Prof G Markets: Tesla’s Value Destruction, Crowdstrike and Cybersecurity, and Bankruptcies

This week on Prof G Markets, Scott reflects on Sam Bankman-Fried’s DealBook Summit interview. He then explains why the cybersecurity sector is practically recession-proof, and shares his thoughts on how Elon Musk’s antics at Twitter will cause Tesla’s stock to get cut in half. And in this week’s unpack, we learn about how bankruptcies work, and whether Musk might file for one at Twitter. Show Notes: DealBook Summit Crowdstrike Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Scott Galloway?

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• 0:48Speaker 01

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• 1:18Scott Galloway?

  This week's number, 6 million. That's how much Miami Night Club 11 raked in last year in crypto payments. But in the last few months, that number is $10,000 in crypto payments. True story, my father told me to never go to a strip club as I may see something I'm not supposed to. He was right, I went into a strip club and saw my dad.

• 1:50Scott Galloway?

  Welcome to Prof G Markets. Today, we're discussing CrowdStrike and the cybersecurity industry.

• 1:56Scott Galloway?

  The continued misadventures of Elon Musk and an unpack on bankruptcies. Here with the news is Prop G Media Analyst Ed Elson. Ed, let's light this candle.

• 2:08Ed Elson?

  Speaking of nightclub, Scott, Prop G Media is going clubbing tomorrow. And the question everyone's asking is, will Scott Galloway be joining us?

• 2:17Scott Galloway?

  A hundred percent no.

• 2:18Ed Elson?

  What?

• 2:19Scott Galloway?

  I think at this point in my life, nothing good can come from me going out late night to a club, which is kind of a raunchy vaudeville with alcohol around. There's just, there's literally nothing but downside.

• 2:33Ed Elson?

  It's bonding.

• 2:33Scott Galloway?

  No, you should bond with each other.

• 2:35Ed Elson?

  Yeah, well, we have a lot of plans to try to convince you to come. Most of them based around alcohol.

• 2:41Scott Galloway?

  Yeah, good luck with that. But here's the key, the key part of me will come specifically my black card. That's right. Daddy has an Amex Centurion, so he can signal to women that if they have sex with me, the kids are more likely to survive than if they have sex with someone carrying a Discover card. You're throwing down black tomorrow, Ed.

• 3:00Ed Elson?

  I know why you can say that, but you can't come with us to a club.

• 3:02Scott Galloway?

  There's, I'm being very serious here, and this is a lesson to bosses, or I don't know. At my age, you just shouldn't be partying with the team. You should be nice, you should have dinner, you should outline the strategy. Because here's the thing, you're all very impressed by me. And when you see me drunk, you'll be uber impressed because I'm actually a better version of me with a little bit of, a little bit of the devil water. But now, I don't have much of a desire to party with any of you. And also, you guys want to be able to get fucked up and not worry about what I think about you.

• 3:33Ed Elson?

  Well, I'm a great version of myself drunk, so.

• 3:35Scott Galloway?

  Are you?

• 3:35Ed Elson?

  I can see it, yeah.

• 3:36Scott Galloway?

  I'm very judgmental. If anyone gets sloppy, I'll be like memo to self, never let them be a manager. So yeah, you're on your own.

• 3:44Ed Elson?

  Let's start with our weekly review of market vitals.

• 3:54Ed Elson?

  The S and P 500 rallied on signs inflation might be easing. The dollar ended November down almost 5% after registering gains for the first 10 months of the year. Bitcoin climbed modestly, but is still down around 20% for the month. And the yield curve inversion between long-term and short-term treasury bonds continued to deepen. Shifting to the headlines. The three major indexes closed out their second straight month of gains after Jerome Powell signaled interest rate hikes will start to slow this month. Over in the eurozone, inflation slowed for the first time in 17 months. Meanwhile, the European Central Bank issued a statement on Bitcoin, arguing the cryptocurrency is taking its "artificially induced last gasp before the road to irrelevance."

• 4:38Ed Elson?

  And finally, against his lawyer's advice, Sam Bankman-Fried, the former CEO of FTX, spoke virtually at the New York Times Dealbook Summit. He said he "never tried to commit fraud at FTX." Scott, you were there at the summit. What did you think of that interview?

• 4:54Scott Galloway?

