number of shares by 20 means each remaining share is worth $125. To argue that stock buybacks exponentially increase the value of a company is to imply losing cash (money to purchase shares must come from somewhere) or taking on debt (another way companies buy back shares) somehow adds value to a company. Actually, when you look at the math that way, you could sort of argue that share buybacks ought to reduce a company’s value, right?
Also, this stuff:
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