I have to admit that I’ve become an Elon Musk fanboy over the last years. I am impressed by the number of disruptions he has initiated. Check the video below for a short summary (here the whole series).
To recap, here are some of Musk’s disruptions:
PayPal, an online payment service
SpaceX, dramatically cutting cost of sending rockets into space
Tesla grid batteries, disrupting energy utility market
Tesla solar roof, solar panels integrated in roof tiles
Tesla direct sales, bypassing car dealerships
Starlink, globally accessible low latency internet
The Boring Company, cutting cost of tunnel boring
Tesla electric cars, years ahead of competition in EV specs
Tesla autonomous cars, disrupting taxi industry
Tesla insurance, disrupting auto insurance industry
Neuralink, eliminating the i/o bottleneck between human brain and machine
OpenAI, to eliminate the threat of AI going rogue and killing humans
Starship, possibly will be used to send first humans to Mars
I watched tons of YouTube videos on Tesla and I am impressed just how innovation-oriented this company is. I am convinced that traditional automakers are screwed (maybe with the exception of VW).
I am seriously considering if I should not put 10-20% of my portfolio in TSLA. I know, their P/E is off the roof, but if they deliver on just a portion of these things they are working on, I don’t see why Tesla should not be as big as Apple or Amazon. I know that it’s a huge risk to put your money in the shares of a single company, but the guy in the following video is really convincing. He is practically 100% invested in Tesla. He says: you believe in EVs, autonomous driving, AI, solar energy? Who better than Tesla?
Take this Elon-loving post to reddit, circa 2016-19
More seriously, I think his fame has finally gotten the worst of him. That, and maybe the consistent lack of sleep over many years. I personally think he is a cocky wanker with some good and not-so-good ideas. He simultaneously embodies a lot of the best and worst aspects of American capitalism (despite being South African - Canadian). The Thai cave incident was when my opinion of him soured and I have heard some not-so-great things about working for him from former employees.
Edit: should add that TSLA as a company is a different conversation… I wish that Musk could be taken out of the TSLA valuation equation, but for many, he can’t.
Sorry, I don’t follow reddit, I never got hooked. Something about the layout does puts me off.
I think if Musk left, it would hurt Tesla. He’s the driving force behind it. When Tesla was in huge trouble when they couldn’t ramp up the production of Model 3, he was there for 80 hours a week, solving the issue.
He’s also not your typical billionaire. I don’t think people in his wealth class still put so much effort as he does.
I don’t know what are you referring to. Musk has not done anything recently, which he hasn’t done in the past. Yes, he is not your boring conservative CEO type of guy, he’s weird, nerdy, and openly speaks his mind. I think the World needs more leaders like this, and not more or political correctness and of behaving “how you’re supposed to”.
I know he makes that impression, but I watched like 30-40 of his videos and I don’t think he’s mindless. These Youtubers that comment on Tesla, they follow quarterly shareholder calls, industry news, various interviews that Musk gives. It’s a whole community of people who can sometimes look similar to Apple sheep, but they are really deep in this EV-solar-AI World.
The cool thing is, we will be able to see if they were right, we just have to wait. Tesla has been battling with bad press since the start. It has been dismissed countless times by Tesla bears sponsored by big auto. We heard how it can’t be done, but Musk already has an incredible track record with Tesla and also SpaceX.
I was referring to, e.g.: his erratic Tesla-related tweets (“taking Tesla private for $420”/“stock price is too high right now”), calling a cave-diver/rescuer a pedophile and trying to dig up dirt on him, naming his kid some ridiculous shit, many of his statements on COVID-19 (at points in time where the available data didn’t require a “visionary” to see what was about to happen in the US…). Anyway, a long list of recent things that indicate poor and distracted judgement…
So, yeah, Musk is a ego-driven tosser but, all the same, I think Tesla’s doing some really cool stuff and I welcome the shift to electric cars powered by energy from renewable resources (although, as an aside, I think public transport investment is much better way forward than continuing individual car ownership). Like the song but not the artist…or something like that.
Tesla announced they will reopen the Fremont factory
The health officer (whatshisname) of the Alameda country said Tesla is not allowed to reopen
Musk said that it’s the final straw and that they will move the HQ to Texas
Tesla filed a lawsuit against the Alameda county
Musk tweeted that they will work anyway and he requests that police arrests him, should they come
the mayor of Fremont sided with Musk
LOL, fun times!
