- After Tesla and CEO Elon Musk announced a settlement with the SEC, the company’s stock surged by more than 15% after swooning by as much last week.
- Tesla is trapped in a surreal debate between short-sellers who don’t understand its business and a new class of tech bulls who … don’t understand its business.
- They can be completely ignored if you’re willing to focus on a few simple Tesla fundamentals.
Last week, the Securities and Exchange Commission (SEC) revealed a lawsuit against Tesla CEO Elon, seeking to ban him from being an officer of a public company. Over the weekend, Musk settled with the SEC and agreed to step down as Chairman of Tesla (for a few years).
Between last Thursday and this Monday, Tesla shares swung about $US85 in total, or around 30%.
Even by the deranged standards of an always-volatile stock, that’s insane.
Obviously, the risk of losing Musk as CEO is the biggest risk Tesla faces. Tesla itself always notes the so-called “great man” risk in its financial filings.
This in itself is quite strange if you take even a small step back from the near-hallucinogenic commentary that surrounds Tesla, and that is largely generated not by the auto press, but by the tech and financial media.
The most significant auto executive of the past ten years, Sergio Marchionne of Fiat Chrysler Automobiles, recently died unexpectedly. FCA shares initially slid a bit, but have since recovered. Stock in Ferrari – Marchionne served as CEO of both firms – is up over 30% year-to-date.
But, you might argue, Tesla is structurally insolvent, according to the sage insights of short-seller Jim Chanos, and is therefore at permanent risk of a precipitous slide into bankruptcy and perhaps liquidation. Wash, rinse, and repeat that thesis for the rest of the short-selling community, which is now once again poised to resume its long losing streak.
Profits are probably coming
Tesla’s balance sheet might be sort of a mess, but there’s little question that unless the Department of Justice finds a reason to prosecute Musk for something criminal, intermittent quarterly profits are soon to arrive and, in 2019, Tesla can return to the equity-and-debt markets to fund its future growth and rejigger any payouts coming due.
Additionally, the vast majority of Tesla investors, if they have been in the stock for any length of time, are ecstatically, deliriously happy. The long position has returned over 1,000% since 2010. The short position has returned pain – and numerous appearances on CNBC to take the edge off and renew the negativity.
The entire Tesla affair, consequently, occupies a parallel reality. Spend too much time in it, long or short, and it warps your brain.
Case in point: Tesla is preparing, after a Herculean effort in the third quarter, to post its first three-month profit since 2016. This will likely send the stock racing toward $US400 per share once again, absent further nuttiness from Musk.
Unfortunately, that profit, while commendable if it comes, should raise a serious question: Why has Tesla been completely out of step with the entire global auto industry for the better part of five years? Since about 2013, when Tesla started selling the Model S sedan in appreciable numbers and the US auto market began a robust and eventually record-setting recovery, pretty much every single carmaker in the world has been posting steady, if not historic profits and steady and often historic sales.
Tesla has been doing well, too, during this period, growing its sales in what is actually a quite limited market – luxury electric vehicles. But the profits have wilfully not really followed, as Tesla and Musk have busied themselves betting the farm to reinvent the wheel.
You’re on your own with Tesla
In this framework, Tesla is a “YOYO” stock: you’re on your own. Even the company’s major institutional investors and significant stakeholders, who along with Musk own most of the outfit, need the fortitude to endure the surreal stock charts. My habit over the past year – following an episode when I struggled to find some logical patterns in TSLA – has been to simply sit back and laugh.
I cover mainly the auto industry, not the stock market as a whole, but I don’t ignore the markets, and I can’t think of another company whose financials do this so routinely. The only thing that isn’t funny is that even as a bet on the future, I think Tesla is hugely overvalued: I’ve personally found its cars to be spectacular, and I understand the customer devotion, but there’s simply no way to argue that a one-factory carmaker that can’t even competently build a mid-size sedan in schedule should be worth more than Ford.