  I couldn't believe he did it. He's so young that I can't help but feel paternal. And if I were his father, I would have flown down to the Bahamas and physically prevented him from doing this interview. He is more likely to go to jail because of this interview. He is more likely to spend more time in jail because of this interview. Not necessarily because he was terrible, but because he's in such hot water that there's just no upside to any impromptu, non-controlled communication right now. And the lesson to young people is if you're ever under investigation for anything, do not do anything without having your lawyer present. They are not your friends. He is not going to win over the media or the public at this point. The question everyone was asking after the interview was, "Do you believe him?"

• 5:38Scott Galloway?

  And I do believe him, but I still think he's going to jail. You know, shit got real and this wasn't... if it's too good to be true, it was too good to be true. And he probably thought, "Oh, I'm not really committing fraud. I'm cross-collateralizing assets that are going up in value and everyone will win and I'll give more money to charity." But he became delusional. He probably convinced himself he wasn't committing fraud. And the fact we don't have regulation around companies that take in people's life savings, the fact that we're willing to put this much faith in the brilliance of these tech innovators. I think our society and the idolatry of innovators is also culpable. I think we're going to continue to produce these kinds of individuals. I don't think this is Bernie Madoff.

• 6:22Scott Galloway?

  Bernie Madoff knew he was committing a crime. That was his strategy. I don't think that was his strategy here. I think he got in over his skis and became delusional around his own abilities and the marketplace. When a guy is in the Bahamas, hanging out in a penthouse, trading billions of dollars, supposedly making tens of billions of dollars in wealth, only taking breaks to come meet with financial icons and the most important people in finance who fellate him, it's pretty easy to start thinking anything you do is not in fact illegal, but just smart business strategy. I found it fascinating. He was stupid to do this interview. I think he's just a manifestation of our idolatry of innovators.

• 7:01Ed Elson?

  Let's go to Mia on the street to hear what New Yorkers think about Sam Bankman-Fried.

• 7:06Speaker 03

  Do you know who Sam Bankman-Fried is?

• 7:09Ed Elson?

  Yes, I do.

• 7:09Speaker 03

  Do you think you should go to jail?

• 7:11Ed Elson?

  Yes.

• 7:11Speaker 04

  100%.

• 7:12Speaker 03

  Can you expand on that?

• 7:15Speaker 04

  He committed extremely obvious and verifiable fraud, and this will all be revealed in the next couple of months, and he will go to prison for a very long time.

• 7:23Speaker 05

  I think it depends on what evidence comes out. I think there's a lot of rumors flying around, but I've yet to see any concrete evidence pointing one way or another, so I'm withholding judgment.

• 7:31Speaker 06

  It seems that way, but it could be that he's actually taken a system which is already broken to its extreme. And maybe he's to be thanked for pushing it to the extreme to reveal the flaw.

• 7:43Speaker 03

  That's interesting. So you would thank him?

• 7:45Speaker 06

  No, I wouldn't thank him.

• 7:46Speaker 03

  Do you think you should go to jail?

• 7:47Speaker 06

  Yeah.

• 7:48Speaker 03

  Can you elaborate?

• 7:50Speaker 06

  Fraud.

• 7:51Speaker 03

  Say that again.

• 7:52Speaker 06

  Fraud.

• 7:57Ed Elson?

  Cybersecurity firm CrowdStrike posted its third quarter earnings and it was a beat. The company reported $581 million in revenue versus $574 million expected and earnings per share of 40 cents. That was 30% higher than analysts' estimates. What's strange, though, is that the stock collapsed. CrowdStrike shares were down almost 20% after the earnings call. So Scott, why do you think the stock fell on such strong earnings?

• 8:28Scott Galloway?

  So, a stock price is not only a function of the performance of the company, but the expectations around the performance. And even though this was an earnings beat, analysts look at specific metrics. Specifically, in this case, they look at annual recurring revenue and specifically here, on net new annual recurring revenue. That is revenue generated from new business acquisitions. And these were weaker than expected. CrowdStrike added 1,500 new customers this quarter versus 1,600 last year, or in the same quarter last year. They had strong subscription revenue. Their annual recurring revenue was $2.34 billion, which was up 54% year-on-year. And 40 US state governments are now CrowdStrike customers. Think of that. Almost every state is a customer.

• 9:10Scott Galloway?

