U.S. markets close in 38 minutes

Tesla’s Big-Hype Machine: Could It Backfire?

Yahoo! Finance
The Exchange

by Marek Fuchs

We now know what those coy, cryptic tweets from Tesla CEO Elon Musk were all about. We know this, too: when it comes to Tesla (TSLA), we’ve officially entered a high-hype zone.

Credit: Reuters

There’s never a dull moment when it comes to the electric sedan maker, which has the tendency to suck the air out of rooms with intrigue and controversy, alternately making grand claims, then vanquishing entire car lines before rubber hits road.

But at this point, Musk may have replaced J.C. Penney’s (JCP) Ron Johnson as the loudest in the public common – and that’s not necessarily a good thing.

Put on your hip high boots and wade in, just for a moment, to what Tesla just announced. Then we’ll make our way over to the circumstances under which they announced it.

The grand announcement

Tesla has conjured up a lease-to-own program that involves guaranteeing an all-inclusive monthly fee, not to mention a particular residual value after 36 months.

“They would not be making that guarantee if they did not believe they could hold their margins,” nodded CNBC with approval, moments after the announcement.

Problem is, what Tesla trumpeted as a “revolutionary new finance product,” (famous last words, those) seemed more like a scheme that will guarantee the open-ended possibility of crimped profits.

In coordination with Wells Fargo (WFC) and US Bank (USB), Tesla will, they said, “create a new kind of financing” (again: words to give investors pause, if not worse) by guaranteeing (oh boy) customers the opportunity to sell at a certain resale value after three years. More to the point, Tesla will make certain that the residual value of the Tesla Model S matches that of the Mercedes S Class.

Look: who knows? Maybe this strategy will work. But even assuming that guarantees work for the first time in recorded history, there is much here to furrow brows.

Gaming expectations

Is the prototypical Tesla buyer even looking for a deal? Moreover, is Tesla driving down the wrong road by gaming shareholder expectations to such a considerable degree?

During the last week of March, Musk, most recently spotted in a hair-pulling fight with The New York Times over a damning – if controversial – review, took to the Twitter airwaves. His tweet: “Really exciting @TeslaMotors announcement coming on Thursday. Am going to put my money where my mouth is in v major way.” Only hours later, he demurred…at least on the future timing of the “really exciting” news, adding: “Slight change of date to ensure no end of quarter distractions — will be Tues next week.” A final word came Sunday night, when Musk tweeted: "To be clear, Tesla is in California so it's no April fool's yet. Also, in my opinion, the Tuesday news is arguably more important" than the earnings.

The earnings, controversial in their own right, nevertheless put the stock in motion. Tesla said first-quarter sales of its Model S exceeded estimates, though did not top 5,000. They held out the prospect of profits, though how much and for how long was uncertain.

Meanwhile, the markets and social media nearly spontaneously combusted with speculation about the upcoming announcement.

@howardlindzon joked about the possible advent of a Tesla phone. The best guess of others was that Musk would increase his stake. And there were scoops about Tesla’s involvement in NASCAR (an April Fool's joke) and taking on Texas auto dealers. We saw everything up to reports of the invention of an advanced cup holder.

Was this dirty tease a legitimate use of social media by the CEO of a high-profile public company? Probably not. The rampant speculation carries with it misinformation and quick-hit holders that destabilize the stock. The hype (“really exciting,” “revolutionary,” “guarantee”) also hitches a company in the larval stage to expectations that are difficult – to say the least – to meet.

Here’s the contradiction: It takes sales moxie to build businesses, and to his everlasting credit, Musk, who built PayPal and SpaceX, has that in spades. But managing a company in the context of the public markets – especially when it comes to new financial products – requires a degree of humbleness.

After all, lay everything you know about Tesla end-to-end and it may still be hard to reach a conclusion. The company seems to exist in order to provoke and confound. Hyping announcements to the hilt does not help matters.

Marek Fuchs was a stockbroker for Shearson Lehman Brothers before becoming a journalist who wrote The New York Times' County Lines column for six years. Fuchs speaks regularly on business and journalism issues at venues ranging from annual meetings of the Society of American Business Editors and Writers to PBS to National Public Radio. His recent book, "Local Heroes: Portraits of American Volunteer Firefighters," earned widespread praise. He is on the writing faculty at Sarah Lawrence College. When Fuchs is not writing or teaching, he serves as a volunteer firefighter. You can contact him on Twitter: @MarekFuchs.