But go ahead, try. Tesla will dominate the future market in mobility as a service. Nope, the company has no business that points in that direction. OK, then Tesla will dominate self-driving cars. Sorry, Tesla Autopilot is, at best, a very, very good advanced cruise-control system.
All right then, Tesla will rule the world of electric vehicles. Actually, it already does – but that market is globally minuscule and barely worth spending money on outside of compliance justifications, as governments impose higher MPG and emission requirements.
All the arguments I just laid out and refuted are made not by anyone in the auto industry, but by a new class of Tesla pundits who consider the firm to be a technology enterprise. Circa 2018, however, we know what the tech roadmap looks like for investors: relatively small up-front venture investment followed by extremely swift scale-up due to network effects.
Fifteen people with laptops and some cloud servers can pull this off. In virtual environments – Facebook, Instagram – it works beautifully. Take it to the streets with an Uber, however, and the capital costs become a potentially intractable problem.
Put it into the capital-obliterating car business and observe as reality destroys all bullish overreach. Exhibit A: Tesla.
The ongoing Tesla scam that has nothing to do with Tesla
The conclusion to come to is that anybody who’s telling you what the future holds for Tesla who isn’t also a relatively seasoned observer of the auto industry is basically scamming you. That holds for bears and bulls on Wall Street, as well as anybody in Silicon Valley who purports to know anything about this stuff.
Those folks missed General Motors creating an $US11.5-billion play with its acquisition of Cruise Automation, an obscure Bay Area startup, in 2016 (Softbank and GM recently put more than $US3 billion into the division that GM bought for an all-in price of $US1 billion). They also didn’t see Waymo’s rapid commercialization coming, something that Morgan Stanley now believes could be worth $US175 billion.
The best game plan for anybody who wants to figure out Tesla’s destiny is to focus on a few fundamentals and ignore literally everything else. First, does the company make a product that people love? Yes, it does. Second, is there a path for Tesla to manufacture that product for less than it costs to sell it? Yes, there is. Third, as with every other automaker on the planet, should Tesla benefit from current macroeconomic trends and be able to rake in piles of cash, i.e. revenue, in coming years? Absolutely – that it thus far hasn’t translated an ever-ascending topline into a pleasing bottom-line is weird.
Don’t confuse any of this with investment advice. The gravy train for Tesla left the station years ago, and all newer investors are likely to get for years is volatility. These days, carmakers are good at two things business-wise: returning their cash-flow to investors in the form of dividends and buybacks; and taking all that cash and using it to create new enterprises that could have substantial spinoff value.
Clearly, GM used its money wisely with Cruise, a division that could surpass GM in worth at some future point. You can now buy that for $US34 per share, GM’s current stock price. While you wait, GM will pay you 4.5% annually to hold shares, about a 2.5% premium on the rate of inflation, whether the stock goes up or down.
If you think that demands too much patience, consider that Ferrari is now worth $US27 billion, post-IPO. Pre-IPO, when it was still part of FCA, you could at times have bought in at less than $US10 (FCA shareholders got a single Ferrari share for each FCA share after Ferrari’s 2015 IPO).
The real vs. the unreal
Tesla’s story has always dipped into wells of surrealism from time to time, but the latest episode has set a new standard for crazy. So much so that while I’m doubled over with laughter while looking at the stock price, I’m also sick to my stomach of all the go-to-zero-slash-take-over-the-world nonsense that has defined the Tesla conversation for the past few months.
True, Elon Musk did and said some odd things. But otherwise, the company plugged away as it has done for several years now.
I know, small-scale execution is incredibly dull and doesn’t justify a $US50-billion market cap. But that’s reality. The unreality – which became a potentially ruinous distraction after Musk’s “funding secured” tweet over the summer – is the big-top circus that has attracted all the attention.
Just remember: it isn’t real. Look no father than the comical moves of Tesla’s stock price for confirmation.
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