  And the net retention was at its highest level in seven quarters, but they got spooked by the ARR number not being as high as they'd like. Now, one, the learning is, stock prices are a function of expectations. This might have been a stock that just got out over its skis. Still an incredible company. Another learning, in any business, you want to attempt to distill it down to two key metrics, what I call logo renewal and dollar renewal. You want to think like a software company, even if you're not a software company. Now, what are those metrics? Logo renewal is the percentage of clients that stick around in year two that were in year one. And dollar renewal is how much money do you get from those retained clients versus the

• 9:53Scott Galloway?

  revenue of that whole base the previous year? So, you're a company that has 100 customers or 100 clients. 90 of them are customers in year two, so you have a 90% logo renewal. Of those 90 returning clients or customers, they spend on average 20% more in year two. You want to grow your revenues. You want to have additional offerings. 90 times 1.2 is 108. So what does that mean? We have logo renewal of 90% and dollar renewal of 108%. But it's a good way to think about a business. How do I hold on to as many clients as possible? And how do I increase the revenue amongst those retained clients? And I'm going to measure that through logo and dollar renewal.

• 10:37Ed Elson?

  And just on cybersecurity itself, I mean, I think back to a year ago, and ransomware attacks was the it topic. It was all over the news. There was the Colonial Pipeline attack. And all these cybersecurity companies seemed like the future. But now, you know, cybersecurity has an index. It's down 23% year to date. That's compared to the S and P, which is down 14%. Do you think the market a year ago was sort of overreacting to these ransomware attacks? Or do you think that cybersecurity is going to continue to be a lasting and enduring industry?

• 11:11Scott Galloway?

  I think the answer is yes. Netflix and Tesla are both incredible companies with incredible products. And one went peak to trough down 75%. And Tesla's off 50% this year because, simply put, the valuation on the company's equity got out ahead of the business. And you're right, cybersecurity was everywhere. Cybersecurity was going to be the new defense and garner the type of spending that our defense department spends on different weapon systems and manufacturers. And sure, this is an incredible business. It's come off a bit, but there's just no getting around it. If you're thinking about an interesting career that's going to grow, I mean, cybersecurity, I think, is going to be the gift that keeps on giving for a long time.

• 11:48Ed Elson?

  Yeah, one of the things that CrowdStrike mentioned was this idea of macro headwinds. And you've been talking a lot about how that relates to the advertising industry, specifically that when things are tough.

• 12:01Ed Elson?

  The first budget that companies cut are their marketing budgets because it's sort of seen as an almost excessive cost. Do you think of cybersecurity the same way here? Do you think that macro headwinds might cause a company to say, okay, maybe we don't need to put this much in the cybersecurity budget? We don't need it at all? Or do you think it's maybe more of an integral part of these companies?

• 12:21Scott Galloway?

  I would argue this is probably more recession proof, the cybersecurity sector, than the majority of, quote unquote, discretionary. I mean, your cybersecurity investments, you know, cut that at your own risk. I'd be shocked if they didn't pitch this to analysts or their investor relations department, didn't repeat over and over in their IR PowerPoint presentations that this company should be recession proof because I just don't think you want to cut your cybersecurity.

• 12:56Ed Elson?

  Elon Musk continues to stir the pot on Twitter. His latest controversy involves Apple alleging that the company stopped advertising on the social media platform. Elon claimed that the company, quote, "hates free speech" and that it was threatening to take Twitter off of the App Store. He also brought attention to the 30% cut Apple takes on all paid apps. Later, though, Elon tweeted a video walking around Apple's HQ. He said, quote, "Thanks, Tim Cook, for taking me around. We resolved the misunderstanding about Twitter potentially being removed from the App Store. Tim was clear that Apple never considered doing so," end quote. So, Scott, it seemed like Elon was trying to wage a war against Apple somehow. Apparently, no longer.

• 13:41Ed Elson?

  What do you think happened there?

• 13:42Scott Galloway?

  I don't know. As evidence, more bullshit. I generally think that Elon and Trump share this need, need or genius to be in the news every 48 hours and will say anything. And when Elon Musk says that Apple hates free speech, like, where does he even come up with that? There's something that's disappointing here and there's a lesson. What's disappointing is the politicization of everything. Everyone wants to say, is that company, is that idea, is that vaccine red or blue? And if so, I hate everything about it, or it can do no wrong. And that's the same thing here, the same bullshit here. And the lesson here... Is that Tim Cook doesn't take the bait.

• 14:25Scott Galloway?

