Is Tesla a Good Long-Term Investment?

Why I am Betting Against Tesla in the Long Run

Tesla is currently overvalued. And I do not believe Tesla is a good long-term investment. But, let me say one thing first – I think it’s a big mistake at this point to (1) buy put options or (2) sell Tesla stock short.  If you do that – you are going to get burned.

So right out of the gate, here I am running my mouth without anteing up or having the balls to put some skin in the game. I concede the point but ask you to kindly take a number as my ever-growing line of critics stretches around the block.

I would never underestimate Elon Musk. The man is a genius. That’s undeniable. I respect Musk tremendously as an innovator, regardless of his eccentricities. In fact, to the contrary, I think his eccentricities only add to what already makes him great. And I pay no attention to the man’s personal life. His private affairs are inconsequential and no one’s business. I live in a glass house and don’t cast stones. Nor do I care much about his online escapades and quips, which often move markets from Bitcoin to Etsy.

Is Tesla a good long-term investment? Here’s my thesis: Tesla DOES NOT deserve this high of a valuation relative to its peers. In the coming years, competitors will continue to dump billions of dollars into their EV buildouts and retake market share from this early innovator. Further, it is my belief that Tesla will be unable to transition loyal holders of either foreign or domestic brands; market recapture by competitors is predicated on the fact that consumers will stay loyal to their existing brand relationship.

And here is the lynchpin – existing owners of a Toyota will buy a Toyota; Ford owners will buy a Ford; Honda owners will buy a Honda and so on. That’s it. The meteoric rise of Tesla cut short as the rest of the market finally catches up. Automakers won’t give you an option. You will be forced to buy electric. And you are trading your Toyota Camry in for a Toyota EV or Ford F-150 for a Ford Lightning – not a Tesla, unless you already own one.

I present to you no mountains of empirical evidence. No detailed statistical analysis. Just the assumption that auto makers will force all of us to buy an EV at some point after 2035, and that we, as loyal consumers, will buy an EV whose brand matches the emblem already in our driveway. And if that brand isn’t already a Tesla, then we won’t be buying a Tesla.

“I am not arguing that at this present time, Tesla is not the world’s most valuable car company. It is not, however, worth three times manufacturers like Toyota. Its valuation is just too rich.”

The real question is – what happens to Tesla over the next five years? Ten years? As Tesla grows bigger, its growth rate is certain to slow. Tesla has a goal of one day making 20 million vehicles a year according to CFO Zachry Kirkhorn. And that number would give Tesla 20% of the entire global auto market in 2030. VW is the largest auto maker by unit volume, and it delivered about 10.3 million vehicles over the past 12 months. VW is valued at about $15 billion per million units and Toyota is valued at $26 billion per million units.

I do not believe that Tesla’s growth is going to come at the expense of traditional automakers.

The Coming EV Wars

Toyota and VW will put about $200 billion in the next few years into their existing EV strategy.

Automakers around the world will transition from internal-combustion engines to battery powered vehicles.

Analysts expect that roughly 20% of all new cars sold globally will be electric by 2025. As it stands today, there are roughly 100 different electric vehicles on the market. Here’s a few of the bigger names and what they are planning to do:

GM will make only EVs by 2035.
Ford will be all electric in Europe by 2030 and recently created an EV-only division.
VW says roughly 70% of its sales will be electric by 2030.
Jaguar plans to sell only EVs by 2025.
Volvo will only produce EVs after 2030.
Dodge says they have no interest in anything battery-powered.

Okay – that’s a lie. Even Dodge is cooking up some EVs. The Dodge Charger goes full electric in 2024. Don’t laugh – millennials are plenty happy with an EV that can do burnouts and donuts, but it is the lack of “muscle car sound” that they are not okay with. Therefore, Dodge has set about trying to reproduce it’s legendary HEMI roar from an all-electric vehicle.  Check it out HERE.

I’m impressed, but I also drove a four-cylinder, Japanese economy shit box to work for nearly a decade.

Clearly, we are in the midst of one of the largest automotive revolutions since Henry Ford first started grinding in 1913.

