TSLA: Can There Be Too Much Of A Beautiful Thing?

In February I wrote a piece in this forum called “TSLA” “Beauty Happens” (here). I gushed about what an amazing piece of engineering a Tesla is (the car, not the stock). I concluded with the comment that “If … aesthetic theory applies to financial markets, as we suspect it should, then don’t be shocked if market participants believe that Tesla’s stock price is not only ’right‘, but could continue to surprise.” 

Tesla aside, Mr. Musk has delivered on his promise with SpaceX, and his fans feel that he can execute upon a future of tech innovations that are only limited by the imagination. When I wrote the last piece on February 3^rd, the price of TSLA had reached $780 a share. As of today (July 13^th, 2020), the share price went over $1,750 (Source: Bloomberg). The market value of the company exceeded $325 Billion Dollars! Elon Musk’s wealth at one point exceeded Warren Buffett’s as per CNBC (Reported July 13, 2020).

In addition to the amazing technology and the dreams of autonomy that TSLA has the best chance of delivering in the near future, we have to also think about what other factors might have propelled the market value. TSLA is a “story” stock, and it attracts retail investors and adoring Musk “fanboys”. With fractional shares trading, the retail market has been a major participant armed with the massive amount of stimulus the Fed and the federal government has sent in the mail. Just take a quick look at the number of new Robinhood accounts that have been opened and are being traded directly, and according to a report on Bloomberg, Robintrack.net showed almost 40,000 new accounts added Tesla stock today alone! Across the pond, the ECB is likely going to take rates further below zero, and buying assets like there is no tomorrow. Money is basically free, and speculation is encouraged; and as we know, with such guarantees many market participants and the like believe it makes sense to speculate wildly.

The second factor is China. As the beauty of a Tesla hits the Chinese markets, where they are now produced in a new plant near Shanghai, the speculative frenzy in the stock has become turbo-charged as a large portion of the population of the world has discovered what car 2.0 looks and drives like.  Beauty, once discovered, is adopted, and mimicked and becomes the new-normal. Tesla’s inclusion in the S&P 500, which apparently is driving the most recent rally, would be proof of this.

Third, competitors to Tesla’s technology have fallen by the wayside for the most part, and this includes heavyweights of yester-years. Even the new Porsche Taycan, which many touted as a competitor (and is a truly spectacular car by any metric) has half the battery endurance of a Tesla. So it is not likely that Tesla owners will swap any time soon. The battery technology, power and autonomy (and electric car tax credits) of a Tesla make it special and un-catchable in the eyes of many. Finally, there is over $25 billion in short interest (source: Bloomberg), which, one would expect are “smart-money”, “not-so-smart-money”, “dumb-money”, and just plain simple hedgers. Some might be caught off-sides because they sold too many out-of-the-money call options, or lottery tickets, to one of these categories. Oh, and by the way, just to show how wrong expert opinion has been, Wall Street has capitulated en-masse on its bearish call on the company’s prospects.

But can there be anything of too much of a really, really good thing? 

I am an unabashed Tesla bull, but I am also a market participant. And experience shows me that we might be reaching a point where the stock price might have to catch down to a company which is trying to catch up to the price. There is much room for a healthy correction in the price of the stock without changing the positive news about the company.

Let us talk about the auto industry for a moment. While Ford has been saddled with terrible management decisions, it is another iconic company. Porsche makes fantastic cars as well. Ford has a market value of $25 billion, and its share price is down 35% for the year (Source: Bloomberg). Same thing with Porsche (market cap about Euro 16 billion and stock down 20% for the year (Source: Bloomberg). Electric truck maker Rivian (full disclosure: I am a big fan and neighbor of Founder & Chief Executive Officer RJ Scaringe) has the technology and the backing of Ford, Amazon AMZN and others to perhaps sell its power-train technology to these other competitors. Amazon is already trying to help Porsche create a charging ecology (in my humble opinion Tesla owns the charging landscape and can extract rents if it chose to do so; which it probably won’t because it does not need to).

So just think about it: Tesla can likely “eat” Porsche and Ford for less than 10% of its stock value. For now, the cheeky “short shorts” are still sold out on the Tesla store (retailing for $69.42 apiece – “Run like the wind or entertain like Liberace…”), and the stock market shorts are beginning to cover their shorts. Which, with a forward price to earnings ratio of almost 400 (Source: Bloomberg), and using history as a rough guide, might be marking the moment to cash in part of the TSLA lottery ticket.