- Tesla’s rising stock price has come about via what Carson Block sees as a history of exaggeration.
- They include Elon Musk’s “funding secured” tweets and the promised “Full Self-Driving” upgrade.
- To Block, Tesla has shown that making careless statements won’t necessarily hurt your stock.
- See more stories on Insider’s business page.
To short-seller Carson Block, Wall Street’s SPAC boom has created opportunities for unscrupulous sponsors to take advantage of investors, particularly in the electric-vehicle industry.
“One of the most effective ways of preying on unsophisticated retail [investors] seems to be doing SPACs in the EV space,” Block said.
Tesla’s stock price has increased by more than 650% since the beginning of 2020, making retail investors — individuals who invest without the resources and, often, expertise of professional money managers — eager to find the next big EV company. SPACs, shell companies that raise money with the sole purpose of buying another firm, have noticed. In the past year, more than 15 companies developing EVs or a related technology have gone public through a SPAC merger or announced their intention to do so. Some experts believed the frenzy has overinflated the valuations of young EV companies and has created a speculative bubble.
“When they look at the massive amounts of wealth that Tesla has created through its stock-price appreciation, I think a lot of unsophisticated, particularly recent entrants to the market can be forgiven for thinking that they might be able to buy the next Tesla,” Block said. “The SPAC sponsors and bankers, I’m sure, are very aware of that mentality.”
But it’s not only Tesla’s success as an investment that’s created those conditions, Block said. He also believed the EV-maker has shown that making false or imprecise public statements isn’t an obstacle to a strong stock price. (Block said his firm, Muddy Waters, doesn’t have a short position in Tesla now, but it has bought put options, which are equivalent to a bet that a stock’s price will fall, on the company’s shares in the past.)
Block said Tesla has been careless in some of its statements
Block pointed to what he sees as two of the most significant examples of Tesla’s lack of discipline in how it communicates with the public. The first came in 2018 when Tesla CEO Elon Musk said he had secured the funding needed to take the company private. His claim boosted Tesla’s stock price before becoming the subject of an investigation from the Securities and Exchange Commission, which sued Musk and alleged he hadn’t received any financing guarantees. The two sides eventually reached a settlement in which Musk paid a $20 million fine and stepped down as Tesla’s chairman for three years, without admitting or denying the SEC’s allegations.
The second example Block cited was Tesla’s decision to label an upgrade package for its Autopilot driver-assistance system “full self-driving.” Though Autopilot can control steering, braking, and acceleration in a wider range of environments than competing systems, it requires the driver to keep their hands on the wheel and eyes on the road at all times. In emails to California’s Department of Motor Vehicles, first published by PlainSite and later summarized by The Los Angeles Times, a Tesla lawyer said Autopilot isn’t close to being an autonomous system and has trouble in a variety of situations, including complicated intersections and poor weather.
Despite those controversies, Tesla’s stock price has soared amid rising sales and profits. At the beginning of 2020, its shares traded at $85 (after adjusting for an August 2020 stock split). At the end of Tuesday, they cost $662.
To Block, Tesla’s success, despite what he sees as a history of exaggerations, has created incentives for SPAC sponsors to be less rigorous in how they evaluate EV companies. (Tesla did not respond to Insider’s request for comment.)
“Tesla is such a bad example to the markets, and particularly to SPAC sponsors,” Block said.
Earlier this month, Muddy Waters targeted an EV company, XL Fleet, it believes has followed that example. Block’s firm accused XL Fleet, which merged with a SPAC in 2020 and makes drive systems that convert gas-powered vehicles to hybrids, of overstating the size of its customer base and the fuel savings its systems produce. (Muddy Waters also took a short position in the company, which means it stood to gain if XL Fleet’s stock price declined as a result of its accusations.) XL Fleet denied the allegations, saying parts of a report Muddy Waters published about the company were inaccurate or misleading.
“I don’t feel like we’re sitting here saying we need to short EV-related SPACs,” Block said. “It’s where do we think that there are likely significant misrepresentations and a lot of promotion and hype, and EV SPACs happen to be one such area.”
Do you work for an EV company or a SPAC that plans to merge with one? Do you have a news tip or opinion you’d like to share? Contact this reporter at mmatousek@insider.com, on Signal at 646-768-4712, or via his encrypted email address mmatousek@protonmail.com.
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