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Great Product, Bad Company, Terrible Stock

Written by Jason Stutman
Posted January 18, 2020

Earlier this week, I woke up to a DM from my colleague and fellow Wealth Daily contributor Briton Ryle.

The bulk of the message was a wall of text that Brit had put together about Tesla Inc. (NASDAQ: TSLA) — easily the hottest stock story on the market the past few weeks — along with a couple mentions of my name.

Brit was running the name drop by me because he’s a genuinely nice guy and didn’t want to blindside me with what he was about to publish. I appreciated the heads up, but it definitely wasn’t necessary.

You see, in our industry, we get a lot of bullheaded jerks, who feel personally insulted if you cross them or their theses. These buffoons have a hard time separating their own stock analysis from their ego and will take it personally if you tell them they’re wrong.

But that’s not me or how I roll. In fact, it’s not how any of the writers at Wealth Daily roll. We speak our minds and we expect our colleagues to speak theirs. At the end of the day, that’s the only way we can provide our readers with independent and honest opinions on the market.

As for what Brit wrote, he basically called me a grumpy old man stuck in a young person’s body. Citing some very recent conversations we’ve had about Tesla, he invoked the image of Clint Eastwood in Gran Torino, pointing an M1 Garand and grimacing at Asian gang members to get off his lawn.

Now, Brit wasn’t quite as colorful in his description, but, either way, it’s a fairly accurate characterization, stemming from my personal bewilderment at the recent explosion in Tesla’s share value. The company’s stock had doubled between October 2019 and mid-January 2020, and I went off on a tangent late last week in the office about how insane I thought this was.

While Brit and I are in general agreement that Tesla’s valuation is, at the very least, ambitious, I’m certainly much more enthusiastic in my belief the asset is overpriced. Furthermore, while Brit thinks Tesla is a “great company” but a “bad stock,” I don’t make quite the same distinction.

Great Product, Bad Company, Terrible Stock

It’s no secret that getting into the Tesla stock debate is like diving into shark-infested waters. I have honestly never seen such an impassioned group of investors on both sides of the argument, at least not to this size and scope.

If you dig into any penny stock forum, you can expect to find plenty of bulls and bears going at each other’s throats, but Tesla is a $90 billion mainstream company. At this stage of the game, the debate tends to be much more boring and civilized, but $TSLA versus $TSLAQ is anything but.

To that understanding, I know I’m bound to offend someone in my analysis of Tesla, but so be it. Before anyone lights their torch or breaks out their pitchfork, though, I want to make one thing clear: I do think Tesla makes some pretty exciting vehicles (the Model S and Model 3 in particular), and I applaud Elon Musk’s ambition in moving the EV industry forward.

That said, I think there are several legitimate gripes to be made about Tesla as a company, and especially as a stock. From my experience, many Tesla shareholders either completely ignore these issues, or angrily deny them, even though they are in plain sight.

One thing about Tesla I find impossible to ignore is the shadiness of Elon Musk. After all, Musk has manipulated Tesla’s share price with fraudulent and misleading public statements for his personal benefit.

This is the kind of claim that will have steam pouring out of a Tesla fanboy’s ears, but there are no ifs, ands, or buts about it; Elon dished out $40 million and stepped down as Tesla chair to settle with the SEC over fraud charges in 2018. 

That specific settlement was over the claim that Tesla had a private takeout offer, with “funding secured” at $420 a share. Elon’s defenders will contend that he was just messing around, but all we need to do is consider the motive. Musk has a compensation package that pays him out based on two things: revenue and Tesla’s market capitalization (rather than providing him with a normal CEO’s salary, bonus, or time-based equity). 

In other words, Elon Musk has two primary monetary motivations: delivering as many Tesla vehicles as possible and driving up the company’s share price however he can. This may seem like it’s in the favor of shareholders on the surface, but only in the short term. The plan provides no actual incentive to create a financially sustainable or profitable company — just a very bright flash in the pan.

Elon’s “funding secured” tweet, though, is just one of many claims the CEO has made to mislead investors and consumers about Tesla. I won’t waste time listing them all, but it’s worth mentioning one of the more egregious: In 2019, Elon claimed that Tesla would roll out 1 million “robo-taxis” in 2020. 

The CEO would also say during a podcast:

The cars currently being produced, with the hardware currently being produced, are capable of full self-driving.

Here, Tesla is making claims of certainty that it simply cannot back up. Tesla’s vehicles are about as capable of full self-driving as my smartphone is of discovering the cure for cancer. I can promise I’m working on it, but it’s just not here quite yet.

In addition to Elon being a bit of a vaporware-pushing shyster, Tesla’s current growth trajectory is anything but guaranteed. While Tesla bulls can point to compelling recent growth in Model 3 deliveries, they cannot ensure the demand is sustainable. 

Consider the following numbers to start:

  • In 1998, Volkswagen sold 50,000 Beetles. Today, the vehicle is out of production.
  • In 2001, Chrysler sold 145,000 PT Cruisers. That model lasted for just a nine year run.
  • In 1966, Ford sold around 607,000 Mustangs. Sales today are down to just 14,000 a year.

The point is, car model sales have historically been erratic and just because something is hip and cool today does not guarantee it will be popular tomorrow.

Now, by no means am I saying the Model 3 is as lame a car as the PT Cruiser, but I am suggesting that when the novelty wears off, Tesla could have a much more difficult time drumming up the same level of enthusiasm we’re seeing today.

Where the rubber meets the road, the case for Tesla’s current valuation all boils down to scale, and the reality is that EVs are not a viable option for many Americans. Not only is there an inherent cost premium on the vehicle, but if you do not have a garage or carport with access to electricity, you aren’t going shopping for an EV. This cuts Tesla’s addressable market in the U.S. by upwards of 40% based on data from the Census Bureau.

To top it all off, Tesla has never posted an annual profit in its 17 years of existence, and since its entry to the public stock market, the company is looking at a cumulative net loss of $5.89 billion.

That’s not a great company by any measure in my book; it’s a bad company, and an even worse stock.

That finally brings us to Tesla’s market valuation, which is really my primary gripe. The company is currently valued about the same as General Motors (NYSE: GM) and Ford (NYSE: F) combined. 

This valuation is despite the fact that the latter two companies (combined) are selling roughly 26 times more cars than the former, not to mention the fact that if you hold shares of GM or Ford, you’re going to be collecting regular dividend payments of around 4.3% and 6.5%, respectively.

That makes Tesla a truly terrible stock to own and a pretty compelling target for some put options. 

Until next time,

  JS Sig

Jason Stutman

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