Tesla Fever? Take a Cold Shower
Dear Rich Lifer,
In a recent interview on CNBC, Ark Investment founder Catherine Wood said she believes Tesla will surge to $6,000 over the next five years.
Am I the only person who was working on Wall Street back in 1999?
It sure feels like it.
Here’s how Wood explains her investment thesis according to MarketWatch …
“‘As we’re looking at other auto companies, seeing how far behind Tesla they are, we’re beginning to believe they might not lose market share, which is a huge change in our assumptions,’ she said, pointing out that market share was a concern when she first predicted in February 2018 that Tesla would reach $4,000.
“Autonomous vehicles will also be a big driver going forward, with Tesla, in her view, positioned to be the dominant player in the space. ‘The winner in autonomous platforms, and in any artificial intelligence project, is that company with the most data and the highest-quality data,’ she said. ‘That company is Tesla.’
Not So Fast…
Now, here’s a little reality check.
Tesla mostly makes electric cars.
Guess how much of the overall vehicle market that category represented last year?
5%? Still less than half that!
That’s right. Counting both fully-electric and hybrid plug-in gas-electric vehicles, you’re looking at roughly 2% of global sales.
So sure, Tesla is leading its competition. But only if you’re talking about a miniscule part of the overall market as it stands right now.
Even if it doesn’t lose market share to other companies …
Does a company dominating a tiny-and-slow-growing segment of its industry deserve an insanely high valuation?
And by the way, I wholeheartedly believe Tesla WILL lose market share in the Electric Vehicle (EV) segment over the next five years.
Major automakers like Ford and VW are moving swiftly to launch a whole range of electric vehicles over the next several years.
These companies might not have the same brand cachet or technology as Tesla, but they have mainstream appeal, well-developed dealership and servicing networks, plus the ability to fund their EV growth through currently-profitable gasoline car businesses.
In the U.S., consumers can also still benefit from tax credits for other brands that are no longer available to would-be Tesla buyers.
What about the autonomous driving argument?
Does Tesla Really have a Leg Up?
Let’s simply accept that Tesla is the leader there, too. (Another questionable assertion.)
If electric vehicle adoption has been happening at such a glacial pace over the last decade, why would I want to pay a huge multiple for an even-farther-out technology like autonomous driving?
The truth is that Tesla has only managed to turn a profit in a handful of quarters so far.
Going forward, it says it can stay in the black “with possible temporary exceptions, particularly around the launch and ramp of new products.”
Its major market is relatively limited at the moment, growing relatively slowly, and competition is only increasing… not just domestically, but in places like China, too.
Process all that and then look at this chart of Tesla over the last three months …
As you can see, the stock has more than doubled since Tesla posted a (surprise) quarterly profit back in October.
Looking a little farther back, you’d find that the shares are coming off a 52-week low of $176.
Analysts are tripping all over themselves to catch up to the action, raising their price targets to $600 a share or higher.
Yet for the full year of 2019, the company almost certainly posted a net loss. We’ll know for sure very soon.
Of course, the market is forward-looking.
Many analysts now believe Tesla can post a full-year profit in 2020, and the consensus estimate is for 5.93 per share in earnings.
At Tesla’s current level, that comes out to a forward price-to-earnings ratio of 85.
The broad S&P 500 index is trading at roughly 20 times projected earnings for its constituent companies.
Meanwhile, rival automaker Ford is trading at a forward P/E ratio of 7.2.
GM? An even cheaper P/E of 5.6.
Investors have choices here:
A. Pay a huge premium for a company that hasn’t yet turned a regular profit and is about to face a huge wave of new competition in its core business line
B. Buy already-profitable, dirt-cheap rivals in the same space (including names that will soon bring the aforementioned competition)
C. Simply buy a broad index of companies with a far more reasonable valuation
D. Sit the whole darn thing out for now.
I consider A. to be the only bad choice. But it’s the choice many are making right now.
History Tells a Cautionary Tale
See, I was on Wall Street in 1999 when the same type of dynamic was playing out. So I remember the hyped names and how analysts were continually raising their price targets to justify the gains rather than scrutinizing the underlying assumptions.
I see the same garbage happening right now and Tesla is just one of many glaring examples.
It’s ironic, actually.
After years of disliking Tesla’s products as overpriced, I might seriously consider buying their (wild-looking) new pickup truck when it comes out a couple of years from now.
At the same time, I can’t see buying Tesla’s overpriced stock now or at any time in the foreseeable future.
It faces too much competition…
Its business is still largely unproven…
Its ancillary products like wall-mounted battery packs are relatively niche…
And it requires too many logical leaps to justify the recent action in the stock.
Meanwhile, there are simply much better investment opportunities, with far less uncertainty and risk, available all over the place.
So I’m holding this Tesla madness up as just one example of a bigger mania that continues unabated in a concentrated group of high-flying stock market darlings right now.
Consider yourself warned!
To a richer life,