What if Tesla founder and CEO Elon Musk had taken the company private in 2018, as he threatened to do?
This question about Tesla
is of more than just historical interest. It goes to the heart of the debate over whether Wall Street’s obsession with short-term results is harmful to long-term performance.
In a 2018 email to employees arguing for why Tesla should be a private company, Musk wrote that “being public… subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term.”
At the time, Musk suggested that Tesla’s private valuation would be about $70 billion. While we’ll never know how Tesla would have fared had Musk followed through, it’s difficult to imagine that it would have done better than it has as a public company. Tesla’s market value today is within shouting distance of $1 trillion.
So it’s hard to argue that Tesla has been harmed by Wall Street’s focus on quarterly results. On the contrary, Wall Street gave Musk and the company a long leash to allow it to lose money over many years. If Wall Street is obsessed with the short term, how is it that Tesla’s stock rose nearly 10-fold over its first six years as a public company before turning in its first quarter of positive net income? How is it that Tesla’s stock was able to rise another 10-fold again in the subsequent four years before it turned in a full year of positive net income?
Tesla is just one example, but more comprehensive analyses similarly find that being a public company does not appear to hurt long-term performance. Consider a study published several years ago in the Journal of Financial Economics: “The Evolution of Capital Structure and Operating Performance after Leveraged Buyouts: Evidence from U.S. Corporate Tax Returns,” by Jonathan Cohn and Lillian Mills, both from the University of Texas at Austin, and Erin Towery of the University of Georgia.
It’s not easy to compare the performance of public companies after they go private, since once private they are under no obligation to tell the world how they’re doing. The researchers overcame this obstacle by being granted access to the tax returns of 300 companies that went private between 1995 and 2007. They measured these companies’ operating performance to that of a carefully selected sample of similar public companies which did not go private. On average over the three years after going private, according to the professors, private companies performed no better than public ones.
Also consider the argument made in the current issue of Harvard Business Review, by Lucian Bebchuk, professor of law, economics, and finance at Harvard Law School and director of its Program on Corporate Governance. He writes: “Over the past two decades, as dire warnings regarding short-termism have proliferated, growth companies — whose value largely reflects expectations about their payoff in the long term —have enjoyed substantial appreciation in value… [They are] trading at high price/earnings ratios, reflecting the willingness of the markets to attach great value to companies on the basis of their future prospects rather than their current earnings.” It would be just the opposite, of course, “if investors were systematically underestimating long-term prospects.”
Keep this discussion in mind the next time you hear someone complain about Wall Street’s obsession with the short term, or if a company whose stock you own wants your approval to go private.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at email@example.com