Sunday, January 26, 2020

The "Tesla -Musk" Phenomenon Continues To Unfold

In January 2016, Ford Motor sold 173,723 vehicles. This is far more than the 50,580 Tesla is said to have delivered in all of 2015. The math showed that only about 1 in 325 cars sold in America that year was a Tesla. Today with over 250 million registered passenger vehicles in America if every Tesla ever made is on American roads, which they are not, only about one in three hundred cars would sport the Tesla name. While these cars roam the streets of Las Vegas as a "hot little rental" turning heads and continuing to "wow" the masses, in the more conservative Midwest they remain as rare as hens' teeth. Ironically, it is the bearish investors that doubted Tesla would hold together that have pushed up the stock as they were forced to run for cover.

Musk Is Sometimes Seen As A Superhero
Some market watchers see Tesla the "Poster Boy" of absurdity and proof of how liquidity has blown a massive bubble in equity prices. In my part of the country, It is the South Korean imports of Hyundai and Kia that fill the streets here in the Midwest and not Teslas. This makes me wonder just how harsh a trade deal we shoved down the throat of our Asian ally but that a subject for another post.

The value of Tesla's stock dramatically changed years ago following the report where it made its first quarterly profit, its market value soared to more than $10 billion. A large part of the increase in the stock price occurred because people that had short positions in the stock were squeezed into buying back their stock. The point is Tesla's recent rally pushed its market value to over $85 billion making it the most valuable US automaker in history with its market cap more than Ford and GM combined. Within days Tesla's valuation again jumped, this time to over $100 billion taking it above the world’s second most valuable carmaker, VW, which sold over 10 million vehicles last year.” Now it trails only behind Toyota.

Tesla Has Been A Cash Burner! (click to enlarge)
With Tesla stock soaring to new highs it is again time to revisit the "Tesla - Musk" phenomenon. I have written several articles focused on this subject over the years and like many skeptics, I'm amazed at Elon Musk's cat like ability to remain viable. Like a cat with nine lives, Musk is a high-flyer that continues to amaze those of us predicting his doom with his gift to avoid falling to the ground. After all his antics and misrepresentations I have to wonder why this clown is not in jail. The only answer I can reach is that somebody is keen on protecting the stock market from the shock of a Tesla meltdown.

Interestingly, in an interview from the World Economic Forum in Davos President Trump sang the praise of Musk calling him “one of our great geniuses” and urged that “we have to protect our genius.” This might help explain the settlement between Elon Musk and the SEC. It was seen by many investors as proof Washington remains a hotbed of cronyism and collusion. For all the turmoil and damage Musk spread upon investors rather than jail time or any meaningful punishment he received a slap on the wrist. Apparently protecting the exorbitant stock price of Tesla and those holding long positions took precedence over the law and justice. According to the posted settlement filings, Musk was to step down for 3 years as Chairman and pay a $20 million fine. Tesla was also to pay a $20 million fine. Following that Musk again started to bash and defy the SEC.

In the past, I likened Musk and Tesla to John Delorean and The DeLorean Motor Company that is remembered for its stainless steel DeLorean sports car featuring gull-wing doors. The company had a brief and turbulent history that ended in receivership and bankruptcy in 1982. Near the end, in a desperate attempt to raise the funds his company needed to survive, DeLorean got involved in drug trafficking but was acquitted of the charges brought against him because officials had overstepped the law.

Tesla Is Deep In Debt! (Click To Enlarge)
For many investors, it is difficult to ignore Tesla is billions of dollars in debt. Some of that debt has been rolled into creating new shares, which dilute the value of existing shares, however, this has had little to halt the rise in Tesla's stock price. Also, there was the issue of "corporate incest" and Tesla's acquisition of ailing SolarCity in an all-stock $2.6 billion merger, this has turned out to be a bad deal. At the time Musk owned 22% of SolarCity which was founded by his cousins. The merger was promoted on the idea that Tesla's mission since its inception was part of Elon Musk's overall "Secret Tesla Motors Master Plan" to expedite the world's transition to sustainable energy and away from a fossil fuel economy.

Tesla's fortunes have moved in lockstep with a surging stock market. In an overview in early 2017, I wrote about how as I continued my research for the update my eyes began to glaze over at the magnitude of the subsidies that Musk had been granted. Government support is a theme of all his companies, and without it, none of them would exist. It also bolsters the argument that true price discovery is gone in our current stock market. Today several forces including stock buybacks and what has become known as the "Plunge Protection Team," appear to jump in at any sign of a pullback. This destroys the proper pricing of assets which are the bedrock of free markets.