Value – That’s What I’m Talking About

Tesla, along with about a dozen other EV names, make up almost half of the auto industry value. Given the number of EVs on the road today, does that make sense to you? Four of the top ten automakers are EV companies including: Tesla, Rivian, BYD, and NIO. BYD and NIO are Chinese multinationals, which is why you haven’t heard of them. Again, does that make sense to you? Have you ever seen a Rivian?

It takes a list of more than 50 traditional automakers to equal the market cap of these EV names.

How does Tesla compare to its peers? Tesla dwarfs the rest of the EV market and accounts for roughly 75% of the EV market. But traditional automakers still dominate sales on a global basis. They sell roughly 99% of cars globally – 97% are petrol, and 2% are hybrid.

EV pure-plays are less than 1% of total sales worldwide.
How could EVs, like Tesla, support such ridiculous valuations? Three things need to materialize: (1) The current line of thinking that supports Tesla’s insane valuation is that pure play EVs will one day dominate the automotive world. It’s true that pure play EVs have nearly doubled their market share of electric-car sales over the past ten years. Pure plays now account for nearly 30% of all electric vehicles sold today. i.e. Traditional auto makers account for the other 70% of electric vehicles sold.

(2) Somehow – and here is what mystifies me – the market doesn’t believe that traditional OEMs will be able to produce competitive EVs in the future. That’s absurd. Let’s look at the Ford Mustang Mach-E. Ford notes that its electrified vehicle sales in January grew almost four times faster than the overall electrified segment. When it comes to pure electric vehicles, the Mustang Mach-E, for example, totaled 2,370 sales in January 2022. More on this below.

(3) Profitability. The Holy Grail. Investors need to believe that these EVs will be more profitable than a conventional petrol vehicle or hybrid. EV makers sell direct and offer subscription-based services as a way to improve profitability.

In all fairness, EVs have come a long way in recent years in improving profitability. And Tesla does lead the pack in terms of profitability. Tesla and VW will easily lead the way in terms of EV production over the next two years. Tesla is projected to sell 2.3 million EVs and turn an operating profit in the range of $20 billion. VW is projected to sell roughly 2.6 million EVs and turn an operating profit of roughly $7 billion. GM remains a distant third, selling less than 800,000 vehicles and earning $2 billion in earnings from them. I will cover Ford shortly.

Tesla is the only profitable EV company for Gross Margins, Vehicle Margins, and Operating Margins. In contrast, most Chinese auto manufacturers have been suffering tremendous losses. But despite these losses, they are fast closing the gap on Tesla. That’s what I want you to see – everyone else’s profitability is improving as they scale. Here are some analyses from Stock Dividend Screener.

Gross Margins, Vehicle Margins, Net Profit Margins

Tesla’s profitability comes from its software offerings. The company continues to produce quality updates like its autopilot program and full self-driving mode, and this keeps consumers shelling out hard cash. Analysts think that roughly $10 billion of the company’s $20 billion in operating profit will come from these software updates.

Analysts that are bullish will also point to the fact that Tesla remains focused on driving down costs through new batteries, product localization, scale and efficiency.

I don’t believe that EV-focused companies will be able to widen their technology lead over traditional automakers in the long run. In the next five year – yes. But beyond that – no. This is what is going to happen: hyper competition will eat away at surplus profits over time. The good news is that this same competition will continue to lead to innovation – competitive innovation. And we will see a lot of consolidation in the industry. But I don’t see Tesla ever being a consolidator. This has been the subject of much debate. And the premise is simple – Tesla uses it huge market cap as acquisition capital to acquire a traditional auto maker like GM.

I never doubted that Tesla would turn a profit. There were some shaky moments in 2019, but Tesla made $721 million in 2020, which is a stark contract to the $862 million dollar loss it reported in 2019. Here’s a fact for you. Tesla, as a company, was founded in 2003 and is nineteen years old. I don’t think many people realize that. Ask someone you know how old they think the auto manufacturer is – they’ll tell you ten years old or less. I guarantee it. That’s a long time for a company to survive without being profitable, which speaks to Tesla’s incredible ability to raise capital.

EVs and Autonomous Driving Capabilities

I also don’t buy into the claim that the holy grail for EVs is “autonomous vehicles”. Let me know how it works out for you when you run over a child in a school zone in your Tesla. It’s a great feature to have on an open highway, but a safety issue everywhere else. I think we are many years away from mass adoption of autonomous driving vehicles.