  He doesn't tweet back, Elon, you know, you're a fucking idiot. This has nothing to do with free speech. You don't understand what free speech means. And there's no evidence of anything you're saying, as always. And you're doing nothing but posing for the rage machine here. Instead, he says, hey, Elon, come on down to HQ. Walks him around, pretends that he doesn't make a skin crawl. I imagine he enjoyed meeting with Elon about as much as Tim Cook enjoys meeting with President Trump. And then Musk walks away and says, oh, what a great guy and a great company. And see, Tim Cook is kind of the man you want to be. He doesn't take the bait. Fine, I'll take the punch. I don't need to win.

• 15:09Scott Galloway?

  Bring him down, just nod your head, pose to the camera and let, you know, let the child, let the angry genius math kid go back to whatever he does, twisting his legs off his G I Joe or kicking the dog. So, you know, two people were in that meeting. One is a man. Oh, my God, that was, that was indignant. Anyways, Ed, your thoughts?

• 15:30Ed Elson?

  One thing that you were saying earlier this week was that all this Twitter obsession is sort of a distraction and that the real thing we should be focusing on is sort of the after effects of Elon's behavior, specifically what's going to happen to Tesla. Could you speak more on that and your thoughts there?

• 15:48Scott Galloway?

  As we all obsess over Twitter and the value destruction there, the real value destruction is going to take place at Tesla. And there's been some interesting data that has come out that says that the brand value of both Twitter and Tesla has taken a real drawdown, a real step down, a real hit, especially among Democrats. And it's kind of modestly up or neutral among Republicans. But these, both these brands have taken just an enormous hit because of Musk's antics. And so you have the perfect storm of bad things for Twitter. One, people are looking for excuses to pull media because they have a lot more options. But also, while he's probably lost his entire equity investment, or $32 billion or 31 of that $45 billion,

• 16:32Scott Galloway?

  he's going to lose seven times that at Tesla. When Tesla goes from $600 billion in market cap to 300, Over the next six months, because the Tesla brand has become associated with an individual who has done a hard right turn and has politicized Tesla.

• 16:47Ed Elson?

  Yeah, just the numbers that Scott was mentioning there. Twitter favorability among Democrats has fallen 18%. And then for Tesla, it's down 20%. For Republicans, favorability is up 5.5% for Twitter and up 4% for Tesla. But it sounds like you think that that brand value is a crucial, crucial part of Tesla's business. I mean, you just said, you know, they're going to go from 600 billion to 300 billion. Are you suggesting that the politicization of Tesla is what will take its equity value down?

• 17:21Scott Galloway?

  You know, I think other than maybe the college you went to, a car is the ultimate expression of your own brand. There's a tremendous self-expressive benefit or lack thereof that goes into your decision around a car. When I choose to drive a Range Rover, I'm choosing to say I'm British. I have money. I have class. I'm in the middle of a midlife crisis. When I chose to have BMWs for 15 years straight, I had 3.7 series. I was saying, I'm youthful, masculine and aggressive. There hasn't been a brand, maybe other than Air Jordans or Tom Ford, that is more closely linked with an individual. And this individual has become totally politicized. And also, there's a large cohort, I believe, of Americans

• 18:03Scott Galloway?

  that don't want anything to do with this individual and aren't impressed by them. And then when you all of a sudden can buy an electric I7 or a Porsche Taycan, all of a sudden there are alternatives and there didn't used to be. And by the way, I think Tesla will experience record revenues, record deliveries, and their stock will still get cut in half. And it'll still be, even with a drawdown of 50% in the company's stock price, it'll still be worth more than the entire German and American auto industries. Combined, this is a stock that's already off 50%, but I think it'll be off 75%. Or put another way, it gets cut in half and then cut in half again. And the proxy here is Netflix. Netflix went peak to trough, down 75% and then recovered and it's now down, I think, about 52%.

• 18:47Scott Galloway?

  But the business cycle is eerily similar here, and that is Netflix was the leader. They inspired an entirely new category, similar to what Tesla has done with EVs. But they didn't have any competition. Everyone was so busy holding on to their legacy businesses and trying to respond and get different, different points of the channel to coordinate around what it meant for not having movies to come out and movies first, to find the capital, make the sort of the investments to go toe to toe with Netflix. And Netflix essentially for almost, or a better part of a decade, had no competition. All of these attributes, all of these dynamics were at play with Tesla. And then what happened with Netflix? Everybody came in and the stock shed three quarters of its value. We're seeing what happened to Netflix play out with Tesla, just with a 24-month lag.

