The mystery of TSLA

still trying to figure this out

As I write this, TSLA now sits at $544B in market value with a p/e of 1,159, forward p/e of 150, p/s of 19.3, p/b of 34.23 and p/fcf of 128. Revenue is $28B with $525M in income, mostly due to regulatory credits.

GM, by way of contrast, has $65B in market value with a p/e of 20, forward p/e of 7.69, p/s of 0.56, p/b of 1.49 and p/fcf of 10.54 despite being the larger seller with $115B and income of $3.21B.

BRK has $545B in market value (it was lower than TSLA mid-week), p/e of 15.4, forward p/e of 21.6, p/s of 2.21, p/b of 1.33 and p/fcf of 20.24 with revenue of $246.5B and income of $35.85B. BRK is by essentially any metric far larger than TSLA. Indeed, its income is larger than TSLA’s revenue. Yet the market valued TSLA higher than BRK during part of this week.

We know we are in an insane bubble. Now it is clear this bubble is larger than the 2000 internet bubble given these valuation levels. What remains a mystery is why given TSLA’s stagnant revenue despite the addition of the Chinese market, the EU market share collapse and the China market share drop, the many forced price cuts and forced export of excess Chinese production to the EU, the low Consumer Reports ratings, the many quality issues and so forth, would the value of TSLA go up 6 times in the face of fundamental deterioration? Of course $1.2T in central bank money printing per month is one reason, by why is it going in TSLA and not GM or BRK?

Rationally addressing this question has been particularly difficult given the very low quality of analysis promulgated by the boosters of TSLA. However, I did manage to find one cogent opinion by Scott Galloway in this 2017 book https://read.amazon.ca/kp/embed?asin=B06WP982HX&preview=newtab&linkCode=kpe&ref_=cm_sw_r_kb_dp_6bYWFbFER22Y6.

As any sort of analysis is so rare I thought it worthwhile to look at this in detail. His section on TSLA should be found on page 195:

1. TSLA has accomplished more than any other automotive start-up in our lifetime and looks well positioned to solidify its position as the market leader in EVs.

2. Although mostly a luxury good for “Silicon Valley bros,” its design, “innovation in digital control” and “massive investment in infrastructure” (he is referring to the “Gigafactory”), not to mention its “Edison-like visionary leader” suggests TSLA has the potential to become a “mass market player.”

3. TSLA’s first volume car, the Model S, swept industry awards and became the best selling EV in the US.

4. The Model 3 has the potential to turn TSLA into an automotive powerhouse. He cites 325k reservations at $1k as horseman grade storytelling (Google, AMZN, FB and AAPL are the four horsemen in his book).

5. He cites challenges to TSLA becoming a fifth horseman but states “Its product is unparalleled in quality and technical innovation. Tesla is not just an electric car; it’s a better car across several dimensions, including a massive and beloved touchscreen-based dashboard, over-the-air software updates (big data/AI), an industry-leading autopilot mode, and design touches (like rethought door handles) that customers love.”

6. TSLA controls the customer experience unlike any other car company. He sees dealerships as a failure of the vertical (integration) test dating from 1985 and sees them creating problems and a gulf between the company and customer.

7. TSLA’s most revolutionary change to the auto industry is its proximity to the customer. “If Tesla can maintain quality customer support in the face of its rapid growth, Tesla’s superior repeat customer rates will become a static part of the story that enables access to cheap capital, which will provide resources to enhance the customer experience, increasing repeat purchases, and so on, and so on.”

8. At the time of the book, TSLA was 4x sales vs F and GM at less than 0.5x. By April 2017, TSLA was more valuable than F despite F selling 6.7M cars vs 80,000 for TSLA (how quaint).

9. TSLA’s regular (annual?) return to the public market for money despite the lack of profitability is explained “because investors respond to Musk’s vision; they buy into his story. This is a guy who says he’s going to put rockets into space, revolutionize the car industry, and transform the power storage industry. Oh, and build hypersonic trains on evenings and weekends. What if you could go back and invest in Thomas Edison’s ideas? Well, here’s your chance.”

