There are plenty of things in the world we understand. We understand how the sun rises and sets each day. We understand how trees absorb CO2 and expel oxygen.
We understand that humans are complex organisms. We understand that the world we live in isn’t always supposed to make sense.
But there are also some things we simply can’t get our head around. Things like how the US continues to do nothing about gun control. How Australia still can’t legalise same-sex marriage. How the UK can’t just leave the EU and be done with it.
Perhaps the meaning of life is to understand that there are some things we will never understand. Maybe we’re also getting a bit too philosophical…
This is after all supposed to be an essay about markets and investment. Well there are plenty of things in the markets we also don’t understand.
We don’t understand how layer upon layer of debt won’t lead eventually to another massive crisis. We don’t understand how the Aussie property market can continue on its merry way. We don’t understand how a company like Tesla continues to rise on popularity and not much else.
The debt issue and property issues are topic perhaps for another day. The Tesla issue…well that’s something we can tackle right now.
When you’re right and wrong at the same time
It’s actually something we’ve tackled before. In fact in July 2016 we wrote,
‘I don’t think the demand for the Model X will hit the highs of the Model S. And I doubt the Model 3 will see the light of day before 2018. Meanwhile GM and others will gobble up customers. Cars like the Bolt will take market share away from Tesla. Being first to market tends to do that.
‘Tesla could (and should) aim to be a niche car maker like Porsche Automobil SE [ETR:PAH3] or Ferrari NV [BIT:RACE]. This would be a market they could do well in. And I can see justification of a market cap around that of Porsche or Ferrari.
‘Instead Tesla is worth around four times Ferrari. It’s too inflated on hype and endless promises. However, if Tesla’s stock price were US$55, then I’d call that fair value.
‘But it seems Tesla’s ambition outweighs their talent. Trying to become a genuine mass market car maker is a stretch too far. And I think it’s all about to come crashing down around them.
‘I think that by mid-2018, amongst delays and missed targets, Tesla’s stock will be closer to US$55 than US$255. And if you’ve got the guts, Tesla might just be the perfect stock to short.’
And in April this year we wrote,
‘When looking at all the car companies in the world as an investment, there is only one. In our view, if you want to make money long term from a cracking car company, Ferrari is the one to invest in, not Tesla.’
When we wrote the piece about Ferrari they were trading at US$66.85. Today Ferrari stock is US$96.75. That’s a 44.7% return in almost bang on six months. Not a bad call.
The thing about Ferrari though is they make a profit. They trade at a high earnings multiple…but they make a profit.
Our Tesla call though…
Well in July 2016 Tesla was trading at US$220.40. We said short the company. We thought they were overpriced and were never going to deliver on their production goals.
We were right about their inability to deliver their product. They are still yet to meet a production target. But that hasn’t done anything except push the share price higher.
We were very wrong about our short call. Today Tesla trades at US$355. That’s a 61% gain in about 15 months.
It also makes Tesla almost three-times as big (in terms of market cap) as Ferrari. And here’s the kicker…Tesla still doesn’t make a profit.
Our short call was wrong, we can accept that. But we still believe that Tesla is the most over-hyped stock in the world today. And convincing us even more that we’re not wrong on Telsa was their latest inability to hit their production targets.
As we know, they’re looking to massively ramp up production for the Model 3. Except this from the The Independent,
‘Tesla has fallen behind on production of its ‘mass market’ Model 3 vehicle, making only 260 cars in the third quarter of 2017.’
There’s no typo there. That’s 260 Model 3s. And this is coming from a company expecting to make 5,000 per week by the end of this year. And 10,000 per week in 2018.
They will not achieve those targets. They very well might in the next few years. But by then it’ll be too late and the EV market will be flooded with new models.
Two ASX stocks set to dominate EV market
At the Frankfurt Motor Show just a few weeks ago every major car maker outlined their EV plans. VW will electrify every single model in the group by 2030. They call it their Roadmap E.
And it’s not just VW’s that Roadmap E includes. It’s also every Bugatti, Audi, Seat, Skoda, Porsche and Lamborghini — all brands owned by VW.
BMW will electrify their whole range by 2025. Tesla still has a bit of a runway to make inroads to the EV market. But we simply cannot understand their valuation considering the market dynamics and their inability to hit any production target…ever.
We still maintain Tesla is the most overpriced company in the world. They are a good company with a good product. But the market is pricing in hype and hope, not actual results.
However while we think Tesla sucks as an investment at current prices, there’s an upside to the EV story no matter how it plays out. In fact thanks to Roadmap E, Tesla and the changing dynamics of the car market, there are a couple of ASX listed stocks that could be set to shine.
We’ll explain which stocks we’re talking about, why they’re on track to dominate the EV market, and how hard they might run tomorrow…stay tuned for more.
Editor, Australian Small-Cap Investigator