Key Is "Future" Tesla Demand (click to enlarge)
Many articles, such as the one appearing on Seeking Alpha, have pointed out Tesla's success is not carved in stone and may depend on demand for its vehicles. It argues that Tesla’s Model Y SUV unveiled at an event in March and set to be produced in 2020 is too small to be a factor outside of the narrower crossover set. This means it is likely to cannibalize Model 3 sales rather than result in market expansion. Tesla is priced for breakneck growth but its product line-up and production capacity do not support this narrative.

With over 100 different electric cars expected to hit the markets by 2025, it is difficult for a realist to envision Tesla being able to remain viable. Many people that wanted a Tesla now have one. While the Model 3 unveiling sparked hundreds of thousands of $1,000 preorders, Tesla has declined to comment on those for the Model Y. For the Model Y to be successful, it must be sufficiently differentiated from Tesla’s other offerings or it may cause significant issues for the company’s long-term demand profile. As for new vehicles, Musk said there are  250,000 reservations for his new cybertruck but with only refundable $100 deposits true demand is questionable.

Another interesting footnote missed by many Tesla enthusiasts is that an electric car-sharing service that debuted in Indianapolis in 2015 is pulling the plug on its network of rechargeable cars after residents failed to embrace the vehicles. Blue Indy will end its collaboration with the city of Indianapolis on May 21st, saying in a statement that the car-sharing service would end "because we did not reach the level of activity required to be economically viable.”

Even as Tesla's saga has become both a phenomenon and a conundrum, it is almost impossible for many investors to see a path forward for Tesla. It may speak volumes that during a recent twenty-five hundred mile round trip from the Midwest to Florida I saw only one Tesla. Since returning home I have seen only one other, this underlines Tesla has a very small footprint. This is why so many investors remain appalled at Tesla's valuation and continue to stand by their claims it is destined to fail. According to a report on The Verge, Tesla sold 367,500 cars in 2019, a new record for the company. This is on the low end of the estimate of 360,000 to 400,000 vehicles delivered that Tesla offered up at the beginning of 2019. Still, this is more cars than it sold in the previous two years combined but it may not be enough. 

The media seems to be in love with Musk and many people think he can do no wrong. Whenever he gets in trouble he goes into a dance to distract or take eyes off the past promises he has failed to carry out. Like the proverbial snake oil salesman hyping the miraculous powers of his product and making outlandish claims accompanied by a tremendous amount of razzle-dazzle Musk tends to over-promise. Elon Musk should be on top of the world after forcing shorts to capitulate but it seems his ego never rests. Musk recently tweeted his Boring Company would complete a commercial tunnel in Las Vegas and it would be fully operational in 2020. Critics have pointed out that Boring has not proved its technology and talent can scale to municipality size projects. The Boring's tunnel projects have been debunked by PhDs and ridiculed by government officials. Ph.D. chemist and video blogger Phil Mason recently said. "There's no revolution here. Let's be honest here: he's driving a car through a sewer pipe."

As to where Tesla's stock price is going, predictions are all over the board. Ark Invest chief Catherine Wood is holding firm on her thesis on Tesla. Wood recently told CNBC that she sees Tesla shares hitting $6,000 within the next five years. Others of us continue to agree with David Stockman. He wrote in May of 2015,  In an honest free market, Tesla would have long ago been carted off to the chapter 11 junk shredder. Even consumer advocate and former presidential candidate Ralph Nader issued a stark warning that things were overdone, he said, "When the stock market bubble implodes, it will have been started by the surge in Tesla shares beyond speculative zeal.

The bottom-line is that where this stock is going is a matter of opinion, some investors argue the company should be viewed as a tech stock rather than the maker of electric vehicles and a car company. Also, few people see its investment in China as risky and that the new Shanghai plant, as well as Model Y production, could pressure profit margins in 2020. Instead, they choose to focus on Tesla as the tip of the arrow in the attack on climate change. The flip-side of this argument is that electric vehicles are not as environmentally friendly as we are told.

Footnote; For more on how this all started see the link below.

1 comment:

  1. And as of today, June 30th, 2020, the stock closed at $1079...double the price when this article was written. When will the euphoria end?