Tesla: Bubble, bubble, bubble, POP!

I was meaning to write a post about how Tesla shares are in a bubble but by the time I got round to starting it, the bubble burst. So much for market timing eh?

Tesla is definitely flavour of the month or year. Since this virus came along its share price has jumped from $86 per share on the 2nd of January to a peak of about $500. The price is now down about a third from the peak. meaning that long term holders are still siting with profits but Johnny come latelys are nursing huge losses.”

“the trend is your friend” Tesla share price over the last year

Technology Stock Bubble and how to value a company?

There’s been a huge rise in the value of technology stocks over the last number of years. Google for example has seen a more or less exponential rise in its share price over the last decade and even the falls from the GFC look like just a good buying point. The beauty of technology stocks is that they have millions of people making money for them – US! – as the saying goes, “If you are not paying for it, you’re not the customer; you’re the product being sold.”

There’s a good critique of that phrase here in a Slate.com article and a fun video from 1973 below if you want to watch. But what I mean is that whilst companies that provide us with the oil and gas that civilisation needs to function and have been doing so for over a hundred years and employ a hundred thousand people are unceremoniously dumped from the Dow Jones (ol’ Standard Oil if you didn’t know), there are companies that are valued more than Germany’s GDP or more than the entire FTSE100 – and their cost base is a lot smaller than old 20th century business like making things out of physical product. How do you value a company that can make money out of thin air more or less and doesn’t need to pay too many people to do it? Are the old rules of the 20th century relevant to the 21st?

My Trouble with Tesla

Tesla or more specifically Elon Musk are a cross between celebrity, brand name, tech stock and guru. He’s not quite like anybody else and in a large part his push to make Tesla the leading car company in the world is really changing things. From an environmental point of view, we will need cars and transport that don’t use oil and he’s part of that transition. I still won’t buy an electric car for myself (just yet). But if you don’t like electric cars (or can’t afford one) you can buy Tesla hares instead – especially sine the share split. And millions did that – using platforms like Robin Hood. The rise in amateur traders is probably the reason why the Tesla share price soared. On a few days in August it went up by more than the average share price in 2019 – even worse on the way down this week.

If you think Tesla are a good investment, what’s a fair price? How do you work that out? I did think that on a sort of valuation basis that if it can sell 2 million cars a year for a net profit of a $5000 per car and its valued at 20 times earning. Price that up and you get $200 billion compared to around $300 billion today. Except Tesla only sold 367,500 cars in 2019 and profit per vehicle is uncertain but maybe not as good as $5,000 per vehicle. Who knows what the company is worth? Of course, Telsa does more than just cars – but I’ve already done more in depth financial analysis than 95% of Tesla investors and it looks overpriced to me – most investors just buy because it’s in fashion.

Pump and Dump

I suspect that for every 100 armchair investors out there buying fractal shares in Tesla, there’s 1 hedge fund guy who’s ready to cream your ass by shorting the stock. They’ve been burnt before but they’ll win out – smart money always does. The same could be said about Bitcoin or any other mania.

The danger comes when your investing is swayed by what others say. There’s so much disinformation out there and a fool and his money are easily parted. I have fallen for these scams myself – but like I say to the kids, “you won’t learn until you burn” – the sexy way to invest is to throw money at the star shares – FAANGs and Tesla are so HOT right now, you can’t go wrong. Investing with boring ETFs is never going to make you a millionaire overnight. But then again, I don’t see my mad gainz evaporate like Tesla has.

Good luck investing your own money. Be realistic and if it seems to be too good to be true, it’s different this time.

Thanks, GFF

9 Comments

  1. “From an environmental point of view, we will need cars and transport that don’t use oil”

    But what if the Global Warming bubble bursts?

    Like

  2. I think the most important question long-term is if Tesla is a strong company and can it pull through on it’s promise as a EV car manufacturer. As a shareholder with a buy and hold approach, I didn’t mind the bubble bursting. I plan on holding for at least 10 years and I didn’t mind seeing the stock fall dramatically. I still like the business and am cheering it on for the long-term. I’d agree with you, if you can’t stomach volatility and hold great companies through hard times, invest in ETFs.

    Like

  3. I bought £10 (fractional) of Tesla, sold when I’d made 120%. Bought again recently on the dip.

    I’d not risk large amounts on stocks or stories like Tesla but it’s fun being part of the ride!

    Liked by 1 person

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