The Prof G Pod with Scott Galloway - Prof G Markets: Elon sells Tesla (stock), the Inflation Reduction Act, Coinbase and Stock-based compensation

Episode Date: August 15, 2022

This week on Prof G Markets, Scott interprets Elon’s $7 billion Tesla stock sale and what it might mean for his control of the company, breaks down the implications of the huge climate bill, a.k.a. the Inflation Reduction Act, and weighs the pros and cons of Coinbase’s heavy reliance on stock-based compensation.  Elon’s Tesla Stock Sale The Climate Bill / Inflation Reduction Act Coinbase Stock-Based Compensation Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. This week's number, 300,000. That's how many more streaming subscriptions Disney has than, wait for it, Netflix. That's right, Disney has more subscribers than Netflix. As a matter of fact, it took Disney two and a half years to get to 150 million subscribers. It took Netflix 12 and a half years. Though to be fair, a lot of Disney subscriptions are part of packages with Verizon or other services. But still,

the mouse has gone fucking gangster on the end. Now, do we have a problem? No, sir. No, Mr. Mouse. No, Mr. Mouse. Oh, that's good, because I thought we had a problem for a minute there, huh? All right, now, get out there and make me some

goddamn money. Welcome to ProfitGMarkets. Today, after a quick look at the headlines we'll be discussing, one, Elon Musk's third batch of Tesla stock sales in less than a year. Two, the Inflation Reduction Act, kind of a misnomer. We'll speak more about that. And finally, Coinbase and the pros and cons of stock-based compensation. Mia, new young person, rotating millennial, bring the average age of this podcast down about 300 years. Tell us what's happening. Hey, Scott. Well, the July CPI, or Consumer Price Index, came in lower than analysts expected. Overall, prices were flat between June and July, thanks in part to steep declines in gas prices. And the PPI, which measures prices of raw materials

and business services, declined slightly from June to July. After months of generationally high inflation, the situation is improving. This might mean that we won't see as large an interest rate increase at the Fed's September 20th meeting. Wall Street certainly thought so, and major indices finished the day in the green. One sector that didn't have such a great week, however, was semiconductors, those tiny wafers that power everything from our iPhones to our BMW Series 7s. Domestic chip producers like NVIDIA and Advanced Micro Devices outpaced the S&P 500 in July, surging over 20% on strong demand and in anticipation of the CHIPS Act. But then, in early August, Micron, NVIDIA, and AMD all forecasted weaker sales and their stocks took an immediate

hit. The company cited lower demand, which is weird because we've heard so much about the opposite, chip shortages. How should we make sense of this, Scott? So broadly speaking, consumer electronics demand is down. It appears that people stocked up during the pandemic. People thought, okay, I'm going to be working from home. I'm going to go to Best Buy and buy a new laptop, new modems, etc. A lot of that demand has been met or sated, and the fears of a recession or a slowdown, a lot of people have decided maybe I don't need to upgrade, and there's a bit of a trough now. Global smartphone shipments in Q2 of 2022 are down 9% year on year. And global PC shipments are off 13%.

Semiconductors are a difficult business because demand can move much faster than supply. One of the wonderful things about Netflix or a cloud business is that demand can double overnight and supply can meet demand in a very granular, liquid way. What we've done in the U.S. is we've invested massively in companies that have the agility to scale supply up with demand. So services companies, companies based on zeros and ones. Manufacturing is the opposite. If demand for the F-150 doubles, Ford can't meet that demand overnight. It takes some time. So there's been an underinvestment in manufacturing by venture capitalists. That poses a security threat because everything from tanks to toasters to our cell phones demand

chips. And these things take sometimes three to five years and cost $10 to $20 billion. And when I say these things, I'm talking about semiconductor factories. Every new semiconductor factory takes approximately the same amount of capital as the budget for NASA at $18 billion. Okay, let's move on. We're moving on to discussing our favorite celebrity, Elon Musk, who just can't seem to stay out of the news. I'm carrying his triplets, by the way. Did you know that? Did you know that, Mia? I'm not surprised, frankly. He's an innovator. He's an innovator.

