All About Tesla’s Market Cap
As promised in my last article here is a breakdown of everything I’m thinking about Tesla’s Market Cap.
Tesla IPO’d some time ago, but considering its meteoric rise, it seems pretty pertinent to the theme of that post. There are a variety of opinions around a company whose valuation has recently surpassed Berkshire Hathaway’s. It’s made Elon Musk the second richest person in the world, which makes it a great case study for entrepreneurialism.
Obligatory disclaimer, I do not own any Tesla stock, and am not making any recommendations nor offering any investment advice.
In the interest of full transparency, I’ll admit, I am ambivalent about Elon Musk personally.
I do think he’s brilliant, incredibly hard working, dedicated and fearless. He is spearheading significant development in an area the health and future of our planet and species depends on. For that, I respect him.
On the Other Hand, Those Things Don’t Make Tesla’s Market Cap Justified
That having been said, Elon has some qualities I think are less admirable.
His fearlessness comes up to and sometimes crosses the line into recklessness. He has a history of promising things that he hasn’t delivered on. These include fully autonomous cars and robotaxis by 2020, and a “battery day” a few months ago that underwhelmed. It seemed doomed to do so because of how much Elon hyped it.
He failed to illuminate the public on any significant battery related developments. Instead he came off as an outlandish prophet of unrealistic success in uncharted waters such as mining.
Most egregious, in my mind, of all of Elon’s misleading public statements was of course, “funding secured”. It was a claim he made via Twitter to be taking Tesla private at $420/share. It was a lie that cost Tesla and Elon personally $20M apiece and forced Elon to step down as chairman.
Most comical, again in my mind, was the shattering of the “shatter proof” window during the cybertruck unveiling. Skip ahead to 0:52.
Tesla’s Market Cap is at Least Somewhat Supported by His Fans, Who Are the Worst.
Elon, brilliant as he is, is like everyone else in one regard; he has flaws. His worst flaw is a sort of meta flaw; the cultivation of a cult of personality I can’t help but think he considers his most prized possession. Like any cult, questioning the leader is verboten. So naturally, none of the followers can detect a flaw within their messiah. Their slavish devotion to him remains intact against any criticism. Unable to see the weak spots of his personality and business he can’t improve upon them. He’s simply too drunk on his promise of delivering salvation.
I fear there are some potentially serious negative externalities society can suffer from because of phenomena like Elon Musk worship. It reinforces the notion that we should depend on plutocrats to save and guide the world. Elon and his ilk want nothing more than to be left to their own devices. They want to operate with impunity. And they think they’re above scrutiny and criticism because they’re the unassailably best humanity has to offer. In turn, this dampens support for society wide, state led initiatives that are often necessary for societal prosperity and advancement.
The Good, the Bad, but Mostly Just the Ugly
That little rant was just a preface. And now that it’s out of my system, I’ll step back and discuss what it is I originally intended to, Tesla.
I’m not sure how to justify a ~$650B market cap. Like DoorDash and Airbnb, the valuation has many years of incredible growth priced in. And like both of those companies, achieving it faces many difficulties.
I previously said DoorDash and Airbnb’s market cap could quickly unravel if so much as a loose thread is pulled from them, and the same is true about Tesla, something Elon Musk himself pointed out in a letter to employees urging them to cut costs in order to shore up profitability, which the future continued promise of is the driver of Tesla stock’s astounding growth.
Tesla fanatics like to defend the valuation most arduously with the contention that Tesla is more than a car company. It’s a solar energy company/software company/taxi company/sombrero manufacturer/bare knuckle fighting promotion etc etc.
Doesn’t Mean Much Until People Buy More Than the Cars
I’ve heard of Tesla’s deferred revenues for things like full self driving software and the supercharger network. But tomorrow’s promises are not today’s revenues.
In other words, Tesla is counting revenue for full self driving cars and use of its supercharger network in advance of customers actually using these things. As far as I’m concerned, Tesla isn’t really a software company until they’re making some real money off of the software. I feel this way since as we’ve seen, Elon’s promises can’t always be depended upon.
Furthermore, it’s weird to think of Tesla as a conglomerate when so much of everything else it provides besides cars have to do with the cars. The fact still remains, Tesla needs to sell a lot of cars to justify its market cap.
While Tesla enjoys advantages in a lot of areas, these can be ephemeral. Lucid Airs may not be in production yet, but they will be soon, and they’ve achieved better battery range than Tesla, including the Model 3 Plaid.
Which Brings Me to My Next Point
It’s hard to imagine legacy car companies, with all of their resources and history of automobile innovation, can’t close the technological gaps. That makes the fact that Tesla is worth about twice as much as Volkswagen and Toyota combined seem pretty bonkers. Especially so when you consider Tesla promised 500,000 cars for 2020 and the aforementioned companies sell ~42.1M annually.
A VW backed startup is now claiming to have created the first solid-state battery. It charges to 80% in 15 minutes, retains 80% total capacity after 800 charging cycles, and is non-combustible. Tesla’s supposed technological superiority is evaporating in front of Elon’s botox surrounded eyes.
