With Tesla moving back towards its ATH, I thought I would provide my perspective on the supreme-meme stock. Before the Tesla cultists jump on me and spam ban requests for my account, I want to give a bit of background. I bought Tesla 10 years ago when it was less than 1/10 of todays price, and sold a few years ago for a profit. I love Tesla’s products and would gladly buy one of their cars myself. However, this is strictly about the value of their stock which I feel is very overvalued right now. Those of you who think you are visionaries if you are just now buying this company in 2020, lol. You are very late to the party and at this point are being spoonfed a lot of ideas by the new mainstream that are not supported by deductive reasoning or data.
Before I go on, I am aware that Tesla does not follow fundamentals nearly as well as other stocks. The wild speculations and cult-like following make the short-term prospects for this stock very unpredictable. I am just attempting to make an educated guess about the long term performance of this stock.
The Bull Thesis
- Tesla’s cars are the best thing since sliced bread or the first iPhone. They have the highest owner satisfaction of any car, and will become the most prevalent car on earth in the future and monopolize the market
- Tesla is not just a car company, they are also a solar/battery/autonomy/AI company. Thus they are a premium, innovative technology company more comparable to Apple than GM. They will monopolize several of these different markets
- The company is not profitable now, but its income will continue to grow exponentially in the future due to our society’s moving to green technology, and Tesla’s prime position to capitalize
- One fund manager (Cathy Wood) says she expects the stock to hit $7000 in the next 4 years (lol!)
- New factory in China = ~1.5 billion Teslas sold (I’m being facetious)
The Bear Thesis
- Not much of a point in focusing on current fundamentals or TA, since based on its current stock price Tesla’s market cap is larger than the 3 major US automakers combined. Everybody knows their current sales are nowhere near justifying this valuation
- We are on a 12 year bull run that many (most?) are predicting is over. In a recession/depression, the animal spirits that kept Tesla flush with cash despite their losses will fade away
- Also in a depression/recession, less people are buying expensive electric cars or new cars period
- Tesla investors want to believe it is a tech company, but a car manufacturer’s profit margins are highly unlikely to ever match traditional “tech companies” (software & electronics) in the future. There is a ton of competition, large overhead costs to produce and ship these products and the auto industry as a whole has been declining for years.
- Electric vehicles are limited by infrastructure. The world’s population is mostly urbanized and increasingly so. Where do you charge an electric car for an hour+ if you live in a small apartment, as is the case for nearly the entire millennial+ generation?
- Tesla will suffer due to rock bottom oil prices. Going green is nice but ultimately economics are the strong guiding hand towards electric cars. It appears that oil will be cheap for at least a few years. Additionally, Trump is likely to win the next election (I don’t like him myself, but I think this is the harsh reality). His presence will not benefit green companies like Tesla for the next 4-5 years
- Government incentives that helped a lot with their early growth are drying up
- Tesla has never paid a dividend and the company is very leveraged. Comparing it to other brand-name tech companies is silly based on this fact alone. Just look at their 10-k history, without the dreamer aspect it just looks atrocious. There is a reason this 17 year old (they are 17 years old and still not profitable!) company’s debt is still junk rated by the major credit rating agencies. In contrast, Apple has had a net income of well over a billion dollars since 2005, before the iPhone even came out. Pretty much every other big tech company is the same, massive sustained profits for a long time.