Anyways, I'm sorry. Go ahead. Go ahead, Mia. Okay, well, I can't wait to hear what you guys name your triplets. But anyway, moving on. This time, Elon is selling billions in Tesla stock, roughly $7 billion worth, to be exact. This is his third round of selling in the past year. He sold 10 million shares in April when he started talking about buying Twitter.

And last fall, he sold $16 billion worth of shares to pay taxes on the exercise of his stock options. All in all, Elon has sold $32 billion in Tesla shares in less than a year. Elon tweeted that he wanted to avoid an emergency sale if the Delaware court ordered him to close the Twitter deal. Scott, do you think that's why he's selling? I feel kind of skeptical. So there's a movie called The Exorcist that I literally don't watch scary movies anymore because at the age of 13, I snuck into The Exorcist with my best friend Adam Markman and I couldn't sleep for the next, I don't know, seven or eight years. Priest says in the movie that the devil will mix in truth with the lies. To be clear, I am not comparing Elon Musk with the dark Satan. However, I just don't think you can trust any fucking thing this guy says. If the Chancery Court forces him to

close on this, he doesn't want to create or inspire a fire sale in his stock. I think he also realizes he might have to close. Shortly before the court case proceeds and the chance to record a Delaware, I think his lawyers are going to sit down and go, let's be honest, you're fucked, you're going to lose this. And rather than lose face, he'll come to a deal or he'll say, just kidding, I'm planning on closing. And also Twitter's legal argument or case against him cited something that was really deft and accurate. It said something along the lines of the following, that his interest in doing this deal is directly correlated to the price of Tesla stock. And that's exactly right. When Tesla was down 30 percent a month ago, he was coming up with all sorts of lies for why he wasn't going to have to close. Now that the stock is up and he's probably personally worth

$20 or $30 billion more than he was just 30 days ago, he's in a buying mood again and realizes he can probably afford it. So I think he's selling, one, to build a cash war chest if he does in fact decide to buy it or it becomes increasingly clear that he has to buy it. And two, the stock is overvalued. So when do you sell shares? When they're fully valued or overvalued. So I think this makes a lot of sense for him. And back to the point about Tesla's share price being correlated to Twitter. If you look at the correlation coefficients between various stocks, Twitter and Pinterest have a correlation of 0.41. If it was one, it would mean it's perfectly correlated.

I turn on the switch, the lights go on 100% of the time. The correlation between Twitter and Meta is 0.58. Twitter and Snap, 0.72. Twitter and Tesla, 0.78. Because the market recognizes that every time Tesla goes up, it means that he is more likely to close because his pockets feel deeper and deeper. Didn't he also say at some point that he doesn't like taking his money out of his companies? Yeah, I see above full of shit. Saw him say this in person at the code conference.

I basically, with Tesla and SpaceX, I just have not really bothered to sort of take money off the table, which is a common – most people do. They sell some of their stock and they take money off the table. And for me, I just like said, you know, my money will be the sort of – if it was the first in, it will be the last out. Which is bullshit. He basically said, I'll never sell. He's been selling like crazy. And there's nothing wrong with that. He's built an amazing company. He's been selling like crazy. And there's nothing wrong with that. He's built an amazing company.

He's allowed to diversify. But whatever he says, weren't we supposed to have a million autonomous taxis on the road by last year? So I think that our idolatry of innovators has convinced these people that they can say anything and we will believe it. Tech innovators largely believe they are immune to any sort of scrutiny or any fidelity to the truth. Well, speaking of our idolatry of innovators, the media's fascination with Elon makes Tesla seem like it's his company. But it's really not. And as he sells more shares, he'll have less and less formal control. Tesla doesn't have a dual-class shareholder structure.