Yeah, well, dogma says: buy the whole market. But, honestly, I have no love for many of the companies that are in the index. Like, I know Coca Cola delivers solid returns, but I hate fizzy drinks and can’t see how this company should help us advance into the future. Tesla is a company that heavily invests in future tech and it gives me hope for a better future. I would be happy to invest my money into these kind of businesses. Not only for the hope of higher income, but also as my contribution to pushing the World forward.
I guess this is where I enter to play the devil’s advocate.
Disclaimer 1: I am neither long nor short TSLA, nor do i intend to establish a position.
Disclaimer 2: I really think that Tesla cars are superb products, and so far i got only positive feedbacks from Tesla owners. But as I will detail below, Tesla the product and Tesla the business are two different animals.
I am not saying that you shouldn’t buy TSLA, but you should seriously consider the below concerns before pressing the BUY button, because for me every single one of these concerns is a red flag that needs to be cleared.
1) Valuation Concerns
As you said, TSLA’s price is off the roof. But how far off the roof is it? Can it be justified? To answer this question, I don’t intend to give a complete course on valuation, but at least to give rough principles to establish a back-of-the-envelope fact-checking.
Valuation through profitability
One way to value equities is to look at its profitability, i.e how much returns it brings compared to the capital needed. A yardstick is to compare the Return On Equity (ROE) of the company to the investor’s required return (usually this required return is in the 8-11% ballpark). If ROE = required return, then the value of the business is equal to its book value. If the ROE is higher, then it should have a P/B >1, and if the ROE is lower than the required return, then it should have a price-to-book ratio lower than 1.
(Note that we do the same with bonds: if the coupon is equal to the discounting rate, then bond price = bond’s par value. If the coupon is greater than the discounting rate, then price > par value, and so on).
How does TSLA fit in this picture? It’s not so great.
Tesla’s trailing twelve months earnings are negative. In 2019, it still lost almost a billion USD.
What if it was positive? Tesla is still an automaker, which means that we can expect it to have roughly the same economics than other automakers.
What are those economics? Well, NONE of current automakers are earnings their required return, and thus most of them are trading below book value (check VW, Ford, GM, Fiat/Chrysler, Renault… None of them have a P/B>1).
Ok, how does TSLA compares to those economics in the case where it would be profitable in the long term? TSLA market cap is currently 154 billion USD (more than VW, GM, Ford, Renault and FCA combined), while its book value is … 6 billion USD. The P/B is roughly 25, expecting a profitability through the roof. I am really not sure that TSLA’s business model will depart so much from classical automakers.
In the long term, either the price will reach down the book value, or the book value will reach up the price (maybe through capital injection/dilution, as happened recently when the company issued new shares to profit from a high price, making the book value go from 4 billion to 6 billion). This is not a way to create wealth for shareholders.
Valuation through growth
Another lense we could have a look at is through the expected growth reflected in the current P/E ratio. This way we can kick the tires to check if the valuation makes roughly sense.
Provided that the profitability is at least above the required return, a P/E above 10 reflects that the market expect a good growth of the earnings.
The higher the P/E, the higher the expected growth. Note that a good profitability is a prerequisite to a good growth: having a high growth but low profitability is a value destruction proposition, as you need always more and more capital to get proportionally less and less returns…
How does TSLA fits in? Once again, it is complicate here:
TSLA TTM earnings are still negative, so it is hard to even define a P/E when it was losing a billion dollar in 2019.
But let’s say that instead TSLA earned a billion dollar in 2019, with a correct ROE… TSLA current market cap would imply a P/E = 154!
That implies an expected growth that would make any Saas-software company blush with envy. In other words, TSLA is currently priced for more-than perfection. They may realize all their innovation, but it is already largely priced in. Any bad surprise will be catastrophic in the long term for shareholders.
As said above, TSLA had quite some difficulties to generate positive earnings (and might start having some in 2020). This is so with cars that cost at least 36’000 USD, i.e already entering in the luxury segment. A small part of the population can afford to pay 40k for a car. If TSLA wants to grow, it will need to address the middle market as well, but i fail to see how it could be profitable on this segment when it barely manages to be profitable with more expensive cars. (lowering the quality would be a big nuisance on TSLA image).