10. “Tesla owners describe their purchase decisions in messianic terms and value the company’s ”mission” above the particulars of its product.”

11. TSLA is not “your hippy uncle’s green brand. Tesla is also a luxury brand, and that combination is potent.” “No other brand can simultaneously tell people: ”You can afford a $100,000 car, you have great taste, and you care about the environment.” Or put another way, I’m awesome and you should definitely have sex with me.” So TSLA focuses on sex appeal more than AAPL.

12. Enron-like the author also touts TSLA’s “deep expertise” in the “capture, storage and transport of electricity.”

13. The self-driving technology put on the road by the tens of thousands is cited “while Google and Apple are still in the research park” which strongly implies that TSLA is ahead of GOOGL in this technology.

14. He implies “early market leadership in other transport markets, in alternate power generation, and in other uses of electricity in the digital age.”

15. Two big obstacles are lack of global reach and “Tesla doesn’t have a ton of customers” and by this we are talking about the billions of FB customers by comparison. Still, “its cars are data-collecting machines, so the challenge here is scale and execution, not the underlying capability.”

To be fair, in 2017, buying TSLA would make you lots of money in 2020. But that is conflating outcome with analysis. The problem is that there is simply a dearth of understanding of why TSLA rose 6x in one year despite its fundamentals. There is clearly pandemic level panic money printing that is boosting equities to record levels but do the points advanced by the author hold up given the research I have read and the story I have been following? The troubling conclusion is nope.

So, what have I observed that disagrees with this?

1. From what I can gather about the auto industry, nearly all car companies in the history of the industry go bankrupt. Musk admitted that TSLA was weeks away from this during their Model 3 “ramp.” GM went bankrupt as did hundreds of companies before it. Indeed, F is the rare exception. By if you mean by “accomplish” accrue $500B in market value, then yes, TSLA has accomplished more than any car company in history. But the difficulty I have with analysts, and I was hoping for better from a professor of business, is that the tiny number of cars upon which to base such sweeping statements as “solidify” and “market leader” ignores the billions invested by competitors and the real volume in mainstream markets. This caution is warranted as VW’s domination of EU “market leadership” quickly demonstrates with its ID.3 launch. The Model 3, which was supposed to turn TSLA into a “powerhouse,” is a mere footnote in that market at present. And that is the problem: the author sounds like he is lauding the leadership of a tiny entrant in the beginning of the market. It would be equivalent to suggesting Grid Computer (a name from the start of the personal computer age) will dominate the market in personal computers based on a tiny history or subset of data. It is naturally easy to step into projections of trillion dollar valuations on the certainty of market leadership, massive market share, massive margins and so forth but this also ignores the very niche and stagnant nature of the EV market. Again, even TSLA stagnant revenue “growth” should be raising concerns. Instead, analysts follow stock price and in this closed loop the stock goes up 6 times.

   So, let us posit a counter factual: let us assume that VW becomes the EV market leader. Will TSLA continue to be valued at more or less than VW? What if GM and VW both exceed TSLA? What then? The Chinese EV makers are growing faster than TSLA in China, what if they exceed TSLA too, at least in China?

   It is this gap between tech analysts and automotive analysts which seems to correlate most closely with their difference in price targets. But I think what tech analysts do not appreciate, because they are used to “failure” as meaning only that they were bought out at a huge premium by a bigger competitor, is that the auto industry seems to have a much more grounded history and valuation is lower accordingly.

2. The fluffy nature of this sticks out by the “massive infrastructure” point. Rather than be impressed with TSLA’s cap ex spending, I think most auto based analysts are surprised by how meagre cap ex spending has been (below replacement). VW’s investment is more in line with the description of “massive.” The bigger issue of course is that automotive analysis of EV market share, pegged at 1-2% in the US for a number of years now, does not suggest that the hype surrounding the EV market will hit reality anytime soon (as there are a number of practical barriers to wider EV adoption). If TSLA investors bet on pickup truck market share growth instead they would be closer to the truth of market share growth (but would not have enjoyed the irrational boom in TSLA stock). In other words there is a disconnect between price, hype and actual data which remains unexplained.

