“Religion was invented when the first con man met the first fool.”
Welcome to the Church of Elon. Let us pray.
For the past few months, Tesla and Elon Musk have been dominating the financial news cycle and crushing the shorts. Short interest is currently at a 9-year low. On Monday, TSLA hit an all-time high, tagging $1794.99 intraday before eventually closing nearly $300 lower. Top?
From the lows in March 2020 to the intraday peak on Monday, TSLA was up a whopping 412% (so close to 420%—funding secured). Robinhood traders (investors) have been piling into the name, with over 480,000 users currently holding the stock—up from 120,000 users at the start of 2020. However, with fractional shares available, we don’t really know how much each user is holding.
Without a doubt, Tesla is the cult stock of the Millennial and Gen Z generations. The young adults view Elon as a god—the Nikola Tesla of our time. Meanwhile, the Gen X and Boomer generations don’t appear to have the same fervor as their children do. I’d speculate that the majority of them don’t know how to accurately value Tesla with traditional financial metrics. Reading through various analyst reports you could come to the conclusion that analysts are in the same boat.
The 31 analysts offering 12-month price forecasts for Tesla have a median target of $850, with a high estimate of $2,322 (Piper Sandler) and a low estimate of $246 (Citi)—which as of this week was upped 83% to $450. The median estimate represents around a 45% decrease from prices traded this week. Some analysts are even citing the “power of hope” as a bull case for the stock. Let’s all say it together: Hope is not a strategy.
Even Musk doesn’t believe in his own good fortune after he downgraded his own stock on May 1st by tweeting out “TSLA stock is too high imo”. This tweet occurred right around the median analyst price target and the stock is now up more than 100% since the stock was “too high”. What a time to be alive.
During my 10 year stretch on FinTwit, I don’t think there has ever been a more polarizing stock. The bears are convinced Tesla is fraudulent yet the bulls worship Elon—hanging on to his every word no matter how ambitious or ridiculous the claim. Shun the non-believers of Messiah Musk.
I’ve never played a side—long or short—mainly because I could never get an accurate read on the company’s financials and feel comfortable taking a position. However, that hasn’t stopped me from enjoying the daily back and forth banter between the bulls and bears.
Because of my agnostic position on Tesla, I reached out to my friends over at Canalyst and asked to use their TSLA model to kickstart my analysis of the bull and bear cases and see if anything interesting jumped out. Here’s what I found:
Bull Cases:
Tesla has a first mover advantage over newer rivals (NIO, Fisker, Nikola) and even some of the older automobile manufacturers focused primarily on internal combustion engines. They have a superior product (depending on who you ask) with a long runway for growth and account for over half of the U.S. EV market share.
If they can double their production capacity by 2021—combined with their increase in inventory—they should have enough vehicles to meet their delivery expectations (production set to equal deliveries in forecasting periods).
Data via Canalyst
Financial woes have been met with ample liquidity; capital markets eager to finance operations (for now).
Without Elon there is no Tesla. Regardless of Elon’s actual day-to-day role at Tesla, he is the visionary head of the company. He could sell underwear to a nudist. He’s created a culture reminiscent of the Apple ecosystem. The Cybertruck reveal event last fall was probably the culmination of his influence after he threw a metal ball through the window and laughed it off. The next day they received 146,000 pre-orders for the Cybertruck.
Bear Cases:
Their valuation is more ludicrous than ludicrous mode. They’re currently ranked in the top 20 of most valuable companies in the United States by market capitalization. At one point earlier in the week, they would have been ranked in the top 10 of S&P 500 companies (if they were in the index). At a $278B market capitalization, they are worth more than Toyota, Ford, GM, and Fiat Chrysler...combined. The math checks out.
It's fair to give Tesla a premium value based on its strong brand awareness, vision, and early success in EVs. But at these levels, the stock has become more of an investment vehicle into the idea of EVs and clean transportation itself versus the operations and profitability of Tesla.
Even with an assumption of double digit growth in volume in the near term, valuation multiples are still in outer space—especially compared to other auto manufacturers.
Data via Canalyst
While Elon is a visionary, he also is very easily distracted and overwhelmed with moonshot ideas. He’s the CEO of Tesla and SpaceX, founder of The Boring Company, and cofounder of Neuralink and OpenAI—quite an impressive résumé, but also a recipe for burnout.
Last week, Elon claimed Tesla is “very close” to level five autonomy, meaning its cars won’t require human intervention. However, he’s been making these claims for years now.
Elon also could step down as CEO (or be removed if the SEC wouldn’t let Elon walk all over them) and the stock would most likely crater. This would be the equivalent of Steve Jobs resigning from Apple in 2011. Except Apple wasn’t wildly overvalued at the time.
Without increased and widespread government regulations to adopt EVs as the standard, demand will continue to be related to penetration and price. A study from 2018 showed that 18 percent of respondents in the United States said they preferred electrified powertrains over conventional gasoline engines. In China, however, that number was 56 percent.
How many people can afford a Tesla while there are much cheaper alternatives? It will be difficult to expand market share without mass adoption, expensive price points, and cheaper alternatives. The younger generations who idolize Elon won’t be able to afford these pricey alternatives.
Tesla and Elon have ambitious goals to change the world for the better and lead us on a path to a sustainable future. One would certainly be remiss to ignore their imagination and innovation as they push the boundaries of traditional society and means of transportation. But, one also has to wonder, with valuations stretched more than a yogi, if investors are struggling to see the forest for the Treelon.
“The scientists of today think deeply instead of clearly. One must be sane to think clearly, but one can think deeply and be quite insane.”
This is post #59. You can follow me on Twitter or Instagram or sign up for my free newsletter here. Also please check out my Amazon page for a full reading list.
How a 39-year-old made nearly $13M on Tesla and refuses to sell his position.