“But Michael – you don’t understand. The computer algorithms make it safer. It’s actually safer than when an individual has full control.”

“You are right – and I don’t doubt that for a second. The issue comes in when there is an accident, or someone gets killed and the vehicle is being driven autonomously.”

Each day more than 100 people are killed in car accidents across the U.S. You may argue that this number will decrease substantially if cars are driven autonomously. And that may be correct. But – and here is the BUT – if it is caused by the software, regulators will be all over it. Even two accidents will be too many. It will be a legal nightmare. The NTSB and the NHTSA makes a big stink about this. And when it happens in short succession (think the Boeing 737 Max planes incident) this will be a disaster.

Ford

I am sure that you have heard the news – Ford will reorganize operations to separate its electric from its petrol business. We should get results some time in 2023 for the newly reorganized unit.

On January 2, Tesla reported its record high quarterly and full-year production and delivery numbers. It delivered 936,172 vehicles last year, including 308,600 EVs in the fourth quarter. On January 5, Ford reported 508,451 total Q4 vehicle sales and 2.04 million total 2021 vehicle sales, including 27,140 Mustang Mach-E sales for the year. Ford is now the second-largest EV automaker behind Tesla. Ford continues to ramp up production of the Mach-E, its F-150 Lightning pickup, and its E-Transit electric van. On January 4, Ford announced it was doubling its F-150 Lightning production to 150,000 units per year after reservations topped 200,000 vehicles. And the company plans to raise global battery electric production to 600,000 vehicles per year by 2023.

I should mention that I hold Ford Stock, but I hold Tesla stock, too. And it is in multiple places in my portfolio. I have been doubling down on ARKK, as per my recent article. TSLA makes up roughly 5% of ARKK and is a core driver, as my critics point out, of why ARKK hasn’t been down more as of late.

And just to be fair. Here is the three-year chart.

I am not going to give you the old window dressing maneuver and not show you the three-year timeframe. TSLA stock has absolutely crushed it since January 2020. I give you that.

But this is exactly what I am saying. The traditional OEMs and the other EVs are going to claw back, little-by-little, Tesla’s huge valuation, as the realization of their own EV opportunity takes root. Ford upped its investment in EVs and other technologies to $50 billion by 2026, up from $30 billion through 2025. It plans to spend $5 billion on EVs this year, double its 2021 total.

What about the Cybertruck?

Yeah, what about it? There are 3 million orders for the Cybertruck, which equates to a backlog of about $200 billion. That’s great. And at $100 for a reservation order, you can go ahead and count me in, too. Reservations used to be a note. It will take approximately 6 years for Tesla to fill those orders if they start producing 500,000 per year from January 1, 2022. They are supposed to begin production in late 2022.

Tesla will see tremendous delays due to both chip shortages and battery cell constraints. And so will everyone else, for that matter. But my point is, everyone from Ford to Rivian to Fisker will use this time to continue to put the squeeze on Tesla, as more options come to market.

Tesla’s Shares Won’t Drop Anytime Soon

Tesla Was Once the Most Shorted Stock on the Nasdaq. There was a time where people were heavily betting against the electric automaker. But now many of the shorts have closed their positions – albeit with bearing any fruit. At the start of 2021 about 8% of the company’s float was held short, and by the end of the year than number had declined to between 3% and 4%. And that short number was as high as roughly 20% in 2020.

The number of short sellers continues to decline as Tesla has managed to increase deliveries on a consistent quarterly basis.

Retail investors don’t seem to be bothered by social media or wall street pundits’ talk of bubbles, as the continue to pour cash into the stock. In fact, Tesla has consistently remained one of the most popular stocks since the second quarter of 2021, appearing on the “top-30 most commonly held retail stocks” list every single week.

In principle, short sellers are betting against the stock for all the right reasons. But, in my opinion, it has become too dangerous to bet against Tesla when the public’s image of the company remains so golden. 

Here’s a graph showing short interest as a percentage of market float, published by S2 Partners in the Financial Times.