3. Yes, but the same publications taking TSLA off their recommended lists or ranking them near the absolute bottom in terms of quality and reliability have not affected the stock price at all. So it is a reason to go up but ignored should it turn negative. Clearly, another massive disconnect. It is also a disconnect that is central to the author’s argument that TSLA is appealing to the sex drive aspect outlined in his book. To be consistent, if TSLA is valued because it enhances desirability, it must follow that it would be depreciated if it dampens desirability. Having celebrities complain about quality or service issues, fires, roofs falling off, leaking, door handles being stuck when winter arrives, panel gaps, unreliability, inability to start, etc. should all be reducing sales (it probably is, hence the desperate price cuts). The only missing connection is to stock price: in the face of this, the stock has increased 6 times.

4. The tech/auto gap is showing here as auto industry analysts do not seem as impressed with such a low volume. Total EV market share of all EVs of 1%-2% is hard to reconcile with $500B for the “market leader.” VW, F, Rivian and others also seem to have sold out their production runs, often within hours. Perhaps this is not a TSLA specific trait?

5. The innovations and quality gush has not stood the test of time very well. Different has not turned out to be better. I should point out VW’s ID.4 has a superior door handle design for cold weather as it does move and thus cannot be frozen shut by ice or snow (unlike TSLA). The non-automotive grade TSLA touchscreen has been offered by nearly all EVs in automotive grade quality (while the TSLA touchscreen has had problems). Over the air updates are available in several different cars now. I actually think the differences are directly linked to quality problems later on due to inadequate testing by TSLA or use of non-automotive grade parts. Recall frequency seems to be driven by non-US regulators, interestingly enough. The hazards of the misleadingly named “autopilot” are by now well known as well, especially when compared to GM’s superior offering.

6. Customer service also seems to be a disaster but that has not affected the stock price.

7. I wonder if auto analysts would agree that this is the most revolutionary change to the auto industry. We have suffered through several Muskian assertions like this where Musk pronounces experts wrong and that only he is the genius. Fortunately he was not able to harm the soccer boys stuck in the caves in Thailand but he has likely harmed many with his COVID-19 pronouncements. Domain experts keep correcting Musk on each of these gospels but the hero worship continues. Those unfortunate enough to listen to his amateur pronouncements seem to be suffering, however, as the tunnel project backers in Las Vegas are discovering to their disappointment. Fortunately, Chinese experts are not listening to his pronouncements on hydrogen and heavy duty motive experts and companies can clearly calculate for themselves the advantage of 1.5T vs 6.5T in the hydrogen vs battery question in this space. This will likely become clearer when 1,000 mile range hydrogen cars become common in a few years while the EV becomes transitional technology. The hydrogen vs EV question is relevant because if Musk really was for the clean energy “mission” he would be directed by facts, not sunk costs. It is telling that heavy duty is investing in hydrogen rather than batteries due to its superior characteristics (which are needed in money making ventures such as trucking).

   I am startled to find that an entire industry was unable to be close to their customers. It is a wonder that they are able to sell millions of cars per year and are brave enough to invest billions given their distance to their customers.

8. We are approaching 20 p/s. Keep in mind that the most euphoric internet bubble stock was selling at 10 p/s in 2000.

9. I did not realise stock investors were so unfocused. Do mortgage brokers ignore income, debt and assets and look at your twitter feed instead? Are they aware that Space-X and the hyperloop are separate entities that are irrelevant in valuing TSLA? This is a serious question as many equity investors have accidently bought the wrong company due to a confusion about name or business. Or is this the big secret I am missing, that to value TSLA you must add in unrelated companies? Edison was an inventor with patents. Is Musk? Again, the conflagration and hand waving is embarrassing.

10. Messianic terms is a cringe worthy appellation to apply to the purchase of a car. Deduct on the sex appeal score. Is this the Google Glasses customer?

