Of false prophets and false profits
I took a lot of abuse over the past 12 months.
“You don’t understand the future!”
“Trust me, I have far more experience than you!”
“This company will be bigger than Apple!”
Enough exclamation marks. You get the picture. Apparently, I had no idea what I was talking about with Musk and Tesla and what appeared to me to be incredibly obvious risks.
Of course, many people made a fortune off it last year. I’m too much of a stickler for my investment principles. Whenever I have a go at a momentum trade, I seem to get it wrong, so I’ve stopped. I’m building a portfolio that will make me wealthy in ten years and that means I need to invest in proper things.
Case in point: I bought Steinhoff when the Reddit crowd started talking about it, wondering if a Gamestop rise of some kind could be on the horizon. Instead, I’m down. I should’ve bought Descendis (Ascendis Health) based on intelligent analysis, but I felt like my risk capital was tapped out.
Net result? People made money on Ascendis. I’m sitting in the red on Steinhoff.
Anyway, back to Musk and Tesla.
Hot off the press is the news that Musk has realised that bitcoin isn’t environmentally friendly. The Technoking of Tesla has perhaps stopped drinking Cathie Wood and ARK’s Kool-Aid, which is now especially embarrassing for ARK and their spectacular assertions that bitcoin is actually environmentally friendly.
The logic is that because bitcoin sucks so much power, it encourages investment in renewable energy. That’s like saying canned lion hunting is great because it encourages people to breed more lion cubs to be shot.
So, I fully agree with Musk’s view on bitcoin from an environmental perspective. What I fundamentally disagree with is the way he plays with shareholder money and emotions.
In the earnings call on 26th April, the CFO (official title: Master of Coin) of Tesla commented that they believe in the long-term value of bitcoin and that they intend to accumulate bitcoin from transactions with customers.
A few days before that on 22nd April, Jack Dorsey (CEO of Twitter and Square) retweeted ARK’s white paper in support of bitcoin as a key driver of the future of renewable energy (the canned lion argument). Musk replied and said “true” – just that one word. He obviously went away and thought about it after that.
With the latest news of Tesla suspending vehicle purchases using bitcoin, the bitcoin price dropped from around $56,750 to below $49,500 – a sell-off of 13%!
Suffice to say the crypto HODLers aren’t happy.
This is big. Finally, Tesla has closed below $600 again. It previously happened in March before Tesla went as low as $563 before people bought the dip.
Who is going to buy the dip this time?
It probably won’t be the crypto-powered Musk zealots who have bought every other dip since Tesla came off its highs. Remember, Tesla closed at $880 on 4th January, so people who bought at the top are now down well over 30%.
Musk has completely alienated any institutional investors who don’t write outlandish white papers and put out price targets that were dreamt up one night under the moon. He has now alienated an army of retail supporters as well.
Who is left?
It wouldn’t be so bad if Tesla made money, of course. There are problems here, too.
Strip out the regulatory credits and crypto profits and Tesla simply doesn’t make money from selling cars. This means we must work with a revenue multiple, which incidentally is 15.8x currently. Ford trades on a revenue multiple of 0.35x and Volkswagen trades at around 0.5x.
I know. I know. Tesla isn’t a car company, and I don’t get it, but just work with me here.
There are only two ways to even remotely justify Tesla’s valuation:
- The future is autonomous driving and Tesla has first-mover advantage and unmatched data on this, which will allow it to dominate the auto industry with never-before-seen market power; and
- Tesla will achieve market dominance in China, self-driving or otherwise.
The first thesis is in trouble. Tesla is being investigated by authorities after a string of fatal crashes, possibly linked to Tesla’s self-driving technology. I personally would never allow my life to be placed in the hands of a computer like that, especially on the road where the human brain remains the ultimate way to react to danger. This isn’t a plane on autopilot high above the craziness.
The second thesis is also in trouble. Tesla’s April sales figures in China sucked. The brand has been dented after concerns about build quality, reliability and downright dangerous cars. The plan to expand the factory there has now been put on hold. Meanwhile, Chinese competitors are expanding rapidly.
Will the end result be that the Chinese domestic market is dominated by Chinese firms? I mean, who could possibly see that coming, based on what we know about China…?
Not for me
With the super-growth arguments seriously in doubt for even the most zealous Musketeers, why would I pay 30x more per dollar of revenue than I would pay at Volkswagen or Ford?
Incidentally, Ford is my best-performing share in my portfolio. Of course, had I bought Tesla at the start of last year, I would’ve made far more money. Well done to those who did.
The question isn’t whether Tesla was a great trade last year. We have the objective answer to that. The question is whether anyone sane should currently be putting money into a company with an erratic CEO, a dicey growth strategy and an eye-watering valuation.
In 12 months, we will have the objective answer to that. In the meantime, I’m happy to have avoided any exposure to Tesla (or ARK) over the past four months.
The inevitable next step is for Tesla to start accepting Dogecoin for cars, which means investors will hold shares in a company that cannot make profits from its core product, while accepting dog money as payment for those products.
Looking back, some will ask what the signs were.