- By the way, since they were rated junk prior to March 22 Tesla does not qualify for Fed bailout money if things start to look bad
- Tesla is seen as a leader in a few green fields right now largely because they are allowed operate at a loss. Other companies do not have this same luxury and are expected to return big profits. Toyota can’t just go full electric and operate at giant losses, their shareholders will go nuts. Tesla has been allowed to do this for a surprisingly long time because of animal spirits. As soon as these green energy fields become profitable and the infrastructures start to take shape other companies will immediately jump aboard in droves. GM already has the Bolt which is actually a great electric city car. Volkswagen has spent tons of cash on EV development. I am sure as soon as total EV sales numbers become more than just a small niche their EV portfolio will take off, along with many other manufacturers
- “Tesla is also a solar/battery/autonomy/AI company”. I see this quote nearly everywhere Tesla is mentioned. None of those are profitable for Tesla and all of them have major competitors. I think it is unlikely for Tesla to be a monopoly in any of these fields. Facebook/IBM/Nvidia/Google/Amazon are way ahead of Tesla in anything AI related, they are all filled with Stanford/MIT/Berkeley etc. graduates with 6 figure salaries. Similar statements can be made for autonomy, in which Tesla is also not the leader. Ford and GM are doing surprisingly well in autonomy, arguably they are outpacing Tesla www.theverge.com/2019/9/25/20882724/ford-autonomous-cars-vehicles-av-austin-texas-taxi-delivery
- There are competing core car technologies. Hydrogen fuel cells, while inferior at the moment, have had several breakthroughs that may propel their green technology further in the next 10 years. See here: www.bbc.com/news/science-environment-52328786. A lot of Tesla’s value is hinged on their absolute dominance of their type of electric vehicle technology in the long term future. Challenges to this thesis substantially hurt their valuation
- “The future is self-driving taxis everywhere, and they will all be Teslas.” Another common point that is made, which is quite unlikely due to existing competition. Uber has a big leg up already. But also, going back to fuel cells: fuel cells recharge in the same time as gas, a couple min. Tesla’s batteries take well over an hour to fully charge. Time charging is time not spent driving, which is lost revenue for a taxi. For now electric batteries are the winner, but it is not certain that in the long term future this will be the case
- Many Tesla cultists think the growth will be exponential and soon their cars will be in every driveway. Just like when the iPhone came out, it grew exponentially for a long time. This thinking is flawed. For one thing, the iPhone has saturated in market share. At this point in time almost everybody who wants a smartphone has one and the phones are starting to blend together, we are entering a new period for the phone industry. Tesla will saturate the same way, their market isn’t even a new field like the iPhone’s was since people already have good cars. Once the early adopters have their cars, Tesla becomes less of a novelty. You are already seeing this in rich neighborhoods in California. If 3 of my rich neighbors have Teslas I want something unique. This is one of the main reasons no car company has ever been totally dominant.
- Covid-19 will likely change the world, telecommuting will likely become much more of a thing. Jim Bianco talks about this a lot (see www.youtube.com/watch?v=frLz2PJnj1M). Historically a lot of people have never telecommuted and didn’t know how to do it. Businesses needed to figure out how to structure themselves to operate in such a manner. Now that they have overcome this hurdle, telecommuting will become much more prevalent. Less driving to work = less need for an expensive car like a Tesla. For my weekend car, I’ll stick with the manual transmission Porsche which is much more fun to drive for a couple miles
- China. They opened up a factory in China, great. China has never stolen anybody’s technology before (/s). The iPhone, made in China but its sales there have always been crap. They only recently hit single digit millions in a country of over 1b since the government actively promotes domestic brands, and strongly takes their side in courts. If a Chinese company makes a “Resla” that is an exact copy of the Model 3 and then sues Tesla for IP violation, you better believe they will win in China. China is experiencing massive GDP losses right now and an uncertain future, both politically and economically. There are many talks right now of reducing our reliance on China due to Covid and punishing them. IMO this all does not bode well for future sales of Tesla’s pricey electric cars
Overall, I think that Tesla is a great company that will do amazing things in the future. We just have a lot of “dreamer” investors right now who think Tesla has some kind of infinite magic sauce. People who bought the stock early did well. And in 8 years, I think you will probably be able to buy their stock for $500 and enjoy a decent dividend and some more steady growth to follow. I think the people buying and holding at today’s prices will see more crashes and no/low profits for a long time. I can see it retesting and crossing the limits that were hit in the crash a month ago, as Covid is far from gone at this point. I would only buy this stock if it goes below $200, and definitely would sell right now if I was holding.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.