Fundamentally, Tesla seems a bit out of whack as a business in the present, never mind the future. Yes, it’s profitable, but that profitability was only achieved through the sales of carbon credits. Those aren’t part of Tesla’s business model and something Tesla cannot rely on in perpetuity.
As for the aggressive production growth Tesla’s future prospects are largely contingent upon, it’s still got a tall order for 2020. About ~180,000 vehicles to produce to meet Elon’s promise of 500,000 for the year.
It seems like Tesla has had to sacrifice quality in order to produce the quantity necessary to fulfill such bold promises, as Tesla has had several recalls this year, which are not unheard of for automakers, but never bode well and seem unusually common for Tesla.
Not to mention, Tesla’s reliability ranking has slipped in Consumer Reports to second to last among automobile producers for reliability. Another ignominiously comical moment they had was this story about a roof flying off of a Tesla on the highway.
So, in summation, I’m going to have to say there’s either going to be a correction in the Tesla share price at some point, or the stock market is totally detached from reality.
Contrary Opinions-The Arguments for Justifying Tesla’s Market Cap
Very compelling arguments, don’t you think?
SolarCity-How it Factors (or doesn’t) in to Tesla’s Market Cap
I’d like to touch on SolarCity, since it is a business apart from Tesla’s cars, albeit one that overlaps somewhat due to the fact that they are both clean energy companies.
I remember the announcement that Tesla was buying SolarCity was met with skepticism by some, and alarm by others. Sure, it’s a clean energy provider, but what did it bring to the table that was supposed to strengthen Tesla as a company?
SolarCity reduced its workforce by 20% in 2016, the year it was acquired, and by all accounts was teetering on the brink of insolvency. What made the acquisition more questionable was the fact it was owned by Elon Musk’s cousins. Was he just bailing them out? Though the majority of shareholders approved the acquisition, many had doubts about it and there is still pending litigation, with some describing it as “a misguided effort to rescue two companies that depend on investors and the government for operating cash” and alleging in the litigation “they overpaid for SolarCity, ignored their own conflicts of interest and failed to disclose ‘troubling facts’ essential to a rational analysis of the proposed deal.”
In keeping with the Musk traditional of bizarre product demonstrations, Elon unveiled solar energy roof panels in October 2016 to gain support for the acquisition, only the tiles were fake. Since then, the solar roofing portion of Tesla has naturally been a source of contention.
Lastly, total solar installations have been declining since the Tesla acquisition. Tesla’s energy revenues increased from $1.12 billion in 2017 to $1.55 billion in 2018, but declined slightly in 2019 to $1.53 billion. Analysts believe that SolarCity has been “a big source of the cash-flow deficit” for Tesla in 2019. You can read all of what I’ve said about SolarCity here.
Final Thoughts, and Implications for Entrepreneurs
We’re living in a Brave New World. Perpetually low interest rates have been fueling a feeding frenzy for equities and unicorn startups (I’m looking at you, SoftBank). Alongside a technological revolution creating software solutions to every problem and pain, changing attitudes towards the realization of profit seems to have opened floodgates of opportunity for entrepreneurs.
There are more angel and seed investors and venture capitalists with their wallets open saying “shut up and take my money” than ever.
There are more startups being minted as $1B “unicorns” way before VC funding rounds have ended than ever. Their investors are comfortable in the knowledge they can get significant return on their investment without any profits realized as long as the players in the market continue to share in the collective belief a company is valuable in spite of the fact it actually loses money.
The challenge for aspiring entrepreneurs is standing out from all of the competition for investor capital. Naturally, that capital has grown alongside increasing investor community demand.
On the Other Side of the Coin
For early stage investors and venture capitalists, the abundance of startups provides significant opportunity. There’s also a serious potential pitfall, the very real chance to make some awful investments (again, looking at you, SoftBank).
More than anything, investors are faced with the challenge of cutting through the noise and finding the proverbial diamonds in the rough. And there’s plenty of rough considering the sobering statistics on startup failure rates.
I’m sure there are plenty of people chomping at the bit to tell me just how stupid I am and how wrong everything I’ve said is, and maybe that’s all true. One thing I’m not, that I imagine someone will want to accuse me of, is a rabid Elon and Tesla hater.
I do want Tesla to succeed as a company. I’m a firm believer that humanity and the world need clean fuel. I also don’t believe Tesla will fail. I’m sure they will remain a highly competitive company, I just don’t think their market cap is justified.
And before anyone challenges me to, no, I’m not going to short Tesla stock. I may be bearish on it, but I’m not confident enough to know how to time its possible fall.
If I ever succeed in getting the attention I crave for my musings, I’m sure the Tesla fans of the world will line up to tear me a new asshole. Go for it, I’d love to be challenged. Even more, I’d like to be corrected. It would also be great to be supported if some of you out there feel as I do. I anticipate civil and thoughtful discussion, resulting in mutual enlightenment.