In 2019, Tesla had its general counsel (i.e the guy responsible for legal matters) quit three times in a row. I don’t know what was the reason, but it needs at least to be explained. When the guy responsible for all your future legal matters don’t want to face their responsibilities, i would like to at least check if those guys did not want to be involved in a fraud.
It has been largely in the news lately, but Musk received 750 million USD in stock options for compensation. This number is bigger that the aggregated few positive earnings that Tesla earned in its whole history. In other words, if TSLA ever earns any money, it is more likely to go in Musk’s pocket than to other shareholders. Ask yourself if you want to enter such a partnership.
In the latest annual report, you can find the following extract:
In other words, no insurer wants to cover the board for their legal issues at a normal price, so Musk decided to insure himself the board. That means that the board is absolutely not independent. If anybody disagree with Musk, his insurance will likely be terminated. That’s a big red flag for me, there are no checks on what Musk is doing.
I did not check it personally, but the latest financial reports from Tesla triggered a massive scandal on Twitter where many analysts said that the numbers don’t make any sense and the books are cooked. I don’t know if this is true, but at least you should check if the numbers make sense and this is not something sponsored by big auto…
Innovation vs Wealth Creation concerns
A final concern, although not directly related to TSLA, is that historically most world-changing innovations did not create wealth for their shareholders:
The automobile changed the world, but most automakers went bankrupt
Aviation changed the world, but airlines have in aggregate negative earnings over their whole history
internet changed the world, but most dotcom companies went bust
So once again, Tesla are superb cars, and exhibit cool technology/innovation. But that does not mean that the business will create wealth in the long term.
Tesla valuation is insane by all means if you look into the past, but keep in mind stock market is forward looking. The two stories with Tesla that you’re buying is a) EV will take off big time, perhaps aided by government bans of fossil fuel cars, and Tesla’s going to rule it, and b) self-driving future into which Tesla invests heavily
It’s premium brand. Basically Tesla is Apple of car makers. And just like Apple they command a premium over commoditized phone makers who struggle to flip a profit
This is an interesting statement for a thread starting with “should I buy TSLA shares”. I followed very closely TSLA since 2011, when I was building electric car prototypes and some early roadster were circulating in Switzerland. Musk is the supreme engineer, but there are a couple of questionable behaviour…I am an engineer in power electroncis and embedded software and deeply respect what Tesla achieved. This is thanks to attracting top talent. Tesla and SpaceX are attracting the most talented engineers in the world, and it shows. Are thy coming for the mission, or for Musk? How sustainable it is?
If you invest long in a company, it is for the next 30 years. Musk is one wrong tweet away to be forced down as CEO from the SEC. IS the longest tenured CEO of an automaker company, let that sink in: no other current automotive CEO has been CEO as long as Musk…how long will he stay? WIll that impact talent retention and projects? It is very difficult to judge and evaluate. That’s why I stick with indexing.
And while you can be a fanboy of Musk the Engineer (incredibly smart), I’m not so sure we should pick him as a role model as husband or father…or generally as an human being. He has 6 kids, how much time does it dedicate to them? He was horrible to his first wife.
So yeah, like everything, a lot of light and darkness. Have you tried analyzed it mathematically? Let’s say you put 10% in Tesla, 90% in SP500. Tesla grows let’s say 15% average annually, SP500 only 7%. After 10 years you would have 18% tesla, 82% SP500 and “only” 10% more total wealth (100k of one million let’s say), but how much risk did you take on? And at the end of the 10 year, you are even more exposed 18% also even more risk.
A better choice to increase return is to shift asset allocation from cash/bond to stock index until you have 100% in stock. Then save even more money, get even more mustachian. only in the end I would take more risk investing in single stock, if really cannot be avoided.
Are you already 100% stock and saving all that you can save? this are relatively risk-free way to increase return.
My opinion is in line with Julianek’s (I am just unable to verbalize it in detail as he did ) - the business (value) does not seem to be in line with its current price (market participants’ opinions).
It is an attractive bet though.
…and TSLA the share is again a completely different animal …
It’s the favorite trade for “tiktok traders” or “robinhood traders”. There are interesting “lemmings-off-the-cliff” opportunities on that stock.