So, theoretically, could he be removed? Theoretically, but he won't. He's considered, and there's a lot of validity to this, the genius, the visionary, the salesperson. You haven't had a new car company in decades. Competing with Boeing and NASA to haul material into space is not an easy feat. And key to much of that was their ability to raise capital at exceptionally cheap rates because this shit is expensive. And he is so dynamic. He is so in the news every goddamn day.

And it goes to the Umberto Eco celebrity effect where you just want to be famous. Doesn't matter what for, you just want to be famous. And he has been able to pump these stocks to such an incredible degree that they're able to finance what had been previously unfinanceable, or at least wasn't able to raise the kind of capital they would need to do this. So as long as he wants that job, I think he has it. If he's not going to be fired for securities fraud or for knocking up a subordinate and for forcing his CEO to pay hush money to somebody for other allegations of misconduct, I mean, he can pretty much light the place on fire and he would still probably have a

job. So it is his company. He's an incredible brand and he's managed to raise enormously cheap capital. His job is safe as long as he wants it. Yeah, that makes sense. I think that's all for Elon. When we return, we'll talk about the Inflation Reduction Act. What software do you use at work? The answer to that question is probably more complicated than you want it to be. The average US company deploys more than 100 apps, and ideas about the work we do can be radically changed by the tools we use to do it. So what is enterprise software anyway?

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a special series from Pivot sponsored by AWS, wherever you get your podcasts. Okay, we're back. The Inflation Reduction Act passed the Senate last week. Economists project that the bill will modestly reduce inflation in future years. But really, this legislation has very little to do with inflation. It's a rebranding of Biden's original Build Back Better plan. There's a lot of excitement about this bill. The yeas are 50, the nays are 50. The Senate being equally divided, the vice president votes in the affirmative, and the bill, as amended, is passed. What impact do you think this bill will have on the private sector? So first off, it's hard to argue this isn't a victory. We've gotten to a point where a lot of people doubt that America can get anything done. And when you're talking

about the very real and existential threat of climate change, the fact that we did pass something does mean something. And they're talking about taking us back several decades in terms of carbon emissions. So this is a big win. It's a big win for Biden. I personally just had my heart broken by this thing. What didn't make it into the final legislation or what was struck from the legislation was some basic head-up-your-ass tax cuts that should have been removed, specifically carried interest. Fine. Rich people win. They have more lobbyists. Kyrsten Sinema wants to rub the small of the back of private equity firms. I hope someday someone loves me the way Kristen Sinema loves private equity firms. Fine. That's bad,

but it's not tragic. What is tragic here is that universal pre-K didn't make it through. What's tragic here is that the child tax credit didn't make it through. We had made real progress reducing child poverty. What is the fucking point of all this innovation, all this investment, all this capital formation, all of this education, if we're going to have uneducated and hungry children? I feel as if we just missed the forest for the trees. Who's going to be charged with actually solving climate change when shit gets even more real than now and we start having super fires or floods every other day? A generation of kids of which there will be too many who are uneducated, too many who have stress, too many who are emotionally unstable because they grew up in homes that were economically insecure. So

I'm a glass half empty kind of guy. On the whole, this is a victory for the Biden administration. It is a victory for America. It's a victory for the climate. But Jesus, don't you always break our heart? I mean, what is the point if we're not going to take care of our children? So I'm going to take off my Debbie Downer glasses. The government has historically played a huge role in R&D. Federal investments in digital technologies in the 50s and 60s literally birthed the internet. The biggest companies in the world are all built on the backs of government R&D. Technology, core to the iPhone, came out of public investments, chips, GPS, global networks.

