What is your Tesla Investment Thesis?

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Earlier this month on Tuesday, August 7th/2018 Elon Musk tweeted and surprised shareholders that he’s considering taking Tesla (Nasdaq: TSLA) private and has already secured funding.

Then on Friday, August 24th/2018 Elon Musk announced that the company would not move forward with their plans citing “going private would be more complicated than originally thought”.

This back and forth has not only caught the attention of the Securities and Exchange Commission (SEC) but also of shareholders in the form or lawsuits. The main concern for both: whether Musk violated securities laws.

One of the lawsuits, plaintiff Kalman Isaacs, said that Musk’s “tweets were false and misleading, and together with Tesla’s failure to correct them amounted to a “nuclear attack” designed to “completely decimate” short-sellers” (https://www.cbc.ca/news/world/elon-musk-tesla-lawsuit-tweets-1.4781880)

Short-sellers play an important part in the Tesla narrative. Currently 25% of the stock is loaned out to skeptics betting on its decline.

As a result of all of this back and forth its time to reevaluate one important question: What is Your Tesla Investment Thesis?

There are five potential reasons to why you would’ve invested in Tesla — reevaluating them will illustrate whether or not they still hold and what percentage of your portfolio Tesla should represent.

Scenario 1: Tesla is the future of the car industry

Industry change and disruption doesn’t happen overnight nor over just 5 years. This thesis is marked with both certainty and uncertainty. What’s certain is that electric vehicles are probably the future. What’s uncertain is what competition in the space will look like. Technology is unpredictable and with many car players exploring how they may venture into the electric space is an important factor to consider.

Scenario 2: Elon Musk

December 2016, Elon Musk was ranked 21st on the Forbes List of The World’s Most Powerful People and as of August 2018 his net worth was $20.2 billion and is listed as 46th richest person in the world. He is charismatic and has a strong background in business. Everything from being the co-founder of PayPal to founding, being the CEO, and lead designer of SpaceX; co-founder, CEO and product architect of Tesla; and co-founder and CEO of Neuralink. Evaluate your belief in him to execute — he’s proven he’s capable of creating quite sizeable companies — do you remain invested in Tesla after he leaves?

Scenario 3: Tesla fundamentals

Tesla is not a well managed company. Currently Tesla has negative earning per share and have been declining. Tesla’s combination of short and long-term debt in comparison to it’s assets and it’s free cash flow illustrates that the company needs cash. Diving into more of a ratio analysis you’ll see that this weak quality holds and the fundamentals are not very strong at all. So if this your investment thesis then maybe you’re monitoring sales growth — which has been very strong for Tesla. If so — any signs of weakness in sales may be your reason to flag for an allocation change of the equity in your portfolio.

Scenario 4: Buy low, sell high

Set yourself a return rate target and be disciplined about sticking to it. Tesla fluctuates on a variety of different elements and can change even based on tweets from Elon Musk.

Scenario 5: You have no investment thesis

Sell now. If there was no thesis to investing in Tesla then it is not a reasonable investment. Any investor should have a strong driver to where they are allocating their assets and the risk associated with that driver. For example in Scenario 2 if Elon Musk is the main driver to investing in Tesla then that may look like a $5000 investment instead of a $15,000 because of the chance of something happening to Musk.

Bottom line is that the “when-to-sell question” doesn’t have one answer. If such was true, everybody would have known the right answer. The interesting thing is that investors are in it because of a variety of reasons. In order to understand that answer you must go back to why you invested in the first place and evaluate if that thesis still holds true.

Verdant Analytics

Investment learning with a comment on world politics, capital markets, and the global economy

Bhupinder Singh Dulku, MBA

Written by

Capital Markets | Leadership | Business Analysis

Verdant Analytics

Investment learning with a comment on world politics, capital markets, and the global economy