• 19:32Ed Elson?

  We'll be right back after a quick break with an unpack on bankruptcies.

• 19:43Scott Galloway?

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• 21:57Ed Elson?

  We're back with Prof G Markets. So far, Twitter's problems are short-term or hypothetical. But if things go from bad to worse, one possible outcome is bankruptcy. If that sounds alarmist, well, blame Elon. Two weeks ago, he told Twitter employees that bankruptcy, quote, "isn't out of the question." Meanwhile, bankruptcy is very much not hypothetical for a number of crypto companies, most famously, Sam Bankman-Fried's FTX. So we thought this was a good time to learn more about how bankruptcy actually works. Here with this week's unpack is Prof G Media's editor-in-chief, Jason Stavas.

• 22:39Speaker 07

  Ed, as you can probably guess, companies face bankruptcy when they can't pay their debts. But that can mean a lot of things because companies usually have a lot of different kinds of debt. They take out loans from banks, but they also issue debt in the form of bonds, which require semi-annual payments. They buy most of their materials and equipment on credit. They have to make payroll every two weeks. And they make payments on leases, regular tax payments, insurance premiums. And when there isn't enough money coming in to make those payments, they have to pick and choose which creditors to pay, and that can get ugly fast. Each creditor has different means of putting pressure on the company to pay up, from charging more fees to going in and seizing equipment or goods. So bankruptcy, at its heart, it's a way to call time out,

• 23:22Speaker 07

  bring all those creditors together under the management of a federal court, and work out an equitable solution. A company can put itself in bankruptcy, or a creditor can go to court and ask the court to compel the debtor into bankruptcy. So once the paperwork is filed, a few important things happen. All of those nasty collections tactics, they're put on hold. Offices can stay open. Nobody will come to repossess your factory equipment or servers, which is why you might hear that a company like Brooks Brothers or J. Crew is bankrupt, but their stores remain open. Banks will typically provide short-term loans to pay necessary expenses because they know the court will ensure that those emergency loans get paid back first. How does the company get out of bankruptcy? Two things have to happen. First, the company and its creditors agree on a plan,

• 24:08Speaker 07

  who gets paid how much, and what steps the company will take to ensure it can actually make those payments in the future. Sometimes, an outside investor is brought in, who agrees to invest cash in the company in exchange for new shares. Negotiating this whole plan can be a huge undertaking because companies tend to have such a wide variety of creditors. To make the process manageable, the court typically creates one or more committees, each one representing a different group of similar creditors. These committees, they handle negotiations on behalf of similar creditors. And eventually, the groups all agree on a plan, the creditors vote, and if the plan gets enough votes, it goes to the judge. Then the judge hears any objections to the plan. They might require some changes.

• 24:51Speaker 07

  And then, once the judge approves it, the company is out of bankruptcy and returning to regular operations.

• 24:56Ed Elson?

  Well, that sounds pretty great, right? Like, maybe even too good to be true.

• 25:01Speaker 07

  Yeah, there are some downsides. So one major downside is that this is just really expensive. A lot of lawyers and a lot of accountants billing hundreds of dollars per hour. And there's a lot for them to do because bankruptcy courts require regular detailed reporting about a company's operations. Much more reporting than is required by, say, the SEC. And plan negotiations can be intense. The biggest downside, though, can be the risks to the owners and the managers of the company. The owners of the company, the shareholders in a public company, they are last in line. So if there's not enough money to pay the company's debts, which is usually the case because that's why the company's in bankruptcy. Shareholders are generally not on the hook to pay those debts, but they can lose some or all of their equity.

• 25:46Speaker 07

  In a worst-case scenario, the company is sold to new investors. The proceeds from that sale are used to pay off the debts, and the shareholders get nothing. They no longer own the company. They don't get any money for their shares. Similarly, if the company's creditors are not happy with management, they can demand management be fired as part of the plan of reorganization. And in extreme cases, the court itself will put the company under the management of a trustee. And finally, there's a lot of detailed reporting, right? So if management has been up to no good, or if the shareholders in a private business have been cooking the books, that's very likely to come out in the bankruptcy proceeding.

• 26:23Ed Elson?

  So the big story has been FTX's bankruptcy. How do you see that playing out?

