Fasten your Seat Belts

Belgius Capital Commentary

Belgius Capital

Fasten your Seat Belts

For a time last week, the market valued TESLA more than General Motors, Ford, and Fiat Chrysler combined, despite the company never having made an annual profit. That was when Tesla’s market cap crossed the US$100 billion mark two weeks ago. Last Tuesday, Tesla shares skyrocketed to nearly $970 [intraday high] per share, which pegged the company's market value above the US$150 billion level. Reality set in later, with TESLA shares crashing by more than 21%, its biggest daily drop on record, to close the week at $748 per share; So, what’s the story?

Tesla is now the second-highest valued auto company by market capitalization after Toyota, which is valued at $227 billion. Tesla sells just under 370,000 vehicles compared to Toyota’s 10.7 million.

While Tesla has added a third of its value in less than a month, Tesla bulls were quick to point out that the company is heading to a rosier future – improving numbers with two-quarters of profit and a new factory in Shanghai to service the lucrative Chinese market. Signs also suggested that buyer demand in the US remained healthy with its new Cybertruck drawing in about 200,000 orders. Even well-respected analyst Rolf Bulk at New Street Research issued an investor note explaining the interest in Tesla saying: “It has become very clear to investors that Tesla has long-term sustainable growth drivers that are difficult to dispute.”

Until the Wednesday Drop happened.

Tesla shares crashed, wiping about US$25 Billion in value. For Steve Eisman, author of “The Big Short” who was known for shorting the housing market before the 2008 financial crisis – there are other automotive companies out there that are far better value than Tesla.

Eisman himself holds General Motors stock and calls it “reality on the ground” compared to the “dream” that TESLA bulls concoct and have spread around the electric vehicle market. Eisman adds that GM used to be a poorly run company with a terrible balance sheet and terrible products – but that is all over now, and GM is positioning itself as a truck company that also sells SUVs.

Eisman is likewise not convinced that TESLA’s Shanghai factory can service the China market. The current public health issue in China relating to the Wuhan virus is derailing economic activity and the global automotive logistics supply chain and may halt growth to one of the biggest markets in the world.

So, what is the future like for TESLA? Was the run-up justified, and will we see more rallies in its share price? Much, of course, depends on the unpredictability of Elon Musk himself and the controversies he seems to ignite, not to mention the problems with Solar City and the ramping up of the battery division.

It is no secret that there is an almost cult-like following behind TESLA and its controversial creator Elon Musk, who would ramp the stock to chase the dream that MUSK has painted for the future. There still are significant issues with electric car adoption in Europe and the US. Sure, brand strength is solid. But the question remains if it can sell the cars? For investors, does TESLA offers better value compared to the rest of the competition. If Musk is taking us all for a ride, and as history has taught us that markets have the tendency to correct themselves – consider fastening your seatbelts on this one.

In the meantime, JP Morgan remains cautious on the stock while others optimistically see $1500 as a bare minimum, and others go as high as $7000. Elon Musk controls 20% of the Tesla equity and stands to gain significantly more shares through options should the very ambitious share price targets be met over the coming years. Against him are massed the ‘short-sellers’ who have accumulated one of the largest short positions on any stock.

Investors may remember Musk flying the possibility that Tesla would go ‘private’ with the financial assistance of Saudi Arabia. This possibility was shot down by the SEC as inappropriate speculation, and Musk was fined for his public musings. However, and in recent days, according to SEC regulatory notices, the Saudi Public Investment fund sold over 8 million shares as the share price surged, retaining only 39151 shares, while billionaire investor Ron Barron remains evangelical, predicting Tesla revenues will hit over one Trillion dollars in the next ten years.

Buyer Beware has never been more appropriate.