As a RIC (Registered Investment Chimp), it’s my duty to protect customers from market mania, and when a stock does what Tesla is doing – with NO fundamental change in their outlook – we have entered totally bananas territory.
My phone’s ringing off the hook about Tesla. I’ve been so busy speaking with Jane Goodall’s family office, a few unruly orangutans, a nice gibbon couple and my buddy Jim Chanos about the gyrations of Telsa that I have neglected sounding an alarm in my WWN column until now.
LET”S LOOK AT SOME FACTS:
- Tesla makes incredible cars (I drive one, sitting on a milk crate) and is a true pioneer in electric vehicles (EVs).
- Federal Tax Subsidies of up to $7,500 used to drive Tesla sales but these subsidies went to zero Jan 1, 2020. That’s not good for business, nor is Coronavirus in its fastest-growing market.
- Tesla is just a kid compared to other automakers with global dealer/service networks, powerful brands built by decades of advertising exposure, and huge installed customer bases.
- And these competitors are gunning for EV dominance as evident in many Super Bowl ads.
- To deserve its current share price, Elon Musk must navigate Tesla from its relatively small scale and entrepreneurial culture to build out the disciplined strategy and formal management structure necessary to grow its business to the scale of far larger competitors.
- Finally, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” So sayeth my main man, Benjamin Graham
And while there seems a lot more voting going on, my negative investment view on Tesla is centered on valuation:
Is the company worth the approximately $160B valuation implied by its recent share price which exceed $900?
My answer to this question is to invoke another unsustainable mania: “Bell Bottoms.” Get my drift? Let’s just be content that fashion derailment was neither a stock nor an ETF!
Putting Tesla’s valuation into perspective, I prepared a comparison of Tesla and its competitors, based on what they are worth (Market Cap), their Revenue and Price / Sales, a ratio of their market cap compared to revenue. Data on the left is sorted by market cap, with Tesla in #2 position, and data on the right is sorted by annual revenue, on which measure Tesla is dead last.
Based on this data, this chimp will bet every magic stone that I collected prior to my domestication / education (including CFA certification, which was later contested due to my species), that despite Elon Musk’s genius, his company DOES NOT warrant being valued nearly 8x higher than its closest competitor (Toyota). It just boggles my simian brain!
The only way Tesla could possibly grow into its massive valuation would be bolt on the business base and managerial discipline of a few competitors, using its overvalued shares – but honestly the ensuing culture clash would not end well. It reminds me of when a neighboring chimpanzee troop tried to plunder our more organized society. It didn’t end well, and the image of their shaking bodies running into the bushes as we pelted them with sticks, stones and fecal matter… but I digress.
WHERE DOES IT GO FROM HERE?
To be clear, this chimp is drawing a line in the sand that says Tesla does not make sense at $800 or $900 (it keeps bouncing around as I write), though it could get even crazier before Ben Graham’s investment ‘weighing’ begins to enforce a rational valuation for the Company’s long term cash flow potential. The danger is significant, as valuing Tesla at 0.32 times revenue (the median valuation for the auto peers above) would trim Tesla shares to $42.00 per share. Trust me – that’s no more fun than falling out of a tree!!
During this period of extreme volatility, the SPC relies on my Grandfather’s saying: “Don’t put your fingers in the mouth of the lion, because you never know when the lion will wake.” Treat your hard-earned investment bananas like your precious fingers. Put them in them in your pocket or somewhere, just far from the lion’s choppers, because we just don’t know when he will awake – and that’s why even trying to play Tesla on the short side could quickly end your piano playing!
Until next time –
The Stock Picking Chimp
Investments without the Monkey Business