• 26:28Speaker 07

  So not all bankruptcies are the same. You can think of them on a spectrum. At one end, you have what's known as a free-fall bankruptcy. This is when a company or creditor just shows up in court one day and says, surprise, we're screwed, no money. Now, that's not ideal. At the other end of the spectrum, the company and its creditors, they get together before getting the court involved. They negotiate a plan, and if things go well, they may not need to file bankruptcy at all. Another thing that sometimes happens is that for whatever reason, the parties might be concerned they're going to get sued over the plan. Shareholders might not like that their equity got cut down or something else. And so they'll go to court in a bankruptcy proceeding. The judge will essentially bless the plan, and that will potentially protect them from lawsuits.

• 27:12Speaker 07

  So when that happens, when the plan is in place, but they just need to get a judge to approve it, that's what's known as a prepackaged bankruptcy, or prepack. Typically resolved in a few months, they're a lot less expensive than a freefall bankruptcy. And there's even been a few cases where the filing and final approval of a prepack was handled in a single day. Now, most bankruptcies are somewhere between a prepack and a freefall. The company has started negotiating with its creditors, there's some points of agreement, but they need the court to get the final deal done. And you really want to be as close to the prepack end of the spectrum as possible. Two things make that hard, though. The diversity of your creditors. If you have a lot of creditors who grow different kinds of businesses with different kinds of interests, it's just hard to get them all together around a table to negotiate

• 27:55Speaker 07

  a plan without the aid of the bankruptcy court. And then, second, it's what kind of problems the company has. If a company's problems are mostly operational, if its business model is broken, if its products just aren't very good, that's kind of hard to fix sitting around a negotiating table with lawyers. Those kinds of situations usually end up in long, complicated bankruptcies. So with this spectrum, I assume FTX sort of lands on the freefall side of things? Indeed. FTX was a supersized freefall. A month ago, biggest thing in crypto, this powerhouse that's bailing out other crypto companies. And then, a matter of days later, it's in bankruptcy court. And as we've reported here on Markets, things are kind of in chaos. The company told the court it has over 100,000 creditors.

• 28:39Speaker 07

  Its assets are mostly crypto tokens that likely have little value, but will be complicated to unwind. And its record-keeping is terrible, meaning it's very difficult to figure out even who should get what. I suppose if there's a silver lining with FTX and it's a very thin one, it's that it doesn't look like there's going to be a lot of assets to go around, which in a depressing kind of way makes it easier to pay everybody off.

• 29:02Ed Elson?

  All of the reporting was saying how FTX filed under Chapter 11 bankruptcy. What does that mean?

• 29:08Speaker 07

  Yeah, so there are two different kinds of bankruptcies that apply to most corporations. Chapter 11 is for when the company believes it can continue operations and emerge from bankruptcy. Chapter 7 is when all hope is lost and the plan is basically to sell the company's assets off to get as much for the creditors as possible. Now, FTX filed under Chapter 11, meaning they had some intention of continuing to operate the business, but that's not going to save the company. The court can convert a Chapter 11 filing into a Chapter 7, or it can just approve a liquidation plan under Chapter 11. And I think it's a pretty safe bet that that's what's going to happen with FTX.

• 29:45Ed Elson?

  And what about Twitter?

• 29:47Speaker 07

  Yeah, so Elon has been apparently threatening to employees that the company might go bankrupt. I don't think that's very likely. Twitter is a very unusual case. It's useful to understand Twitter's capital structure after Elon bought it. Elon owns 80% of Twitter and then a variety of other wealthy entities like Oracle founder Larry Ellison, some large venture capitalists, a Saudi prince, they own the other 20%. But Twitter also has about $14 billion in debt, most of which it took on as part of the Elon takeover. It owes that debt to Wall Street banks and the payments on that debt are between $1 and $2 billion per year, depending on what happens with interest rates. Plus, Twitter has struggled to make any profit in the past, let alone $2 billion a year.

• 30:31Speaker 07

  Now, if Elon were a run-of-the-mill billionaire, Twitter's situation would be quite dire. They're going to have to come up with $2 or $3 billion a year more than they make for the next couple of years in order to pay their debt and keep operating. But because of Elon's vast wealth, which is well over $100 billion, he can potentially afford to keep Twitter afloat indefinitely. And he has every incentive to do so because as we discussed, if Twitter doesn't pay its debts, its creditors can force it to go into bankruptcy and they can essentially take the company away from Elon. So if the company goes bankrupt, Elon risks losing not only his 80% stake in the company, but also the $26 billion in cash that he paid for that stake.

