Tesla: The Next Enron?

via WSB:

I mentioned in my previous post that I had another analysis coming soon. I didn’t think it would be so soon, but the paper just got graded and I got another A.

Heads up! This post will get A LOT of hate, but I don’t care. Some of you may appreciate this DD. For the suckers and fools – many of whom have only been around since January this year – this will trigger them in a fit of blind “REEEEEEEEE!” rage as I slaughter their sacred cow. I also have no positions in Tesla and do not intend to initiate a position in Tesla or their derivatives.

TL:DR: Tesla is priced way past perfection by literally every valuation method. Ignore ARK’s nonsensical price targets because they are 1) just marketing stunts for low information retail and 2) unsubstantiated claims that rely entirely on Greater Fool Theory.

TL:DR2: If you previously made money with Tesla, great, move on to something new. Dump your bags if you got em and take profits. If you’re an average WSB autist, find other stonks to get rich off of since it won’t be from Tesla’s limited upside.

APRIL 9, 2021

Company and Industry

Tesla was founded in 2003 and is headquartered in Palo Alto, California. The company operates two segments: automotive manufacturing and consumer solar energy. The automotive manufacturing segment builds and sells automotive vehicles. The consumer solar energy segment manufactures and sells solar energy generation to residential customers (“Tesla Financial Statements”, n.d.). Tesla’s core business model across both segments relies heavily on state and federal government subsidies in order to operate (“Tesla 10-Q”, 2020). The company is traded on the NASDAQ stock exchange under the ticker, TSLA.

Market Capitalization

On February 3, 2020, Tesla had a market capitalization of $136.9 billion. On March 1, 2021, Tesla had a market capitalization of $557.9 billion (“Tesla Financial Statements”, n.d.). This represents a 307.52% increase in Tesla’s market capitalization between February 2020 and March 2021. At the time of this writing, on April 9, Tesla had a market capitalization of $649 billion.

Tesla’s current market capitalization defies all rational explanations as it is being valued more than Ford, General Motors, Tata Motors, Honda Motors, Ferrari, Lamborghini, Aston Martin, Mazda, Nissan, Porsche, and Volkswagen all combined (“Tesla Financial Statements”, n.d.). To assert that Tesla is more valuable than the worldwide automotive industry is a ridiculous proposition that is not substantiated by either business fundamentals, nor future growth prospects.

Stock Price and Employee Information

Tesla stock price also had parabolic movement as the stock price increased 360.53%

between February 2020 and March 2021. On February 3, 2020, Tesla closed at $153.00. By March 1, 2021, Tesla closed at $718.43 (“Tesla Financial Statements”, n.d.).

As of December 31, 2020, Tesla employed 70,757 employees. This represents a 47.36% increase in employees when compared to December 31, 2019, when Tesla had 48,016 employees.

Response to COVID-19

Tesla was affected by the Covid-19 epidemic that disrupted global trade in 2020. At the start of the pandemic, Tesla received an undisclosed amount of government assistance from the Paycheck Protection Program (“Tesla 10-Q”, 2020). When California went into lockdown on March 18, 2020, Tesla’s Fremont, CA factory continued its operations. Elon Musk was defiant in his insistence that Tesla’s operations not be disrupted even with the virus spreading throughout California (“Elon Musk v. Public Health”, 2020).

After public outcry, Tesla shut down the California factory on March 23, 2020. However, by May 11, 2020, Elon Musk resumed operations at the Fremont, CA factory in defiance of the state law. By May 13, 2020, Alameda County, CA withdrew their enforcement of the law and allowed Tesla to continue operations as long as they followed social distancing measures (“Elon Musk v. Public Health”, 2020). It is unclear if there was any actual oversight or enforcement of those policies. By November, 2020, California had granted Tesla “essential workforce” exemption (Kolodny, 2020). While there are no consistently reported figures, it is estimated that over 400 Tesla employees contracted SARS-CoV-2 between May and December 2020 (Boudette, 2021).

