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Naturally, I see a lot of headlines every day. Many of them are basic news stories or repeat what’s been published many times before. However, one really caught my attention yesterday and piqued my curiosity. The headline was “Tesla: Little More Than A Gamble On History Repeating Itself.” I like that framing because I’ve thought for a while now that this is basically the whole story with Tesla’s enormous stock price, and the headline expresses the point well.
Then I opened the article and a few of the opening stats had my eyes popping out. Here’s one of the summary bullet points: “TSLA’s valuation is unsustainably high—trading at 16x forward sales, 111x forward cash flow, and 270x adjusted forward earnings—without revenue visibility to justify these multiples.”
Also, lest you think this person is a total Tesla hater, think again. In the opening paragraph, they write: “Has CEO Elon Musk done things nobody else has? Yes, emphatically so. Can he do it again? All things indicate that he can, indeed. Should you be funding that dream? No, you should not. I hope to tell you why in the ensuing paragraphs.” That’s not what I expected.
Oh, also, this same writer recommends Peter Thiel’s Palantir as a buy. So, it seems clear enough Elon Musk’s politics are not the reason for the Tesla critique.
The writer points out what I’ve been pointing out for the last two and a half years: demand for Tesla vehicles has dropped, even though sales were supposed to rise a lot year over year through 2030. That’s nothing new, but Tesla fans/shareholders consistently think sales are about to rise again. Any time in the past two and a half years, predicting that Tesla sales would fall has led to those people claiming all kinds of things about you and vociferously arguing that, no, actually, Tesla sales were on the verge of rising fast again. They might even have had arguments A, B, and C ready to explain why. However, we can now see that 1) all of the extra incentives Tesla was offering were not from goodwill, but were actually to try to stimulate demand, and 2) the trend wasn’t for only 3 months, or 6 months, or 9 months, or 12 months … but effectively 36 months.
But the writer, Elizabeth Pramila, didn’t stop there. Oh no.
“But why stop there? What about down the P&L? Again, more of the same, and this literally flows down all the way to bottom-line growth. For most of the past three years, Tesla has been experiencing negative growth across all margins, occasionally demonstrating growth surges — or spikes, rather. One cannot call them spurts because that would mean achieving new plateaus. As a wise red panda once said, ‘There is now a level zero,’ and that is precisely where we are at with regard to Tesla’s profitability story.” (I had to google the panda thing, but, yes, this has been the issue facing Tesla, and it has been dangerously approaching a critical tipping point.)
She adds that Tesla “has neither the revenue visibility nor earnings stability to offset the valuation risk. The only thing it offers investors now is a lullaby that sounds too uncomfortably like Frost’s ‘many promises to keep, miles to go before I sleep’ chant that keeps the bulls placated.
“Meanwhile, the risk looms large in the form of unimaginable multiples — 16 times forward sales, 111 times forward cash flow, 270 times adjusted forward earnings, and an enterprise value of over 322 times operating profit.” (Emphasis added.) Frankly, these are stunning numbers. The cognitive dissonance that must kick in here from Tesla shareholders. (Note: In case you are not familiar, forward free cash flow (FCF) is “an estimate of the cash a company will generate in the future (e.g., the next 12 months) after paying operating expenses, taxes, interest, and reinvesting in the business, offering a forward-looking view of financial health beyond past performance,” as Google summarizes.)
But the quick response, or assumption, is that Tesla is on the verge of activating robotaxis (real ones) and making an enormous amount of money shuttling people around and also selling more vehicles again from the surging demand for self-driving capability. Pramila explains why she thinks all of this hype has gone far overboard, including from a purely money-making angle. She tries to explain how much Tesla would have to dominate the robotaxi market and make profits on this in order for the company’s valuation to make sense.
She had a similar take on Tesla’s potential for significant revenue from robots. But Larry Evans discussed that matter better a few days ago after his time at CES this month for CleanTechnica.
At the end of the op-ed, Pramila simply concluded that Tesla’s valuation was far too disconnected from clear, predictable, safe revenue streams. She decided that so much of the company’s valuation is based on the basic idea that because Elon Musk and Tesla succeeded before in opening up the electric car market and making a lot of money on it, the company would do so again in another fresh market or two — with perfect timing, market leadership, and a big head start over competitors.
“To me, an investment in TSLA does not make any sense at these multiples, and with the severe lack of visibility into how they can be justified. A marginal holding might be fine, but only in the sense that it is a biotech-like bet on an unknowable future. Investing in Musk? Again, a marginal holding at best. It is not a realistic bet, in my view because despite the genius of the persona, it is statistically improbable that he can generate another $100 billion revenue stream within the Tesla portfolio.”
Naturally, with a market cap of $1.37 trillion, a lot of people with a lot of money disagree. Meanwhile, BYD, which sells more full electric vehicles than Tesla now and also sells a large number of plugin hybrids, and which also has about as many R&D engineers as Tesla has total employees, has a market cap of about $0.128 trillion ($128 billion), more than an order of magnitude less than Tesla.
But, hey, when have stock traders and financial markets ever made massive errors in forecasting and created huge financial bubbles?
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