Tesla’s stock keeps on rising and in the eyes of bullish investors, Elon Musk and his tech wizards can do no wrong – but is it a bubble waiting to burst?
Key words
Bulls: a term used to describe investors who believe that a particular stock or market will go higher.
Bears: a term used to describe investors who believe that a particular stock or market will go down or underperform.
Bubble: a term used to refer to situations where the rapid increase in the price of assets or financial instruments is driven by speculative demand.
Market capitalisation/cap: a term used to refer to the total value of a company’s shares of stock.
You may wonder why so much attention is focused on the debate in the financial world about Tesla—after all, don’t financial ‘experts’ disagree on almost everything under the sun? If these were your thoughts, you’d be right – but the debate surrounding Tesla is curiously interesting. Both sides see the evidence as supporting their view, but only one can be right. Are the bulls mad or are the bears about to lose out on the opportunity of a century?
Recently, the company split its shares, sending it soaring 12% – it also made Musk, the founder and CEO of the company, the world’s third-richest person. It increased the market capitalisation of the company to $463bn. To some, this is clear evidence of the ‘madness of men’, and to others, it proves that Elon Musk’s vision is the stuff of dreams—and money.
The central issue between them is this, to invest in a company, the analysis must demonstrate that they are creating value, or are going to create value which is worth X amount in the future. Tesla, by most metrics, trails other car companies in making and manufacturing cars, and they have less efficient manufacturing processes – so how can they be worth so much more than some of the world’s best-known car companies?
It’s this issue that has split investors globally. And if you’re looking to join in, you’ll need to consider this: Is Tesla a car company?
Is Tesla a car company?
For the average onlooker, that question may appear ridiculously stupid – is this what bankers and investors get paid ridiculous amounts to debate, they might ask. Tesla makes cars, we’ve all seen them— every celebrity on a mission to save the planet owns one, so how could they not be a car company? We wish it was that simple, but it isn’t.
But for some Tesla stock sceptics, it couldn’t be simpler: Tesla is so obviously a car company; and for a car company, their surge in value proves that a bubble exists and sooner or later, it will burst.
This is their reasoning: for a car company which is yet to prove itself in terms of sales and brand reputation, its high market value is simply ludicrous. This is because, in comparison to other established carmakers, Tesla neither makes as many cars or sells as many cars. On Monday, when Tesla’s stock rose 12.6%, it added $51bn to the company’s value—that’s the value of General Motors, one of the world’s largest and most established car companies. It sold over 7 million cars last year whilst Tesla, sold a little of 350,000. And that’s just the beginning of what many see as madness.
Tesla’s market cap is close to being worth more than some of the world’s biggest and most reputable car brands combined. And when you consider just what car brands Tesla is pushing aside, in terms of value, you might conclude that it all doesn’t make sense.
Ferrari, General Motors, the German giants of BMW, Mercedes, Audi and Volkswagen, Chrysler and many more. Most of these brands sell more cars, have more efficient and established processes and by the reviews of most car experts, make better cars. And whilst coronavirus wreaked havoc on the global auto industry, Tesla escaped relatively untouched.
All this taken into consideration, and an examination of the city car park, only to find one or two Teslas at any given time, might lead you to the same thoughts Sir Isaac Newton had centuries ago: “I can calculate the motions of heavenly bodies, but not the madness of men”.
At this point, the bulls would be angrily howling at their monitor screens—the bears have got it all wrong they might say. Because to them, comparing Tesla to other car companies is a useless and flawed exercise – Tesla is obviously not a car company they argue.
An Innovative tech firm creating carving out its own industry
Yes, they make cars – we’ve all seen the Model S, and the ones with the Lamborghini type doors. That, however, is only half of the story.
To the bulls, Tesla is, in fact, a tech company which happens to make cars. Instead of comparing them to General Motors and others, sceptics should look more towards other tech giants like Apple. To them, Tesla is the new Apple, and it’s market cap rightly reflects that.
A closer look at Tesla, it’s development over the years and the sheer variety of projects the company has embarked on, and you may conclude that the bulls are right. After all, last time we checked, General Motors or Ferrari didn’t create a supercharging network which helped kickstart the electric vehicle revolution.
The software and technology that Tesla builds to aid its vision and mission of creating a different kind of car are mind-blowing. Tesla leads the industry in battery technology, artificial intelligence and data collection. To Tesla, cars and technology aren’t two different things— they’re the same. Where other manufactures might tinker with technology which aids the driving experience, Tesla produces technology which is their cars. A subtle but important difference. The Mercedes S class is usually considered a leader in its class for technology advancement, but even so, Tesla’s models S and X are far more technologically advanced.
And when it comes to the technological products the company produces and sells, cinema-sized dashboard screens and semi-autonomous driving are just the beginning. Tesla produces self-driving software, they build their own charging stations, they develop and sell solar panels and glass tiles, and they also develop and sell their own battery storage units. No other company, regardless of their reputation or the number of cars they sell, comes close to the technological powerhouse and capabilities of Tesla. And that, the bulls argue, and not the ‘madness of men’, is why the company is valued so highly.
Here is another way to look at it: Nokia and Blackberry both made software and hardware, but it was the iPhone which combined both in the same product.
To value Tesla’s stock based on solely on the notion that it’s a car company is to miss the point entirely, the bulls argue. It’s a tech company, creating its own industry, changing the way we travel, and the very notion of what a car can do. To bulls, that’s a lot of value, and they’re cashing in now in hope that just like Apple investors, they’ll be standing tall later with a lot of money.
Then there’s Elon Musk…
So far, you may think the opposite sides of Tesla argument disagree on everything, but not quite. Between the two camps, there’s an agreement on something: Tesla’s CEO, Elon Musk, is brilliant, eccentric and ridiculously ambitious.
When he set out to create a company that rivalled some of the industry giants, he was laughed at. When the likes of BMW and Mercedes turned their attention to electric vehicles they said, it’d be game over for Tesla. Musk proved them wrong, and he hasn’t stopped there. Tesla fever has gripped the US, and Musk wants global domination. Next stop? Europe; and in what may be seen as a poignant statement, his destination of choice to build a Tesla Giga factory, is Germany. Perhaps, this is his way of signalling to the old boy’s club of car-making giants that a new era has arrived.
But whether business executives across Europe will be swapping their Mercedes and BMWs for Tesla’s remains to be seen.
Principles of Benjamin Graham: Investing vs Speculating
When asked who the most influential person was on his investment strategy and thinking, Warren Buffet replied “Benjamin Graham”.
For Graham, investors must know when they’re speculating and when they’re investing. In a lecture, he stated: “An investment operation is one which, on thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”
From that, bearish investors would argue that on thorough analysis, Tesla is a car company whose value is propped up my madmen engaged in nothing more than a speculative betting game. And bullish investors, as they howl and point to the numbers, will argue that this tech company, which happens to make cars, has a solid and profitable foundation which deserves due recognition and respect.
Whatever side of the argument you’re on, if you find yourself tempted to buy Tesla stocks, you should follow Graham’s advice and ask yourself— am I investing or speculating?
As Tesla stocks continue to rise, the bears and bulls will continue to debate its true value. For the sake of technological advancement and innovation, we should all hope that on this, the bulls are right.