The Tesla Bubble:

With comparisons to the DotCom Bubble.

Tesla. Everyone knows about the wonder stock…unless you’ve been living under a rock. Elon Musk is the “genius” business guy that everyone loves - well maybe not since Bitcoin’s decline. But he’s not quiet and his leadership has without a doubt helped his company increase their capital. Don’t get me wrong- I might be slewing his company but he has good intensions in my eyes. The stock has increased over 700% between January 2020 and January 2021. The current P/E ratio is 691 meaning that investors are paying $691 for just $1 of earnings. This alone shows the overvalued nature of Tesla. They don’t even pay a dividend so it begs the question: why? What has caused this explosion of madness?

One reason could be that Tesla was included in the S&P 500 Index in December 2020. As investors found this out months before the inclusion, demand for the shares increased. As the stock started to rise, FOMO kicked in and retail traders joined the party. People bought the stock as it was only going up and people started to get greedy. Since then, there has been a sell-off…But the big one is yet to come.

I came to this conclusion looking at history. Let’s take Cisco Systems- A key player in the DotCom bubble. In March 2000, it was the most valuable company in the world (worth more than Microsoft)- it sounds crazy with hindsight but we are reliving it now. Tesla is the sixth largest company in the USA by market value. It peaked at around $77 in March before quickly falling to $56 by May. Now here’s the interesting part. It rallied from that “bottom” to $68 in August. It never reached a new high. After reaching the $68 mark, the real sell-off came and it crashed to around $15 and three-quarters. This sell-off took seven months before it slowed. Quite brilliant! Note: Tesla’s rise has been far greater than that of Cisco. I’ll let you decide what you make of that.

Again, if we look at the DotCom bubble- Venture capitalists poured millions of dollars into Internet companies that might have had ok ideas, but had no business strategy. Now, I’m not saying Tesla has bad management at all, but I am warning of a company that seems to be too good to be true at such an infant stage. Financially, Tesla doesn’t looks bad. It does have a history and it has made profits. But the valuation is worrying- a market capitalisation of $650 billion+. For 2020, Tesla reported a profit of $721 million from $31.5 billion in sales. In 2019, Tesla had a $862 million loss and sales of $24.6 billion. They also sold 36% as many cars as they did in 2019. Ford, on the other hand, sold 4.2 million cars (a 25% decline from 2019) and had a revenue of $127 billion (Ford has a market cap of approximately $57 billion). BUT, Tesla is still at the beginning of their journey and it is too early to buy as a long term investment.

I have also been researching the anti to Tesla. Not VW or Ford or any car manufacturer for that matter (well, maybe one- cars value excellence(hint) ). It’s oil! Oil is still necessary and its death will be for many years to come. People overexaggerate how fast change will come- with the government constantly distracted by something “larger” there is still time before action will take place. In the long run, I agree - oil is a no go but I think there is still one boom for it to come. On the other hand, in the long run, I think Tesla could have a strong future - look at Microsoft and Amazon. They suffered a “little” back in 2000 and now they are huge.

The other major problem with Tesla is their reliance on regulatory credits. Regulatory credits is not a sustainable way to generate revenue (5%!). Tesla can make 100% profit on the credits they sell even though they get them from the government for free to begin with! Also, profit margins are a measly 3.18%. How can you compare those margins to that of a "big tech” company? Investors need to make up their mind- is Tesla big tech or is it a vehicle manufacturing company? Being stuck in the middle is not ideal for anyone and with a P/E ratio of that of a tech company, it does beg the question.

I personally have no position on Tesla but if I did I would be short. The crash will be inevitable. It is a certainty - the timing not so much. Whether it be when interest rates rise or before that (maybe even after, but I doubt that) - I will never know. Tesla is the target of this newsletter but there are other overvalued stocks in the technology industry - SNAP, for instance!

A final thought: To be sure, Tesla’s current valuation IS irrational but remember we live in a crazy world today: In a country swarmed with the FED’s bank cash, its not just Tesla that looks bonkers! Treasury bonds are going nuts and the US government is inflating the economy more than people care to admit/realise. We truly are in a mad world and it may take some time before the Tesla crash happens. My next publication will be on the topic of inflation and what will come next.

(I could have made this longer but I don’t know how much you guys want. Please could you let me know if you want me to expand on this and I can make a Part 2?)