The Department of Energy is now authorized to issue a quarter of a trillion dollars in loans to private companies to stoke manufacturing of EVs, solar panels, batteries, etc., which is a big boost from what it's currently working with, $40 billion. The cost of these loans is actually only $5 billion because they can get 50 to 1 leverage. Tesla received a loan like this to expand manufacturing a decade ago. By the way, Elon, stop shitposting America. You didn't start an EV company in South Africa. You didn't start a space hauling company in Canada. You started both of those in America. On the climate side, it's overdue. Natural disasters have increased by 5x over the last 50 years. Today, almost half of the contiguous U.S. is covered by a moderate to severe drought. In the past six years, 85% of giant sequoia groves burned in wildfires. Think about that. 85% of our sequoias have burned in wildfires compared to 25% in the prior 100 years.

And 60% of the EU and the UK is in a drought, which has huge consequences. More than 100 French municipalities have no running drinking water. So this is massively overdue and welcome. It is a win, but I put a small W on it. I'm really optimistic about this bill for its climate components, but I don't understand why it's called the Inflation Reduction Act. How does a $700 billion package that pumps more money into the economy reduce inflation? So what is inflation? It's too many dollars facing too few goods. So if you provide tax credits that result in increased manufacturing capability, you address the supply side. We can address the demand side of inflation by raising interest rates and making things more expensive such that people demand less of those goods because they're more expensive. It's the supply side that takes more time to figure out. It means investments in things like semiconductor manufacturing. It means giving the government the ability to bring down prices. For example, Medicare will be allowed to negotiate

drug prices and lower health care costs, which have been one of the biggest contributors to inflation. And on the supply side, it should lower the energy costs. It also includes tax compliance measures, which should help us collect more money. $80 billion infusion of cash to the IRS would result in $204 billion in revenue to government coffers over the next 10 years. The Republicans are trying to make it sound like everybody's going to be harassed by these new IRS agents, and most of these new hires are just going to go to replacing IRS agents that are leaving or retiring. And you can't have a functioning government unless you actually collect taxes from the people who owe it. According to the Congressional Budget Office,

every $1 spent on tax audits results in $2.50 in tax revenue here. So besides the IRS, who are the winners here? I've always been fascinated, and I've been a bit of a snob. I've always thought, go to college and get a job at Google or starting a tech company, because that's sort of how I came a professional age. And I've met a lot of wealthy people who are in the mainstream economy that own car washes or property developers or figured out interesting supply routes for windows. This is the mainstream economy. And I think you're going to see a lot of opportunities for homeowner projects. The bulk of the tax credits are going to homeowner projects.

So solar panels, heat pumps, electric, HVAC, water. There's just going to be a ton of on-the-ground infrastructure for jobs that won't necessarily demand a college degree. I wonder if some of our junior colleges might get into the business of some sort of vocational training around different types of on-the-ground frontline worker jobs that will be inspired by this act. You could have more than 9 million jobs created over the next 10 years from the investments that will come out of this bill, according to UMass researchers. All right, so moving on to Coinbase. The crypto trading platform released quarterly earnings on Wednesday, and they were ugly. The company lost $1.1 billion and revenues fell over 60% from last year. The most popular trade on the

platform? Users converting crypto to fiat and withdrawing their money. On the company's earning call, analysts zeroed in on one particular number, Coinbase's stock-based compensation. The company issued $391 million in share and option grants to its employees, equal to nearly half of the company's revenue for the period. Scott, why is this such a concern? Stock-based compensation is you issue options to employees. You say, all right, the stock's gone from 350 to 80 or whatever it's trading at, which means all of the stock options that kept you around are no longer worth anything. So we have to issue new ones. for the company and investors. The bad news is it means there's more shares out there. If the shares go up, the earnings get diluted, meaning the earnings will be spread across more shares. When the shares are going up, nobody leaves.

Your employees stay, you don't have to pay them a lot. You have a lot of negotiating leverage as the company because they know that, okay, Bob, maybe you want a raise of 20% in your current income, but we know that you're investing shares worth a half a million dollars a year. So boss, let's be honest, you're not going anywhere. Once those share prices decline by 70% or 80% and Bob's no longer vesting anything, they have to issue Bob more options and it's dilutive.

