Telsa is Overvalued. Here's Why.

 
 

By Andrew Leuciuc

Written Wed February 3, 2021

Updated 11:27 AM ET, Fri March 5, 2021

 

Tesla will play a major role in the future of the tech industry because of the innovations they’ve made in the car market and with solar energy, and people have recently begun to take notice, betting their life savings on Elon Musk. However, its recent spurt has brought to mind many questions about whether it’s overvalued, and if it is overvalued, how much should people expect it to drop? On March 17th, 2020, you could’ve purchased a Tesla share for just $72.24. As of January 19th, 2021, Tesla share prices have increased twelvefold and they now sit at $842 (which is remarkable, considering the company split its stock in August of 2020). What caused this huge spike in share prices in such a short period of time is one of the questions many investors have, as their money could be in jeopardy (at least in the short term) and it’s one that will be explored in great detail below. But more importantly, is this growth sustainable over the next few months? The answer is a resounding no; here’s why. 

 

Tesla is known for its innovation in the automotive industry, along with the brilliant ideas its founder, Elon Musk, puts on display year in and year out at various events around the globe. The company has created various clean energy products, including electric vehicles and solar panels. Ten years ago, Musk took the company public, and the auto industry hasn’t been the same since. Yet despite its recent reputation as the leader in automation, Tesla has had its fair share of ups and downs. Its financial situation in 2008 was so bad that it almost had to declare bankruptcy. Although the board of directors approved $40 million in convertible debt financing, the company just barely survived. A year later, Daimler took a 10% stake in Tesla for $50 million. That, combined with a $465 million loan from the Department of Energy (which was paid off in 2013), helped Tesla further develop its battery technology. Since Tesla had its IPO in 2010, countless car models have been released, each more innovative than the last. It’s no secret that part of what makes Tesla so intriguing is its creativity, and people aren’t exaggerating when they say that Tesla has changed the game. Numerous car companies have spent decades attempting to create an electric vehicle that’s going to drive them into the future, yet Tesla has done just that in the last few years. In the aftermath of the 2008 Recession, Nissan and GM introduced the Nissan Leaf and the Chevy Volt as a result of the increased demand for fuel-efficient cars. Although these cars can be credited with partially reviving the electric vehicle (EV) market, as well as being affordable, the performance of both vehicles was subpar, and each had horrible driving ranges. Then, Tesla’s Model S and Model X came, and a new era of EVs was started right in front of our eyes. 

The Model S and Model X tore down stereotypes about EVs that had existed for years: that they’re slow, impractical for family use, ugly, etc. The Model S could get from 0-60 in as fast as 2.3 seconds, and the Model X was the fastest family crossover SUV in the world, having the ability to get from 0-60 in 2.6 seconds. Additionally, both vehicles had driving ranges up to 400 miles. For a moment it seemed as though Tesla would be unstoppable until people noticed the price tag on each of those machines. The 2021 Model S starts at $69,420, while the 2021 Model X debuts at $79,990. For reference, the average salary of a working US citizen is $48,672, and the average new car costs $40,000 (according to CNET). It was clear from the very outset that the main issue with these two models is that they can’t reach a considerable amount of the US population. But Elon Musk, being the smart man that he is, had another model in the works to combat this issue: the Model 3, which became the best-selling EV of all time. 

In 2003 when Musk launched Tesla, he shared a master plan with the general public. According to the Solar Tribune, Musks plan was laid out in three parts: 

  1. Build sports cars that run on zero-emission electric power generation

  2. Use the revenue to build an affordable electric car

  3. Use that revenue to build an even more affordable electric car

Step one was completed when the Roadster debuted in 2008. At $109,000 customers could get a high-end electric vehicle that could travel over 200 miles on a single charge. Tesla was able to sell 2,450 of these cars in over thirty countries. Musk took the bulk of the profits and re-invested them into R&D. Four years later, the Model S and Model X were introduced to the public. Although the prices of each were more in range of what the average American family could afford, it was still too expensive for the majority of people around the globe. Yet it was a sign of major progress being made, and the Model S even went on to win numerous awards, including the Motor Trend Car of the Year in 2013. Then in 2017, something beautiful happened that had never occurred in the history of the auto market: an electric hatchback sedan able to seat up to five adults, with a range of 315 miles, and a 0-60 speed of 3.1 seconds became available for just $37,990 (2021 edition). The debut of Tesla’s Model 3 revolutionized both the automotive industry and the electric vehicle market.  When Model 3 was finished, the three-step plan was completed. Since the first master plan was finished, Musk has released yet another master plan, consisting of four steps:  

