Why Tesla Investors Should Care About Elon Musk’s Multiplying Ventures

Elon Musk’s many businesses and the relationships between them are facing increased scrutiny as the Tesla CEO continues to add more to his plate.

During Tesla’s Q2 earnings call on Wednesday, Truist analyst William Stein asked Musk about another technology venture he recently founded and incorporated in Nevada: xAI. Musk recently said the AI ​​startup aims to one day compete with Google’s Bard or OpenAI’s ChatGPT and plans to collaborate with Tesla on software and silicon.

Stein asked him, “For investors who believe that AI features and products can have a lot of value and Tesla products, it can be a concern that you’re in another business where AI is the focus. Can you talk about how xAI can overlap, can compete with Tesla, or otherwise add value to what Tesla is doing?”

Musk argued that xAI and its focus on artificial general intelligence would bring some value to Tesla, and talked about recruiting as an example.

“There were only some of the world’s best AI engineers and scientists who wanted to join a startup, but they didn’t want to join a large, relatively well-known company like Tesla.” He added: “So I thought, OK, it’s better that it’s a startup that I run than they go to work somewhere else. It’s kind of the genesis of xAI.”

In addition to the xAI example, he said he was only able to distract a top materials engineer an apple promising that an engineer can work simultaneously on SpaceX and Tesla. The engineer in question, Charles Koeman, joined Tesla in late 2015 and now serves as vice president of materials development for SpaceX and Tesla, reporting directly to the CEO.

The question of Musk and his many businesses also came up earlier this month when Sen. Elizabeth Warren, D-Mass., called on the Securities and Exchange Commission to investigate his ties to Twitter and related corporate governance issues.

Last year, Musk bought the social media company for $44 billion and installed himself as interim CEO. He is now the controlling shareholder, CTO and executive chairman of Twitter, serving as CEO of both Tesla and his aerospace and defense company, SpaceX. He is also the founder and funder of brain-computer interface startup Neuralink and tunneling venture The Boring Co.

Tesla is the only public company among this group. And he never revealed to shareholders exactly how much talent, time and money he spent helping Musk with his other ventures, and why sending people to Twitter would be a smart use of Tesla’s resources. As CNBC reported, Musk previously enlisted employees from Tesla, SpaceX and The Boring Co. to help him take over Twitter.

At least one high-ranking Tesla employee has moved to X Corp. Musk, the parent company of Twitter. This was shown by court records Dhruv Bathura, who has been with Tesla since late 2013 as a senior manager of business operations finance there, is now a senior financial officer at X Corp. Batura posted job ads for X Corp. on Twitter on the day of Tesla’s Q2 earnings report.

In a proxy statement dated May 2023, Tesla did disclose some details about its related party transactions. Among them, Tesla revealed that “Twitter is a party to certain commercial and support agreements with Tesla. Under these agreements, Twitter incurred costs of approximately $1.0 million in the aggregate in 2022 and $0.4 million in 2023 through February.” Tesla did not say what exactly Twitter is buying from the company.

According to Randall S. Peterson, a professor of organizational behavior at the London School of Economics, “Musk makes a convoluted argument by saying, ‘I’m helping Tesla by keeping these great people from joining the competition.’ It’s a counterfactual that you can never verify or challenge in an investigation.”

Most startups fail, Peterson noted, and people who want to start startups probably won’t join Tesla’s direct competitors in the auto industry.

Peterson said Musk’s many ventures could pose a risk to Tesla, and shareholders should look for more details.

“When you’re running multiple companies, it’s hard to focus on one thing and excel at one thing,” Peterson said. “This is a risk for the CEO himself. Will the shareholders of most companies allow their CEO to run several other companies at the same time? The answer to that is probably no. So it begs the question of what Tesla’s board of directors is up to, whether they are independent at any level, or are they so enamored with Musk that they not only tolerate his unusual way of doing things, but may not release significant fundamental issues as long as the money is flowing in.”

The boards of companies in crisis, such as Enron and Royal Bank of Scotland, have failed to rein in their CEOs, despite the signs of trouble in many areas, he noted.

Another risk, Peterson said, is that Musk’s employees may feel pressured to work on many projects at once for him outside of Tesla. In an effort to please him or accumulate new work experience, they may not recover from work and burn out. Burnout, he said, can lead to severe burnout or poor performance.

Finally, the professor noted, Musk can create distractions that prevent focus among his employees, even as he intends to cross-pollinate between his businesses.

“You have to be hyper-focused to be the best at something, both as an individual and as a corporation. That’s why we’re seeing a trend from conglomerates that were big in the 70s to companies that are more focused today,” said the professor.

Still, Musk appears to be doubling down on useless collaborations between companies in his growing empire.

On Wednesday’s call, he was asked to report on Tesla’s progress in developing a humanoid robot called Optimus. He sounded futuristic and said that one day Tesla may work with Neuralink to create robots, prosthetic arms and legs that will help amputees regain full mobility and dexterity.

Tesla did not immediately respond to a request for comment. Twitter responded with an automated reply containing a rude character.

— CNBC’s Rohan Goswami contributed to this report.