Tesla is a stock that does not need much introduction. True Tesla fans are proclaiming that it is not a normal automotive company but is a visionary company that is into automotive, solar energy, software as a service (Full Self Driving), Fintech (Insurance for Tesla Owners) and RoboTaxis.
No doubt, it needs to be more than a normal automotive company to justify its current lofty valuations of around 600 billion dollars. To put things in perspective, their current value is more than the combined market cap of General Motors, Ford Motor Company, Fiat Chrysler Automobiles, Honda Motor Company, Hyundai Motor, Daimler AG, Ferrari, BMW and Volkswagen. Yet, if not for the sale of regulatory credits, it has not much to show in terms of profitability as compared to the other car makers.
To know more about the bull thesis, it is good to pick the brains of Cathie Wood from Ark Asset Management which has a large stake (10%) of Tesla in her fund’s portfolio. Her target for Tesla will be $1,400 by 2024. Her arguments are Tesla will be maintaining their market share of Electric Vehicles of 18%. The total EVs on the market will be around 37 million by 2024 which is around 1/3 of the total vehicles currently.
Furthermore, the battery technology of Tesla would put them in a good competitive position as compared to their rivals. Elon did state that Tesla will be able to halve the battery cost in the next few years. This would make the cost per car in line with current combustion models. There could be also opportunities in licensing their battery technology.
More importantly, according to Cathie, what will be driving the valuation of Tesla will be the Robotaxis business, which will have margins comparable to software companies.
The thesis of more EVs by 2024 is something I agree on. The new Biden administration, which is in support of green policies and the world’s effort to combat climate change; paves a smooth path for EV adoption. Moreover, China also came up with a policy to end sales of any combustion vehicles by 2035. However, Tesla has not proven it can churn out profits from producing automobiles.
As for RoboTaxis, Elon did mention Tesla owners could use their Tesla as taxis when they are not in use; this will straight away generate a huge pool of autonomous vehicles in their Robotaxis business model. However, they will be up against Alphabet (Waymo) which already have a Robotaxis model in Phoenix and Amazon who have taken over Uber’s auto-drive division.
Moreover, there could be lots of regulatory headwinds ahead. In terms of autonomous driving capability, Tesla has not shown to be way ahead of its competitors (Waymo have been working on this technology for almost a decade).
As for battery technologies, Tesla seems to be ahead of its competitors by a huge margin (5 years ahead). But, the other companies are trying to up their game. Toyota has announced a solid-state battery to be launched in 2021 which is safer, takes around 10 minutes for a full charge and will have twice the distance range of a conventional lithium-ion battery.
The current astonishing run for Tesla could boil down to Elon’s effect. He is often compared to Steve Jobs for their grand visions. I am impressed with what Elon has done at Space X whereby the odds are against him. But, Tesla will be against private sector companies that are more agile than a government agency such as NASA. Nonetheless, profitability is still the most crucial element that would drive a stock price. Elon got it, based on an email he sent to his staff on Dec 1st:
“At a time like this, when our stock is reaching new highs, it may seem as though spending carefully is not as important, this is not true.”
“When looking at our actual profitability, it is very low at around 1% for the past year. Investors are giving us a lot of credit for future profits, but if, at any point, they conclude that’s not going to happen, our stock will immediately get crushed like a soufflé under a sledgehammer!”
The current EVs run has been reminiscent of the Solar and 3D Printing Bubbles; charts are appended below. It is all about new disruptive technology but at the end of the day, the earnings will be driving the valuation. Benjamin Graham, the Dean of Value Investing, sums these up best with this quote:
“In the short run, a market is a voting machine but in the long run, it is a weighing machine.”
Source: Investing.com- Solar Bubble 2007-2009
Source: Investing.com-3D Printing Bubble 2012-2015
The issue with a bubble is we do not know when it would peak. When it burst, it would be volatile. To quote John Maynard Keynes:
“Markets can stay irrational longer than you can stay solvent.”
Thus, if you don’t get the timing right, it could lead to financial ruin. Tesla has been coming out with red sexy shorts to mock the short-sellers.
Famous Fund Managers on the Other Side
Back to Tesla, could the inclusion to S&P 500 be the last catalyst for their gravity-defying price surge?
3 famous fund managers are short Tesla stocks at this juncture. They are Jim Chanos who has been a bear on Tesla since 2016. We also have David Einhorn from Greenlight Capital and Michael Burry made famous by the “Big Short” movie. Their main arguments will be that Tesla is not able to make a profit from its automobile business despite premium pricing. Besides, there seem to be financial engineering in the last few quarters from their sale of regulatory credits, to pave the way for S&P 500 inclusion.
Given the financial matrics, it is overvalued and it is riding on the vision of Elon to turn it into a powerful cash flow machine.
It is interesting to observe that research and development expenses compared to revenue have also decreased from 12% in 2017 to 5% in 2019. Their R&E expenses have been stagnant at around 1.3 billion dollars (It is still a huge amount) since 2017.
The price target for analysts has been wide-ranging. It ranges from a price target of around 90 by JP Morgan to the recent upgrade by Goldman Sachs from $445 to $780. The median price target is $430. It is not surprising Goldman Sachs was the recent lead underwriter for their 5 billion dollars placement.
Source: Investing.com- Tesla Price Chart
From the charting point of view, the path of least resistance is still pointing up. Thus, it is better to stay on the sidelines for those who are looking into setting up a short position. It would be better to revisit Tesla after its inclusion to the S&P 500 on Dec 21st. Will it be a Sell on News Situation? A fall of around 20%-30% is very possible after the buying demand dissipates after the inclusion. Thus, taking some profits off the table before the event might be a wise decision.
For 2021, Tesla would have to start working on the profitability front (excluding the profits from the regulatory credits) to justify its sky-high valuations. Their Messianic Brand has great potential to pervade other industries and products. It could be a Great Company that spans different industries in the future. They would have a cool 20 billion dollars war chest to turn their visions into reality.
But, we are likely to be in the midst of a bubble for the EVs, we will be cautious and would not initiate new positions at current prices. There could potentially be a drop of around 20%-30% after their inclusion into S&P 500 as demand for their shares dissipates.
As with all bubbles, it is tough to gauge when they will burst. Tesla could jolly well reach $1000 (The Solar and 3D Printing bubble had a run of around 1 year plus to 2 years before bursting- EVs are at the 1-year mark). Sir Issac Newton wisely quoted when he was badly burned in the South Sea Bubble Bonds (1700s):
“I can calculate the movement of stars, but not the madness of men.”
Kudos to Tesla for giving the climate change initiatives a big boost by spurring up the urgency of the other competitors who are trying to play catch up.
Nonetheless, I would settle for a nice Tesla Hoodie rather than the stock for now.
Disclaimer:
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.