  1. Integrate energy generation and storage

  2. Expand to cover the major forms of terrestrial transport

  3. Autonomy

  4. Sharing

Tesla has since taken another big leap with new models like the Cybertruck being released, and once again Musk has found great success while checking things off his to-do list. Additionally, Tesla has started moving equipment into a new plant in Berlin, and production on the Model Y crossover is expected to start soon. So, how does all of this add up to overinflation? After all, it seems like anything Elon has the Midas touch, turning anything he touches into gold. 

It’s important to look at Tesla's p/e ratio (price to earnings, a ratio that divides a company's stock price by its annual earnings per share) as this is the first red flag. The historical average, as given by Yahoo Finance, of the S&P 500 is 15. What was Tesla’s in 2020? 1,601. Read that again and cement it into your brain. 1,601. Tesla’s p/e ratio is bound to be largely due to its share prices’ extraordinary growth (close to 700% in 2020). But the issue isn’t just that Tesla grew so much in so little time; rather, the issue lies in the fact that other automotive companies grew too. Data provided by the S&P Global Market Intelligence shows that GM grew by 15.2% and NIO by 1,110%. Additionally, the total market value of all other major US, Japanese, Korean, and European vehicle makers rose in 2020. James Mackintosh put it best in his article for the WSJ: “If Tesla is a success, the rest of the industry won’t be. When someone buys a Tesla, they choose not to buy a Ford or a BMW.” So, how is it possible that Tesla has grown so much in such a short period of time, despite the successes of other car companies all over the world? My guess has to do with the founder/current CEO himself, Mr. Musk. He is one of the most popular figures of the 21st century. Infamous for smoking marijuana on a talk show, giving his child a name none of us know how to pronounce, and telling people he was taking Tesla private at $420 a share, Musk is someone who young investors seemingly can’t get enough of. Everyone loves a good story, and Tesla certainly has one. Unfortunately, private investors may have loved Tesla’s story too much, as many took their $600 stimulus checks and bought the hottest stocks on the market, pushing Tesla to a price that experienced investors consider overvalued. Michael Burry, known for shorting the housing market years before anybody could have imagined a crash (the premise of the movie The Big Short) and going long on Gamestop stock, thinks a Tesla bubble is obvious and is even going as far as shorting it. He announced all of this in a tweet back in December of 2020. “So, @elonmusk, yes, I’m short $TSLA, but some free advice for a good guy...Seriously, issue 25-50% of your shares at the current ridiculous price. That’s not dilution. You’d be cementing permanence and untold optionality. If there are buyers, sell that #TeslaSouffle.” Per Business Insider, “the hashtag seems to reference a letter Musk sent to Tesla employees on Tuesday, in which he warned that the automaker's stock could ‘get crushed like a souffle under a sledgehammer’ if profit margins didn't improve.” Burry then went on to attach a spreadsheet in his tweet which raised more red flags with Tesla’s stock. Despite having an industry high market capitalization, Tesla still has revenue and total profits below that of Volkswagen, Toyota, and other major car companies. 

 

Furthermore, Tesla’s somewhat dominant position in China could be under attack this year, which raises the second red flag. China’s EV market is the largest in the world, and the country is still extremely focused on cutting down on fossil fuel use, which inevitably will lead to yet more expansion in the EV sector. China is Tesla’s second-biggest market, but Chinese challengers such as NIO, ORA, and BYD are looking to take a larger slice of the pie. Both Chinese companies and Tesla need to also look out for traditionally big companies like Daimler and Volkswagen that are realizing that electric cars are the new wave. VW’s ID.3, compared to the Tesla Model 3, had much better spaciousness and design, and with the help of Dirk Hilgenberg, VW is currently working to improve the battery range, among other metrics. It would be an understatement to say that the work VW is doing today looks promising. Currently, VW’s primary goal is to catch up to Tesla by 2024, and so far they’re on track, as the VWs management team projects that by 2025 they will produce a new fully electric and almost completely autonomous car. As VW and other auto companies allocate more money to R&D, consumers may decide that a Volkswagen is a better option than a Tesla.