• 31:14Speaker 07

  So furthermore, I don't think Elon wants any part of running a company while it is in bankruptcy court. Right? He's cranky enough about the regular reporting obligations of a public company. He's really not very happy with the SEC. He's going to hate having his creditors and the court looking over his shoulder every month. And the court can really look for anything it wants. So that's not something I think Elon really wants. Now, as Scott pointed out earlier, things start to get interesting if Twitter continues to lose money and Tesla's stock declines. Because with the way Elon has structured his personal finances, he may begin to run into a situation where even though he's worth $100 billion on paper, it's difficult for him to come up with $2 or $3 billion a year in cash.

• 31:59Speaker 07

  If that happens, though, I don't think he takes the company into bankruptcy because of all of the risks that that entails. I think he's still got enough leverage with his creditors to renegotiate some kind of deal. Because the thing is, even if you're a creditor of a company, you'd prefer the company continue to operate. That's your best chance of getting the most money back. And so I think Elon will find a way to keep Twitter out of bankruptcy court. And frankly, the easiest way for him to do that is simply to pay the debt or just buy the debt. Right? If he can come up with $14 billion, which he probably can, he can buy the debt away from those Wall Street banks. And then he doesn't owe anybody anything, as long as he can continue to fund Twitter's operations.

• 32:39Ed Elson?

  Thanks, Jason. So Scott, it feels like Elon could just sell Tesla stock, $14 billion worth of it, and then he's fine.

• 32:48Scott Galloway?

  Yeah, so I don't think that's the case. I don't think he could just sell 14 billion in Tesla stock. He sold 14 billion because his required coverage for margin loans, he's likely already taken out. He'd probably need to sell closer to 20-plus billion in Tesla stock. And now we're talking about the kinds of sales that probably put downward pressure on the stock, increasing

• 33:14Scott Galloway?

  The amount of stock he would need to sell to cover his margin ratios. So I think he's kind of painted himself in a weird way into a corner. And after hearing what Jason said, I think it's likely he continues to make the interest payments. He can come up with, to your comments and Jason's comments, a billion dollars a year in interest payments and hope for some sort of path to increasing the value here. But just hearing you guys talk about it, I think a decent scenario now is he sells it for enough to pay back the debt in a private transaction, take the L and move on.

• 33:50Ed Elson?

  Talking about taking the L, what is like the worst case scenario here? What is he trying to avoid in this situation?

• 33:58Scott Galloway?

  I think a guy like this is trying to avoid loss of face. So the reason why Masayoshi Son continued to pour billions of dollars of good money after bad to bail out WeWork, even though it made no sense. WeWork should have gone bankrupt. That would have been the smartest thing for Masayoshi Son. That would have been him acting as a fiduciary for the Vision Fund. Instead, he didn't want to lose face and have American vultures come in and take the company away from him in bankruptcy court. So he continued to pour, I think he poured another $10 billion into the company to buy out Adam Newman, who had voting shares, controlled the company. Adam Newman played Masa perfectly. So I just don't think Elon Musk is willing to endure the loss of face around a bankruptcy.

• 34:38Scott Galloway?

  I think the worst case scenario here is that regulators move in or that it just becomes such a weeping sore of cash. It becomes a failing business, the consumers get fed up, that employee attrition begins to take its toll, and the thing just becomes a giant flaming bag of shit reminder of what a stupid, errant, manic strategy this all was.

• 35:02Ed Elson?

  Thanks, Scott. Let's take a look at the week ahead. We'll see trade deficit and wholesale inventories data for October. We've also got earnings from Costco, Lululemon and GameStop. That meme stock is down 40% from a year ago. Scott, do you have any predictions for us?

• 35:18Scott Galloway?

  Well, I'm a glutton for punishment. And several years ago, at South by Southwest, I predicted the Tesla stock would be cut in half. I think it went up seven or tenfold since I said that. But I'm going to make the same prediction again, hoping that a broken clock is right twice a day. I think this stock gets cut in half. I think the circus that is Twitter and Elon Musk begins to infect Tesla and the company becomes worth more than the entire German and US auto market, even after it's cut by 50%. That's all for this episode. Our producers are Claire Miller and Jason Stavert. Special thanks to Catherine Dillon, Ed Elson, Mia Silverio, and the PropG Media team. If you like what you heard, please follow, download, and subscribe. Thank you for listening to PropG Markets from the Vox Media Podcast Network.

• 36:03Scott Galloway?

  We will catch you next week.

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