Analysis of COVID-19 Response

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Tesla’s source of value is derived from automotive sales of the Model 3 and the Model Y, both of which are only manufactured in Fremont, CA and Shanghai, China. Going into 2020, Tesla only had $8.2 billion in quick assets and $10.7 billion in quick liabilities (“Tesla Financial Statements”, n.d.). With a quick ratio of 0.76, Tesla was in a vulnerable position when the COVID-19 pandemic started. Shutting down the Fremont factory in accordance with state law would likely have been catastrophic to Tesla’s financial health, as the company has often been in a precarious financial balance between solvency and insolvency. (Note: Tesla has nearly gone bankrupt in 2008, 2014, 2017, 2018, 2019, and 2020. Elon has a gift for doing magic tricks and buying himself more time)

This uncertain situation is likely what drove Elon Musk to be so defiant about the company’s operations and eventually caused him to rebel against the state’s legal measures to shut down all but essential businesses, of which Tesla is not. This is also the likely motivation behind the stock dilution seen in Q3 and Q4 2020, when Tesla issued more stock and raised $12.686 billion (“Tesla Financial Statements”, n.d.). A curious observation is found when looking at the cash flow from operating activities and comparing it to cash flow from financing activities. Year-over-year, Tesla is a company that consistently subsists itself through financing activity, not operating activity (“Tesla Financial Statements”, n.d.).

When looking over all of the relevant information, it is clear that Tesla did what it had to do in order to remain solvent. However, it is also clear that they were entirely fixated on staying operational at any cost, even if it meant its own employees were put at risk of infection from SARS-CoV-2. Employees should re-evaluate their relationship with Tesla and decide if the company views them as an asset, or an expendable resource. Tesla’s efforts in this regard were found wanting.

SWOT Analysis

Tesla’s strength is really down to the cult of personality surrounding Elon Musk. For better or for worse, without Elon Musk’s personal brand, Tesla would have gone bankrupt long ago because it is not a sustainable business model. Tesla has survived through a combination of a secular bull market, dovish monetary policy, generous fiscal policy, corporate welfare, and legions of wishful thinking investors (Strauss & Smith, 2019).

The weakness surrounding Tesla is that despite what seems to be carefully crafted earnings management, the core business of Tesla is not profitable and may never be profitable. A counter argument may be that other automotive manufacturers also have razor thin margins and not the best balance sheets. This is a fair argument, but it is important to point out that Ford Motors and General Motors have vastly higher revenues than Tesla, and they rely on cash flow from operating activities, not financing activities, to stay solvent.

There are many threats that Tesla is facing. Tesla has many eerie similarities to Enron (NYSE: ENE). Enron executives were publicly hostile towards short sellers and Elon Musk is particularly vocal about his disdain for short sellers (Niedermeyer, 2019). Enron was routinely hailed as a futuristic, innovative disruptor that was changing the world. (Note: You can read more about this in Niedermeyer’s book. Also read more here, here, and here)

Tesla is also facing increasing competition from well established automakers like Ford Motors and General Motors. These automakers can undoubtedly make a better electric vehicle (EV) than Tesla at a more attractive price point for consumers. As such, they will continue to take market share away from Tesla, and may eventually take over the company (MacDuffie, 2018).

While China has been seen as the promised land for Tesla’s profitability, China has many state-sponsored investments into their own companies such as XPeng (Kharpal, 2021) and Nio (“Nio Motors Has”, n.d.). From a geopolitical perspective, it is unlikely that the Chinese government will allow a U.S. business to dominate their own EV market. (Note: they absofuckingloutely will not allow this to happen)

The opportunity that Tesla really has is the new administration in Washington D.C., which has recently unveiled a bill entitled “The American Jobs Plan” (“American Jobs Plan”, 2021), which will invest up to $3 trillion over the next 15 years. Much of this bill will involve infrastructure and clean energy initiatives. This is something that Tesla will undoubtedly capitalize on and enjoy the juicy resources provided to them, courtesy of the U.S. taxpayer. Regardless of sentiment, this fresh capital influx will likely stimulate the company’s operations and allow them to continue operations for the foreseeable future.

