In this article we will expose a prejudicial view of Tesla stock. At times it seems that Tesla is the only electric car maker in the world. It is hard to argue with its cars (they pass the ‘eye test’) but it is useful to look at the criticism. Going through an exercise where you place critical thinking at the heart of it, may unearth something important you had missed. Sometimes being a contrarian investor, is avoiding the stock that everyone is buying.
Tesla was founded as an electric car maker in 2003. Over the years it has expanded into the manufacturing of vehicle batteries. Interestingly, Tesla now also refers to itself to be a clean energy company. This is due to its solar panel business. Tesla’s cars are designed to have a premium look and feel, with an affordable price. The acceleration of a Tesla car is very impressive. In effect, they give you the performance of a sports car with the comfort of a family car. Although other car companies produce electric cars, Tesla has become the byword for electric cars by the man on the street.
Tesla sold 367,500 cars in 2019 and has a market cap of $567bn. Over the same period, General Mortors sold 7,700,000 cars and has a market cap of $63.55bn. NoW one number should not be seen as the be all and end all, but the comparison is illuminating.
Throw in that GM was the first mass producer of an electric car, and you wonder why is Tesla is the only one which is considered to know how to make an electric car. This begs the question, how is it possible that a car company which makes it profit from something else, is worth more than one of the largest car companies in the world?
Oh look… another fantastical company.
Intriguingly GM recent got caught up in the Nikolai truck scandal. It was going to enter into a partnership with a company which has yet to make money from actually selling anything. If a large multi-national can get it wrong – it is a warning that you can only trust the research you have done yourself.
Tesla was initially left out of being added to the S&P500 despite its size. The reasons were difficult to argue with, the quality of its earnings are in doubt! Although some will be quick to point out that it is profitable, the devil is in the (creative accounting) detail. It made a lion’s share of this profit from selling carbon credits to other carmakers – not from selling cars!
It really does not help when the analyst who predicted Wirecard shares (that recent fraud) was worth zero seems to get in on the act. In fact Neil Campling and his team produced a list of 20 things to watch out for to help you identify the next fraud. Although there was no named stock in the report, the similarities with Tesla are worrying. Ignore at your own peril.
When such a reputable portfolio manager as Alexander Darwall can get it so wrong, what is stopping other investment managers from having missed the warning signs with Tesla? Remember we all make mistakes as investors, but you do not expect an Investment manager to get it so wrong as to invest into a fraud.
Although such odds may sound appealing to some, the reward is not good enough in relation to the downside risk. It can be argued that the share price has proven detractors wrong (see below), but here something else may be at play.
Some hedge fund managers may have doubts in relation to the long-term viability of a company, but will still ‘trade’ the shares. I.e. they are happy to go along for the ride and make a bit of money from momentum trading. The doubters and believers are so strong, that Tesla will either dominate the electric car market or may even disappear…
This article was deliberately written as a form of criticism of Tesla stock. Too often investors get drawn into ‘the story’ about how a company will revolutionise its industry. They do not perform a fundamental analysis on the financials. The story is interesting but it is not what will create cash.
This article may not change your mind, indeed it is not necessarily designed to. Yet if it has succeeded in creating a doubt, this will encourage you to actually go through and check the facts. How many of you have actually read the Tesla stock annual report?