 

The third red flag comes in the form of credits. One of the big reasons for Tesla’s profits may shock investors. It’s not the new cars or solar panels: it’s the regulatory credits that the government gives out for contributing zero pollution to the environment. During the second quarter of 2020 alone, 7 percent, or $428 million, of Tesla’s revenue came from regulatory credits. As stated by CNBC, “Without zero-emission vehicle (ZEV) and other regulatory credits, Tesla would not have been able to report four consecutive quarters of GAAP profitability, a milestone it reported Wednesday that meets the qualifications for Tesla to join the S&P 500.”

 

There are even more reasons to believe that Tesla’s stock is greatly overvalued, and again, they have to do with the people who bought Tesla stock with their $600 stimulus checks without doing research beforehand. Oftentimes investors let the stock market get too psychological, and history has shown that it can have severe consequences. Prior to the Dotcom bubble popping, thousands of people were investing their well-earned money into literally anything that ended in dotcom. “The internet is the next big thing!” they would yell, and while they weren’t wrong, their awful financial decisions driven by speculation resulted in a bear market. The events that took place earlier this year in January give me the same queasy feeling the dot-com bubble probably gave many investors before it burst. In fact, there have been three separate instances of Musk’s fans throwing money on stocks that have no real value. The first instance occurred on January 7th when Elon Musk tweeted out “Use Signal”. Musk’s tweet was supposed to be read by people as “use signal, the cross-platform centralized encrypted messaging service, as opposed to using WhatsApp, who had a change in the privacy conditions of use that allows Facebook to target users with advertising.” Instead, Elon’s fanboys mistook his tweet as a stock tip, and they drove up the share price of a small company called Signal Advance, from $0.60 a share to $70.85, all in just three days. The second instance happened just recently on January 25th, when Musk tweeted out “I kinda love Etsy.” Etsy proceeded to jump 9% the next day, prior to the market even opens. The next day Musk tweeted out again, this time about Gamestop (GME). GME then rose remarkably by 157%, after already having risen by a staggering similar percentage previously. 

 

The point here is that Elon Musk’s followers have been almost too loyal recently, and many of them are so new that I’m not really sure they know exactly what or who they’re following. Tesla has had phenomenal success the past year, and it seems as though nobody can get enough of it. Of course, there’s always the possibility that Tesla won’t have the ultimate demise many investors believe it will. After all, with Musk’s innovation and creativity, nothing is off the table. Tesla is years ahead of its competitors; that, coupled with the fact that it's trendy and popular, could be disastrous for VW and GM. My fear is that when Tesla stock prices start to drop considerably, which they likely will, Musk’s fans will hop off the hype train, sell all of their shares, and drive the company's value far lower than what it actually is. If I had to guess a fair estimate of Tesla’s share price, I’d say it’s around $450-$550. While this wouldn’t be the biggest crash, even a $400 dip could hurt many people's life savings, and scare them into selling something they shouldn’t.
 

References:

https://www.cnbc.com/2020/07/23/teslas-sale-of-environmental-credits-help-drive-to-profitability.html

 

https://www.bloomberg.com/news/articles/2020-12-28/tesla-s-dominant-position-in-china-could-be-threatened-next-year


 

https://smallcaps.com.au/elon-musk-proves-stock-market-bubble-is-here/


 

https://www.thestreet.com/personal-finance/average-income-in-us-14852178

 

https://solartribune.com/master-plan/

 

https://www.tesla.com/blog/master-plan-part-deux

 

https://finance.yahoo.com/news/teslas-stock-is-a-prime-example-of-a-bubble-research-affiliates-rob-arnott-195453373.html

 

https://www.wsj.com/articles/believe-in-tesla-then-why-arent-gm-ford-and-toyota-crashing-11610623762

 

https://markets.businessinsider.com/news/stocks/tesla-stock-big-short-michael-burry-elon-musk-share-issuance-2020-12-1029859345

 

https://www.cnet.com/roadshow/news/average-new-car-price-2020/

 

Andrew Leuciuc

Writer - Mezo Inc.