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Recommendations and Predictions

Using a valuation based on comparable firms (Berk, et al., 2017), Tesla’s intrinsic value is much closer to $32.82/per share with a current book value of $24.03 (“Tesla Financial Statements”, n.d.). With 959,854,000 shares outstanding, this fair value would give Tesla a more realistic market capitalization of $31.5 billion (“Tesla Financial Statements”, n.d.). This market capitalization would be comparable to other auto manufacturers, like Ford and General Motors. However, this represents a 95% decrease in the current market price of Tesla. This would still be a generous valuation for Tesla as at $32.82 per share, because the PE ratio would be around 51 and still far higher than the industry average of around 24.

To be even more generous, one could give Tesla a valuation based upon the discounted free cash flow (DFCF) method (Berk, et al., 2017). This would give Tesla a market capitalization of $312.9 billion, and a valuation of $325.89 per share, yet this is still 51.86% lower than where the market is currently pricing the stock at. This DFCF valuation uses a discount rate of 11% and operates on the assumption that Tesla’s earnings will grow by 50% every single year through 2026 before leveling off at a 10% earnings growth rate from 2027 onward. This simply is not practical, as Tesla’s revenue growth has only been forecasted to grow at 33% every year through 2023. It is safe to say that Tesla has already been “priced to perfection” and then some.

While the story of Tesla has largely been a successful example of “fake it until you make it”, reality will eventually catch up to Tesla, whose brand is inseparable from the brand of Elon Musk. Were this a street report, the coverage would be initiated with a “Strong Sell” recommendation and a $33.00 price target.

In order for Tesla to justify its unreasonable valuation, the company will need to demonstrate that it can achieve sustainable profitability without the extensive use of government welfare in the form of rebates and subsidies that are paid for by U.S. taxpayers. To that end, it needs to increase operating margin expansion and drive new revenue growth through licensing. The licensing of its proprietary software and intellectual property to other automotive manufacturers might be its only saving grace in the years to come as more experienced auto manufacturers take market share from Tesla in the EV space.

References

American Jobs Plan. (2021, April 08). Retrieved April 10, 2021, from www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/

Berk, J., DeMarzo, P., Harford, J. (2017). Fundamentals of Corporate Finance, 4th edition. Pearson.

Boudette, N. (2021, March 15). Hundreds of Tesla Workers Tested Positive for Coronavirus. Retrieved April 10, 2021, from www.nytimes.com/2021/03/15/business/tesla-workers-coronavirus.html

Elon Musk v. Public Health: A Timeline of the Tesla Factory Standoff. (2020, May 13). Retrieved April 10, 2021, from www.theguardian.com/technology/2020/may/12/Elon-musk-tesla-reopening-lockdown-timeline

Kharpal, A. (2021, April 09). Chinese Tesla rival Xpeng Motors Gets $76 Million from Government. Retrieved April 10, 2021, from www.cnbc.com/2021/03/15/chinese-tesla-rival-xpeng-motors-gets-76-million-investment-from-government.html

Kolodny, L. (2020, November 20). California gives Tesla ‘Essential Workforce’ Exemption. Retrieved April 10, 2021, from www.cnbc.com/2020/11/20/tesla-gets-exemption-from-new-california-covid-19-health-orders.html

MacDuffie, J. P. (2018). Response to Perkins and Murmann: Pay Attention to What Is and Isn’t Unique About Tesla. Management and Organization Review, 14(3), 481-489. doi.org/10.1017/mor.2018.32

Niedermeyer, E. (2019). Ludicrous : The Unvarnished Story of Tesla Motors. BenBella Books.

Nio Motors Has Chinese Government Support. (n.d.). Yahoo.com. Retrieved April 10, 2021, from www.yahoo.com/now/nio-motors-nyse-nio-chinese-164539129.html

Strauss, N., & Smith, C. H. (2019). Buying on rumors: How Financial News Flows Affect the Share Price of Tesla. Corporate Communications, 24(4), 593-607. doi.org/10.1108/CCIJ-09-2018-0091

Tesla Financial Statements 2008-2021: TSLA. (n.d.). Tesla. Retrieved April 9, 2021, from www.macrotrends.net/stocks/charts/TSLA/tesla/financial-statements

Tesla 10-Q June 2020. (2020). Retrieved April 09, 2021, from www.sec.gov/ix?doc=%2FArchives%2Fedgar%2Fdata%2F1318605% 2F000156459020033670%2Ftsla-10q_20200630.htm#Item_7

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