Tesla Shareholders: I’ve Got A Bridge To Sell You
Anyone with an eye on the stock market would have to be living under a rock to miss the biggest bubble since the dot-com crash: Tesla Inc. While an undeniable titan of media coverage, thanks to Elon Musk’s skill as a frontman, their finances have been less than encouraging.
If you’ve come across this article from my social media, you’ll likely be aware of my occasional erratic splurges of Medium rants. If you’ve come across this from a search engine or recommendation however, there’s a good chance you’ve seen the Twitter hype beasts shouting from the rooftops about their “Million™” dollar gains from a buy and hold, and now you’re thinking about jumping on the gravy train. Here’s why you shouldn’t.
Tesla’s Finances
Real talk, this gets nerdy.
In the world of investment, P/E is king. At least it is in my world of investment, since I don’t hang out with 13 year olds using their parent’s ID to make $3 purchases on Robinhood. P/E stands for “Price-Earnings Ratio”, it’s a metric used to compare how much a company earns versus how much the free market has valued that company through the stock market.
Let’s look at Xerox for example. For some of you that might be a verb similar to “photocopying”, but for the rest of us not stuck in the past, they’re a primarily business-to-business company that specialise in communication software and of course, paper. They have a P/E at the time of writing of 3.62. This means that their current market value is 3.62 times their current earnings. This could signify the company is undervalued, but its a number that sounds reasonable when you put things into context.
Imagine your sister has a lemonade stand. She’s earning $20/day grifting guilt-ridden joggers into buying sour tap water. Let’s say she only does this for 3 months in the summer and 5 days per week. So each year she’ll earn around $1,200. You spot an investment opportunity, because you’re a little weird like that, and you’re trying to look for a fair price to buy a 50% share of her little enterprise. A P/E of 3.62 would suggest you’d value the lemonade stand business at $4,344. So for your 50% share of the company you might put in an offer of around $2,172. This seems pretty reasonable. In only a few years you could make your money back from relatively little growth in your sisters business.
Tesla’s P/E is at the time of writing, 819.69. With that logic applied, if your sister has the charisma of Elon Musk, she should be able to negotiate your 50% stake in the lemonade stand to a price of $491,814. All for her $20/day lemonade stand. I don’t think there’s much I have to add to let that sink in.
Tesla Episode VI: Return of the SEC
As an avid viewer of the SpaceX launches, I know how it feels to get a little caught up in the excitement that Elon Musk promises and (sometimes) delivers to human progress. But that’s exactly the problem. The value of Tesla isn’t being driven by bean counters looking after retirement funds, or coke-snorting traders at a national bank. It’s all an indictment on Elon Musk as a person. Everytime SpaceX makes another launch, or Hyperloop promises to career through the underbelly of Los Angeles, it’s the publicly traded Tesla stock that takes the boom. The people making that connection aren’t those hedge fund managers, they’re young people with a certain level of disillusion about the stock market, and a trading app on their phone.
The likes of Robinhood have brought investment to the masses, and that’s a good thing. For far too long the stock market has existed only as a news headline, or words muttered under the breath of the minority of Americans who’ve actually bothered to save any money at all. But they’ve brought out a new wave of tech-savvy young minds who are always no more than 48 hours out from their most recent viewing of The Wolf of Wall Street. Armed with an iPhone and about 6 minutes of investment training, they’re looking to make their millions riding the coat tails of what they believe to be the coolest man in the world. Then they tell all their friends, and everyone else hops on, because who wants to be the one to miss out on becoming rich while your friends are launching their Tesla Roadster into space?
There’s an old saying in finance: “When your hairdresser starts talking about a stock price, it’s time to cash out”. Sooner or later there’s going to be a moment of collective realisiation. Not dissimilar to the scene from the Big Short in which Steve Eisman (played by Steve Carell) discovers that a stripper with a low income has 5 houses and multiple mortgages on each property. It’s all hanging on by a thread. One YouTube video or viral tweet revealing the amount of time it could take for Tesla to become even profitable, let alone a good investment, will be enough to bring the share price crashing, because that’s the audience keeping the stock afloat right now.
I’m not saying Tesla has no long term viability as an EV/AV company, but there’s a bubble brewing in Palo Alto, and it wouldn’t be the first time.