Analysts Betting Against Tesla Have Gotten Burned

Investors who have bet against Tesla, historically, have gotten burned. Last year Einhorn and Chanos took out short positions and that was when the company was valued at roughly $700 billion. Over the past year, shares of Tesla have increased by nearly 50%.  And shares have increase more than 1,200 percent since the start of 2020.

And then there’s the case of Michael Burry who wagered against Tesla with the now-deleted famous tweet that the company benefits from “massive government and electric subsidies”. Burry exited his position of more than 800,000 put options between October and November 2021.

Is Tesla Really Worth 3x Toyota?

Tesla’s market cap is $1.1 Trillion. This is three times the market cap of its nearest competitor, Toyota. VW is the third most valuable manufacturer in the world with a market value of around $140 billion.

What’s confusing is that both Toyota and VW are more profitable than Tesla, and they also sell more cars. In the last quarter, Tesla sold roughly 300,000 cars whereas Toyota and VW each reported sales of more than 2 million automobiles.

Tesla, as a matter of opinion, you are not three times more valuable than Toyota; either your market cap comes down or their market cap goes up, or investors witness some combination of the two.

Valuation Grade and Underlying Metrics

Tesla trades today at 176x P/E TTM and 98x P/E FWD. Their P/E for 2022 is 111x.

It is wild to think that when you look at all the numbers and give them roughly 10 percent of the market share by the end of the decade, that you only wind up with a price that’s 35x earnings.

A market cap of over $1.1 trillion implies that Tesla owns nearly 120 percent of the entire global passenger EV market. It also assumes that the company becomes more profitable that Apple this decade. Bears have pointed to the fact that Tesla would need to sell more than 30 million vehicles in 2030 to justify the current valuation. The the International Energy Agency (IEA) has predicted between 30 million and 47 million EVs will be sold in 2030, globally.

My own estimate is that fair value is in the range of $700 dollars a share. At the end of the day, I don’t think the company will be selling 10 to 12 million vehicles a year, which is what the stock is currently pricing in.

Tesla recently reported adjusted earnings of $2.54 a share, up 218% from the year-ago period and the fourth straight quarter of triple-digit gains. Revenue jumped 65% to $17.7 billion, above estimates of $17.1 billion.

Tesla and Production – Today Demand Exceeds Supply

Tesla’s productive capacity is increasing. The EV maker expects production growth to boom in 2022 despite ongoing supply-chain issues. Tesla will bring no new EV models to market this year. This includes the highly anticipated Cybertruck. Instead, Tesla will focus on growing production volumes on existing models at its current and new factories.

Tesla has the enviable problem of demand outstripping supply. Production launches in Austin, Texas, and Berlin are key to alleviating these issues. On Friday, March 4, Tesla received approval to begin commercial production at its new factory near Berlin. The plant is capable of producing up to 500,000 vehicles per year. It will eventually produce the bulk of Tesla’s vehicles destined for European customers, starting with the Model Y crossover SUV.

It will be interesting to see how Tesla competes with established German names Volkswagen Group, BMC, and Daimler AG.

Tesla Has Quality Problems

Despite the attachment that Tesla drivers have for their vehicles, the brand is notorious for quality problems. This will also weigh on the brand in terms of long-term adoption. I can assure you that brands like Toyota / Lexus and Honda / Acura will not have these same quality control issues. But in the near run, early adopters do not care. They love the brand for its technology, styling, and rapid acceleration.

I’m Not Bullish on Tesla’s Expansion into China

Roughly 49% of Tesla’s US revenues came from China. As a percentage of overall sales, China has grown from under 20% in 2020 to 22.6% in the third quarter of 2021. I believe that Tesla’s presence in China is at risk due to criticism by state media. The company opened a Gigafactory in Shanghai in 2020 before the pandemic.

In closing…

Critics attack Musk for claims of non-EV businesses that have not turned a profit – from solar panels to robots. I am not making claims against any of these. I believe other ventures like The Boring Company, Open AI, and Neuralink may hold great promise. As I said in the beginning, I think musk is a visionary and he thinks on a larger scale then most entrepreneurs we are accustomed to. I’m just not sold on Tesla in the long run.


I’d love to hear your thoughts.

Disclosure
I am/we are long Ford (F) and Tesla (TSLA) either through stock ownership, options, or other derivatives. 

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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