So it's a non-cash charge, but still there's a cost to shareholders because it means that the earnings will be spread across more shares, reducing earnings and putting more pressure on the stock price. So what accounting principles do is they force the company to report those new options as a cost. So, for example, in this case, Coinbase, the stock-based comp was almost half of revenue. It was 49%. Apple stock-based compensation is only 2% of revenue, meaning the options cost to maintain these employees only costs shareholders 2% of revenue. At Salesforce, it's 10. Meta, it's 12. Airbnb, it's 12. Roblox, it's 23. At Robinhood, the stock-based compensation charge is two-thirds of revenue, meaning there's no way this stock is likely ever going to have a sustained run. There's going to be huge gravity pulling those shares down because so many new shares will be issued.

So whenever you start seeing numbers like this where stock-based compensation is 50, 70, 80 percent of revenues, it basically means one thing. It means shareholders, at least in the short and the medium term, are fucked. Scott, from an employee perspective, how should my peers evaluate an offer with equity? So equity-based compensation is a key way to build wealth. And I would say you want to figure out a way to have four savings in your life. So if you're going to work for a company, a private company or a public company, generally they have lower or below market compensation in terms of current comp sometimes. And they talk about your options

package. And when people call me and ask me for advice on a job offer, they very rarely know how to calculate the value of their options. And this is hugely important and should also be something in my mind that you want to focus on even more than your current comp. And that is you typically can go back and negotiate a little bit. And what I suggest is you want to negotiate around your stock-based compensation. Now, why is that? It grows tax-deferred. So if you get 1,000 options at a strike price of $50 and the stock goes to 100, you've made $50,000, but it vests over four years. You don't have access to it. And it's tax deferred in the sense you're not taxed on it until you exercise

those options. The way you get rich at a public company is one, you get into senior management, and two, the majority of your compensation comes from stock-based compensation. So I would say, call someone who understands this stuff and say, okay, here is my options package. Here's where the stock is at. Here are the vesting terms. Here's what happens if I get fired. Does it accelerate? Is there a one-year cliff? Does it vest over two years, four years, five years? This stuff is important. Why? Why? Because it is human nature to spend all the money you get every two weeks in the form of current compensation. The way you typically build wealth is through some sort of forced savings. Be that a mortgage that you have to pay every month paycheck and options or equity in a company

that grows over time that you don't have access to as for savings. So pay attention to the options or stock-based part of your compensation or your offer. That makes sense. I hadn't thought about the for savings or really the tax implications of that kind of compensation. Okay. What's up for the coming week, Mia? Well, in one word, shopping. Retail sales are the big story this week with Walmart, Home Depot, Lowe's, and Estee Lauder all reporting earnings. We'll also see GDP growth numbers in Europe. The EU, unlike the U.S., has registered positive GDP growth in the past two quarters,

and we'll see if that continues. Scott, do you have any predictions? My only prediction is that I think inflation is going to decelerate faster than people are predicting. Technology is ultimately deflationary. Work from home is deflationary. People are spending less money on restaurants or going to Chopped or on the subway, whatever it might be, or on gasoline. I think there's a lot of downward momentum around energy prices. So I think we're going to see inflation decelerate even faster than they're predicting. Do you have any fun plans for the rest of the summer, Scott? Yeah, I'm leaning into my white privilege. I'm going to Nantucket. I'll be wearing pink shorts and whale belts. None of that is true. But actually, you're from Nantucket. That's right. Sure am. I'm going to my home planet, aka Nantucket, as well. Oh, nice. In the next couple days. That's weird to be raised on Nantucket.

That explains a lot. Yeah, we're going there. We love it there. We take our boys there. So, I will see you in Nantucket. Yeah, try not to get eaten by a shark. No, don't even say that. Speaking of that, I read the Nantucket Harbormaster reported 43 shark sightings in recent weeks, including one hammerhead. I don't even take baths anymore. I'm so freaked out by that. Okay, we will see you next week. Thanks for tuning in. Leave in the night.

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