Last Thursday, Tesla CEO Elon Musk surpassed Amazon CEO Jeff Bezos to become the world’s richest man, with a net worth of around $195 billion.
Good for him.
Musk is a super-smart guy. Tesla is a fine company. And it makes wonderful products.
But I wouldn’t touch the stock with a barge pole.
That puts me at odds with some of my colleagues at The Oxford Club, including good friend and fellow analyst David Fessler, an early investor in the electric vehicle (EV) maker and an enthusiastic owner of the product.
Tesla shares have made Dave considerably richer than he already was.
And, given that he owns a diversified portfolio, he will be fine if Tesla suffers a major correction.
Or if it collapses like a bad soufflé.
Longtime Tesla bulls will insist they’ve heard it all before.
Skeptics insist the stock is trading at ridiculous levels. Yet it just keeps going up.
And they’re right. Tesla rose more than 700% last year. And it was up 24.8% in the first week of trading this year.
In fact, Tesla gained $60 billion in market value on Thursday alone. That’s the equivalent of General Motors‘ (NYSE: GM) entire market value.
The bullish case for Tesla is that EVs are the wave of the future. Tesla is the dominant player. And sales and earnings will ultimately rise enough to justify the share price.
But let’s slow down a moment…
Tesla sold a half-million cars last year. At an average price of about $40,000, that’s $20 billion in annual sales.
However, Tesla does not control the EV market the way, say, Apple (Nasdaq: AAPL) owns and controls the Mac and iPhone operating systems.
There are other EVs out there. None of them, in my view, can hold a candle to Tesla’s products right now.
But the gap will almost certainly narrow as automakers around the world – including leading luxury carmakers – release highly competitive models.
Tesla earned about $2.35 a share over the last 12 months. That means the stock is trading for more than 350 times earnings.
The Wall Street consensus is that Tesla will earn about $4 a share in 2021. That puts it at more than 200 times prospective earnings.
At these levels, the stock is a bubble, in my view.
It carries an unjustifiable and unsustainable valuation, one that will lead to a waterfall drop at some point.
That doesn’t mean the stock won’t eventually recover, however.
Amazon (Nasdaq: AMZN) carried a bubble-like valuation in the dot-com mania of the late ’90s and lost more than three-quarters of its value in the 2000-2002 bear market.
But unlike, say, Pets.com, it was a real company with fast-growing sales, and the stock ultimately recovered all it had lost and much, much more.
No doubt a few Tesla true believers are willing to hold on to the stock for many years and may make good money on it over the long haul.
But my past career as a money manager taught me that only a tiny percentage of shareholders have this kind of patience and fortitude.
Many who have recently accumulated a big position in Tesla – especially the ones trading on margin – are in for a rude awakening.
Am I short the stock?
No, I am not. Not out of any lack of conviction but because of the limited profit potential in short selling.
A stock can only go down 100%. (And even that is a rarity.) Whereas a stock can go up many hundreds of percent, as Tesla has over the last few months.
There are more than a few signs that markets have become frothy in the past few months: the meteoric rise in Bitcoin (another bubble, in my view), the record use of margin, the newfound popularity of day trading (now embraced by millions of young investors)…
The sky-high valuation on Tesla is another warning sign.
Its shareholders will ultimately learn the difference between price and value.
Price is what you pay. But value is what you get.
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