Tesla, the Bull, and Bear Case
Trading at all-time highs, what does the future hold for Tesla?
Tesla stock recently hit all-time highs and has now overtaken Facebook as the 6th biggest company on the NASDAQ.
What does this mean for investors? Is Tesla a buy, or is time to sell and take profits?
In this piece, I discuss the bear and bull cases for Tesla…
Tesla: the bear case
The bear case starts with the idea that Tesla is essentially just a car company. Bulls will claim it’s a tech company because of innovation in batteries, solar, and artificial intelligence. However, over 90% of Tesla’s revenue comes from selling cars.
Market cap
Tesla currently has a market capitalization of around 1.2 trillion dollars. This is more than four times the size of the nearest competitor Toyota, with a market cap of $250 billion.
Sales and profit
Toyota has more than 5x the revenue of Tesla and has a higher profit margin. So… Tesla costs four times more than its nearest competitor but has a lower market share and makes less money.
Value
Price-to-earnings ratio (P/E) is a measure of market value per share divided by earnings per share. A good value company would have a P/E ratio of less than 30. Tesla’s price-to-earnings ratio is over 300.
This means that by traditional metrics, Tesla is massively overpriced.
Tech company…?
But what if we consider Tesla as a tech company? One that is redefining the future of transport. Well, let’s compare to Apple:
- Apple has 8x the revenue of Tesla
- Apple has 3.5x the profit of Tesla
- Apple has 35x the free cash flow of Tesla
This means that Apple is in a much better position to invest in growth. If Tesla wants to grow, it is likely to need to dilute shareholders in order to raise capital as they have done in the past.
Bear case summary
Tesla is not a tech company, it’s a car company! Its financial performance is not as good as some competitors yet it has an astronomical valuation based on speculated future growth. Shareholders are likely to get diluted and the stock price could also drop massively from the current speculative bubble.
Tesla: the bull case
The bull case hinges on the idea that Tesla is operating at the epicenter of many technologies that will be huge in the future. These include Bitcoin, space travel, AI, synthetics, battery technology, and transport.
Revolutionary technology
Tesla will revolutionize the car in the same way that Apple revolutionized the mobile phone. They will also play a key role in car insurance, a self-driving taxi network, solar power, and home batteries that store energy and sell it back to the grid.
Rare leadership
All of this will be achieved due to the genius and leadership abilities of company CEO, Elon Musk, now the richest man in the world. Musk has a proven track record of running successful companies. He is also extremely bright and ambitious.
Already growing
Investors are no longer paying for future growth. Company financials show that Tesla is already growing. Revenue has increased by 40% since last year and gross profit has nearly doubled. Free cash flow is also increasing, meaning the company can invest in more growth.
Momentum and hype
Perhaps we live in an era where traditional business fundamentals don't matter so much? Easy trading apps like Robinhood and communities like Wall Street Bets have fundamentally changed market dynamics. Now money can be made from picking the right memes and following the right hype more than business fundamentals. If a ticker symbol has enough momentum, it doesn’t matter what the fundamentals are.
Political tailwinds
Clean energy that reduces carbon emissions is increasingly becoming a focus for countries around the world. The US government provides incentives for companies producing products that meet these goals. As the world’s biggest electric vehicle manufacturer, Tesla benefits greatly from these tailwinds.
Bull case summary
Tesla is having a great year. Profits are up, revenues are up, the company is growing. With the leadership and vision of a CEO like Elon Musk, and tailwinds like government green energy credits to spur things along, the future for Tesla is looking very bright.
My personal thoughts
I think Tesla is a fantastic company with huge potential for future innovation. I also think the stock is currently massively overpriced! The bears and bulls both have valid arguments. I won’t personally be buying at these prices. However, I will continue to gain Tesla exposure in my portfolio by dollar-cost averaging into a NASDAQ 100 ETF.
DISCLAIMER: This article presents my own learnings based on personal experience. It should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.