Back to the Future

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24/02/2020
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Great Scott! The Tesla share price has risen almost 60% since the start of the year (US Dollars). From trading at $424 to around $750, at the time of writing. Considering that we are barely into the second week of February, this is a staggering achievement for a company that some analysts had written off all together.

While you shouldn’t compare one bubble to another - we aren’t even sure this is a bubble yet - It does look eerily like the dot.com bubble experienced at the start of the millennium. Of course, you don’t need a flux capacitor to know that this meteoritic rise in share price can’t go on for ever.

Back in 1999 no one doubted the internet was the future, but the clamber to be an early investor created one of the largest speculative bubbles. We have seen speculative bubbles throughout history with the first considered to be the tulip bubble during the Dutch Golden Age where the price for some bulbs reached extraordinarily high levels before dramatically collapsing in 1637. While no one is doubting clean energy and transportation is the future, investors need to be wary of bubbles and ensure that they look back to learn for the future.

Everyone is more concerned with the environment today, which is undoubtably a good thing, but when there is a bandwagon to jump on everyone tends to jump without looking. Fundamentals should remain the primary concern when making any investment. Investment managers also need to take care. Again, it is a good thing that Environmental, social and Governance (ESG) is actively promoted to clients who want it, but it’s also important to ensure investments are not made purely on ESG criteria. While it should be the primary reason, the fundamentals also need to make sense.

The fundamentals are where Tesla has struggled. It has a ballooning debt bubble – we are sure that bubble exists! It has also struggled to meet production targets, or even make a profit. Yet, despite these issues the share price has risen, to the point where its market cap is $135 billion. To compare, both General Motors (GM) and Ford have a combined value of $80 billion. So, despite producing less than 4% of the cars of both GM and Ford, it still commands a market value in excess of both these companies (Source: 2019 Company Reports). This does leave many analysts scratching their heads at the meteoritic rise in Tesla’s share price.

It is likely that some of the recent rise in the share price can be attributed to short sellers having to close their positions. It was no secret that Tesla was one of the most shorted stocks on the NASDAQ. Short selling is the practice of borrowing shares and selling them in the market in the hope that when you have to buy them back the share price has fallen. The difference between what you sold them for and the price you must buy them back is the profit. However, shorting Tesla stock has not been a very profitable business for many fund managers. Due to the rise in share price many have had to buy the stock back at a much higher price. So, the buyback of these shares may have also contributed to demand and the subsequent rise in its share price.

Some analysts have pointed out that it is unfair to compare Tesla to other car companies, as it’s much more than just a car company. This is partly true, Tesla does own SolarCity, which specialises in solar energy. It manufactures and installs solar panels at your home. Tesla looks to be trying to manufacture the entire end-to-end process; create energy at home that you can use to charge your Tesla.

Other car companies do operate other businesses as well. Ferrari were quick to realise that their prancing horse is not just a badge that can be stuck to the front of their cars, but its also a very powerful brand and can be stuck to anything! Ferrari retail stores can be found in almost every major city, selling everything from Ferrari aftershave, Ferrari clothing, Ferrari towels, Ferrari iPhone cases etc. Then you have the French car company, Peugeot, that makes everything from bicycles to salt and pepper mills. We would even argue that other business interests can be detrimental to your business if it shifts your focus away from your primary revenue stream, which in Tesla’s case should be making and selling cars.

Tesla also famously do not have patents. Elon Musk once explained the reasoning behind this and quoted a sinking ship analogy to the lack of patents; ‘If we’re all in a ship together and there are some holes in the ship, and we’re bailing water out, and we have a great design for a bucket, even if we’re bailing out way better than anyone else, we should probably share the bucket design.’ One can assume that the sinking ship to which he was referring is the planet, and the fact that the only way to save it is to develop clean transportation. While this is very admirable, it doesn’t necessarily make commercial sense. After all, other companies can use your technology for a licencing fee, and thus Tesla could create another revenue stream.

There is evidence that other car companies are catching up. The Jaguar I-Pace is a battery powered SUV and it has become one of the most highly decorated production cars ever. In 2019, it won the European car of the year award, the world car of the year, while also winning best design and best green awards. If you are going to compare the Jaguar I-Pace with a Tesla model, then the Tesla model X is the most comparable. The biggest factor when it comes to buying an electric car is the range, and while the Tesla has a range of 238 miles, the Jaguar I-Pace is not too far behind with a range of 234 miles.

(For reference, I am comparing the 2019 Jaguar I-Pace EV400 vs the 2018 Tesla Model X 75D)

Given the difference in price (the Jaguar is unaspiringly cheaper) it is hard to justify one model over the other. The automotive industry has always been about innovation. For example, the internal combustion engine was developed by Mercedes-Benz in 1886. Ford introduced the production line for their Model T and revolutionised the way how quickly cars can be built. Despite this innovation neither company dominated the marketplace, so it will be difficult to argue that Tesla can achieve where others failed. For one, we can’t see many of the German manufacturers simply rolling over and allowing Tesla a free ride, after all, not even Uber do that!

Maybe to justify the current share price Elon Musk not only needs to create a car that runs on clean energy, but can travel through time to places whereby the occupants can exclaim ‘Roads? Where we’re going, we don’t need roads!’ Of course, flying cars aren’t the future, but there is perhaps another candidate that needs looking at. While electric cars have been making all the headlines hydrogen has been making some progress.

Whether Tesla’s share price may or may not be justified is inconsequential. It may well be on the cusp of putting a Tesla on every drive and making huge profits. However, along with every other company promising the clean energy and transportation revolution, investors need to be aware that despite promising the future, many might not be around in the future. In the end the bottom line is the bottom line!

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