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Are Shareholders Gambling or Investing in Tesla (NASDAQ: TSLA)?

Written by Jason Stutman
Posted February 1, 2020

When I was just barely over the age of 21, a few friends of mine whom I knew from high school thought it would be a good idea to hit up the Borgata Hotel & Casino in Atlantic City. 

I was dead broke and deep in student debt at the time, so gambling away what little I had honestly wasn’t too compelling, but I couldn’t pass up the chance to catch up with a group of close friends...

So we hopped in a couple of soon-to-be-broken-down cars, making our way to the bowels of New Jersey from Long Island. It was about a three-hour drive. There were seven of us in total.

I knew everyone in the group very closely with the exception of one person; Vinny, let’s call him, was one of my buddy’s fraternity brothers from SUNY Buffalo.

I haven’t seen Vinny in years, but, at the time, he could be best described as a young Joe Pesci, who instead of knocking out rolls in iconic Scorsese films, was auditioning for the next season of The Jersey Shore.

Vinny was your stereotypical Brooklyn guido, and he wasn’t ashamed to admit it. He was loud, unfiltered, and one of the funniest people to pretend like you enjoyed Jägermeister with.

Vinny, though, had a clear gambling problem. While I went to Atlantic City that weekend to catch up with a few friends, Vinny was there to hit the tables. 

I didn’t see much of Vinny that whole weekend, but I can vividly remember trying to reason with him in our final minutes at the casino. Vinny was on an incredible hot streak, managing to turn $400 into $10,000 over the course of a couple of days. 

We were literally packed and ready to go but Vinny, being Vinny, wasn’t ready to call it quits. On our way out of the hotel and through the casino, he walked up to the nearest roulette table with a $10,000 max bet. 

He put it all on black... and lost everything.

The Only Way to Beat the House

Anyone who’s been to a casino knows that they want to keep you sitting at the tables as long as possible. It’s why you can get free drinks in a town like Vegas where a margarita at the bar is $15. It’s why if you’re crushing it at the high-roller table, you get your room comped for another night.

This, of course, is because casinos know the odds are ultimately in their favor. They know that, if you play the game long enough, your luck will eventually run out.

Gambling, of course, is much different from investing, but there are some important lessons to learn from the former that apply to the latter. One of the most important things an investor needs to know how to do when investing, for instance, is recognize when they're beating the odds and when it’s time to cash out.

This all comes to mind this week in the wake of Tesla’s (NASDAQ: TSLA) fourth quarter earnings beat, which sent shares up another 11.3% on Thursday. $TSLA’s ascent over the last six months has been nothing short of remarkable at this point. Shares have climbed from as low as $185 to $650, roughly a 250% increase in valuation.

Tesla’s continued rise has plenty of Main Street investors taunting Wall Street with cheers of “We told you so!” But if history tells us anything, it’s that these moments of euphoria can be the most dangerous times to invest.

During the company’s earnings call, Elon Musk told listeners “a lot of retail investors actually have deeper and more accurate insights than many of the big institutional investors and certainly better insight than many of the analysts.” 

This is the equivalent of “the house” calling you sir and offering complimentary drinks to keep you at the table. 

After all, Musk himself was the one who said Tesla’s share price was “higher than we have the right to deserve” when shares were trading around $260. He probably knows retail investors are sitting on a time bomb here, but now that the CEO’s pay is tied directly to Tesla’s market value, he wants you to believe you’re a genius for scooping up shares at $640.

Of course, this isn’t to say that Tesla’s rally can’t go any further, but it’s obvious to any seasoned investor that the risk of a major correction is likely at this point. Without knocking any of Tesla’s legitimate accomplishments, there is an extreme disconnect between share value and performance here.

Tesla’s earnings beat is being hailed as a breakout moment for the company, but the reality is that the company grew revenue just +2% year over year and non-GAAP net income just +12%. Earnings per share were up just 7% when accounting for dilution.

These results were enough to earn Tesla the “earnings beat” headlines, but, realistically, that’s some seriously lukewarm growth for what’s supposed to be a hyper-growth technology company. 

For some context, Facebook (NASDAQ: FB), a company that receives much more negative press than Tesla, reported year-over-year revenue growth of 25% and earnings growth of 6.8% this week. The stock is down 6.1%. Tesla’s recent ascent has almost nothing to do with performance and everything to do with public perception. Over the long run, that’s worth about as much as a hot streak at the casino. 

And while the mainstream media was obsessing over Tesla beating expectations, Elon Musk was walking back yet another (arguably fraudulent) claim he previously made about the company.

Despite promising investors that Tesla would have a million robotaxis on the road by the end of 2020 and telling customers that the cars they’re buying would soon be capable of full self driving (FSD), the CEO admitted during Wednesday’s call that there is no such guarantee. 

Here’s the actual response:

It's looking like we might be feature-complete in a few months. The feature-complete just means like it has some chance of going from your home to work let's say with no interventions. So, that's it doesn't mean the features are working well, but it means it has above zero chance.

You read that correctly; Elon is now promising FSD with at least “above zero chance” it will work.

This walk-back is particularly concerning for Tesla’s investors for a few reasons: 1) It strengthens the case that the company has committed securities fraud by misleading investors; 2) It strengthens the case that Tesla’s has misled customers with its marketing; and 3) Elon admitted during the call that the take rate of FSD is critical to the company’s margins. 

In short, if Tesla can’t keep getting its customers to buy a software upgrade with effectively zero overhead, earnings are going to slip. 

So while retail investors are celebrating in full force for beating Wall Street at its own game, the victory could be fleeting, like Vinny’s tall stack at the casino. 

Shorting Tesla’s stock, of course, will continue to be a dangerous game due to the cult-like nature of the shareholder base, but owning the company’s stock carries just as much risk.

Until next time,

  JS Sig

Jason Stutman

follow basic @JasonStutman on Twitter

Jason Stutman is Wealth Daily's senior technology analyst and editor of investment advisory newsletters Technology and Opportunity and Topline Trader. His strategy for building winning portfolios is simple: Buy the disruptor, sell the disrupted.

Covering the broad sector of technology and occasionally dabbling in the political sphere, Jason has written hundreds of articles spanning topics from consumer electronics and development stage biotechnology to political forecasting and social commentary.

Outside the office Jason is a lover of science fiction and the outdoors. He writes through the lens of a futurist, free market advocate, and fiscal conservative. Jason currently hails from Baltimore, Maryland, with roots in the great state of New York.

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