11. Clearly it is not an appeal to the head like Google. It is not an appeal to the heart like FB. So I guess that leaves an appeal to sex like AAPL. We can put a marker here.

12. The non-automotive business of TSLA is hardly material. I have seen projections of future potential added up in an attempt to justify stock projections but this actually ends up looking even less professional than the non-automotive analysts spouting off about the automotive industry. Needless to say the energy storage and distribution market is even more competitive than the auto industry with hundreds of huge specialists with deep industry connections offering a very wide assortment of products as their main business. I know that they keep trying to suggest it will magically bloom but the actual industry is much slower growing as evidenced by TSLA’s historical results in this area.

13. This part might have been before industry surveys came out which put Google near the top and TSLA near the bottom and has not aged well at all given subsequent research. Even in the context of current products, GM’s offering seems to be more highly rated than TSLA. Waymo self driving taxis have already started. TSLA is just a projection. Customer experience with their latest beta has been scary, to say the least, and certainly not ready for deployment. Weirdly, the author does not mention the many defections from TSLA. If TSLA was the leader, why do people keep leaving? This stands in stark contrast to FB, AAPL, GOOGL and AMZN.

14. There really is an effort to project leadership but the facts do not seem to support this.

15. There is counter reporting about the actual depth of information gathering. It seems far less impressive than touted when examined in detail.

So the main takeaway is that Musk’s attempt at spelling SEXY (foiled by Ford when they refused to allow the Model E), is dead centre within this book’s analysis of sex as the driver for sales. This does not address the six fold increase in stock price (and to be fair the book was published in 2017). Then again, sex drive or euphoria can lead to strange outcomes. Nor does it appear to stand up to closer scrutiny on any of the points raised. Too many of the assertions made are contradicted that it is actually odd and undercuts the author’s credibility (the earlier part of the book’s analysis of FB, AAPL, GOOGL and AMZN were quite nice and the book is well worth a read as a result). Clearly the author is not an automotive expert or an energy industry expert or an autonomous driving expert and that is the common theme I have found throughout this debacle and bubble: all these puff pieces sound amazing and look good from a distance. They tick off blue sky potential and add the sizzle of genius (Edison!). But any due diligence type of investigation starts to blow hole after hole in the assertions until what you see is not leading but lagging, in every dimension save for volume in a tiny niche (and even that leadership is wiped out by a real entrant within months). Given the stock price growth, clearly investors do not like to examine stories too closely. Money flow beats facts on the ground.

If sex is the driver, it is clearly extremely fragile, as the EU market shows. Or, more accurately, maybe the market leaders with decades if not more of experience actually are closer to their customer than TSLA or tech analysts. Otherwise, why would customers be choosing other names over TSLA by a wide margin in the EV space? Put it another way, maybe there is an element of rational comparison going on by the customer that it is not entirely driven by sex (except for those early TSLA customers where the TSLA is the fifth car in the stable).

Even if we were to stay within the possibly misguided sex appeal analysis framework, it should be pointed out that last of anything is usually not sexy. So last or near last in quality, reliability, service, etc., sparking exponential growth in lawsuits, is hardly alluring. Yet the disconnect with stock price and valuation could not be greater. So TSLA stands as a $500B example of still unclear analysis.

If I were to guess, when the influence of the sex driven buyer is overwhelmed by more rational buyers, this bubble might start to pop. After all, the number of customers with four or five cars is limited. After so many years of seeing the same car, maybe the Polestar looks fresh by comparison. It is an odd method of analysis, but if TSLA is indeed boosted to $500B merely on sex appeal, that seems to be an even more fragile foundation than fashion trends as it can easily be supplanted. That Taycan will turn more heads at the country club after all. It also implies a much higher cap ex drain than has occurred historically, to keep up the sex appeal (and given the long lead times in the automotive industry that might already be too late).

The one genius in all of this is the genius able to boost a stock six times, albeit during a central bank panic of liquidity issuance rarely seen. How they are able to maintain this in the face of deteriorating fundamentals will be the most interesting read should it ever be published.