by Giles Coghlan, Chief Currency Analyst at HYCM
Traders, as you might expect, like to go where the action is. With G7 currency volatility still on the decline, many are turning to other asset classes in search of alpha. Equity markets are currently soaring and with dovish central bankers now firmly holding the reins of global monetary policy, and it seems as though this trend may be set to continue.
Where do newcomers to stock trading tend to look first? Usually at high profile large-cap and story stocks. You’d be hard-pressed to find one with more fanatics on both the bull and bear side than Tesla. Tesla is so polarising a company that on any given day you’re likely to read an analyst making a case for it going to zero followed by another that says that it’s going to the moon. As a service to our traders, we’d like to present several key points from both the bull and bear cases, to give you a balanced and easy-to-understand primer on this most interesting and controversial of companies.
The Bear Case
Still Unprofitable
For many analysts, Tesla as a company and its controversial figurehead, Elon Musk, represents everything that’s wrong with the stock market. A persistently unprofitable company with an army of ardent supporters that have helped it to consistently confound every reasonable investing best practice. Since the company went public a decade ago it has yet to see one full year of profit. This is despite having released several electric vehicles that have successfully competed for market share against their internal combustion counterparts. A move that has seen the company’s revenues multiplying six-fold since 2015. You’ll routinely see exasperated bears on CNBC trying to explain that a company that grows its revenues while losing money is not sustainable, even as its share price continues to hit new all-time highs.
Competition Heating Up
Tesla’s significant first-mover advantage meant that for the longest time it had free reign in the electric vehicle market. A market, one might add, that Tesla essentially created. Even up to last year, the company enjoyed a 60% share of the US EV market, despite some notable entries from Audi, Porsche, Jaguar, and BMW, among others. Tesla bears are keen to point out that its lacklustre financials and inability to scale production don’t bode well with so much stiff competition about to come from established carmakers. These companies have a great deal more experience than Tesla in designing, building, shipping and supporting large fleets of vehicles. Aside from the fact that there is very little that is proprietary about Tesla’s vehicles, many expect the established players to come into the space and bring polished, affordable, mass-produced electric vehicles into every home; a feat that Tesla has yet to achieve.
Greatly Overvalued
Tesla’s stock trades at P/E multiples that are far higher than other car manufacturers. Over the past few years, it has been trading at multiples of between 60 and 80, while rival manufacturers such as Ford and GM trade at multiples remaining in the single digits. At the time of writing, Tesla’s market cap is at $150 billion, which is more than Ford ($32.11 billion) and GM ($49.67 billion) combined. Its soaring stock price has also led many to expect that insiders, hedge funds and other large holders are almost certain to be taking profits at these prices. This would significantly increase the risk of buying at these levels. Even Ark Invest, one of the most vocal Tesla bulls (that has called for Tesla stock to reach $7000 by 2024), has been selling a part of its holdings of late. In a recent SEC filing, the fund disclosed having sold in excess of 450,000 Tesla shares in the fourth quarter of 2019. Holders consistently selling the top could also have something to do with the fact that Tesla stock has such a rather large 52-week spread, going from lows of around $176 to highs of around $968.
The Bull Case
Significant First-Mover Advantage
Tesla has been all-in on electric vehicles since 2003. The rest of the industry has intermittently dabbled in the space, only to defer taking EVs seriously until the technology matures. Tesla has been responsible for pushing these technological boundaries that have now forced traditional car manufacturers to join the race in earnest. First-mover advantage is not just about branding or market share, analysts have estimated that Tesla’s battery technology is three years ahead of the rest of the industry. This means that not only are Tesla vehicles currently able to beat the driving range of all their competitors, it also means that rival manufacturers will be forced to sell their electric vehicles at a loss just to compete with Tesla. They will be doing this at a time when their extensive internal combustion infrastructures gradually become obsolete and they must make the transition to exclusively electric fleets.
More Than Just a Car Company
Even mainstream talking heads like Jim Cramer are coming around to the fact that Tesla stock behaves like it’s a technology company, rather than just a car company. This is a vital part of the narrative that many bears may be missing. Not only has Tesla been creating an entire industry that includes vehicles, batteries, software, supercharging networks, and autonomous driving, it is working in three important areas that are all tech-heavy and governed by exponential improvement and growth. These are robotics (the machines that build these increasingly computer-like vehicles), batteries (the “fuel” that powers them) and AI (the brains that will one day make them completely autonomous). The high-profile bears may be experts in the old model of producing vehicles, but many don’t seem to understand this next iteration of the industry as thoroughly. As these technologies continue to converge, Tesla could be uniquely positioned to not only maintain its market share but to expand it.
Artificial Intelligence Is the Long Game
When Tesla bears focus almost exclusively on the company’s performance as a car manufacturer, they miss the point that Tesla’s long game is ultimately about artificial intelligence. It’s currently the only car manufacturer to be shipping vehicles with its own custom-built AI computer chip. Tesla vehicles are overengineered with hardware that can be brought online later via remote updates, allowing functionality to be added after the vehicle is purchased. It’s currently the only car on the market that gets better the longer you own it. The logical conclusion of this process is a fleet of completely autonomous vehicles that can drive to and from anywhere without any human input whatsoever. What does AI require and feed on more than anything else? Data; and with so many Tesla vehicles on the road for so many years, Tesla currently has more real-world driving data than any other car company or autonomous driving start-up. By some estimates, the company has accumulated 14 billion miles of driving data from its vehicles. This means that Tesla is best positioned to expand into other industries that other car manufacturers simply can’t. Autonomous driving could severely disrupt the existing ride-sharing industry and allow Tesla to transition from a one-time purchase hardware model to a recurring driving-as-a-service software model.
Final Thoughts
Looking beyond the persona of Elon Musk, the bears seem to be overly focused on how Tesla is performing as a traditional car manufacturer, rather than being able to see it as a technology company. Amazon started life out in a similar fashion, a perennially unprofitable company that was constantly compared to traditional retail brands. This insistence that Tesla conforms to certain rules of the road when it comes to making vehicles could be the greatest weakness of the bear case.
On the other hand, for the bull case to be realised many different factors that are still pie in the sky must converge. The bull case is riddled with ifs, buts, and maybes that make this stock look almost like a two-decade-long Kickstarter campaign from a traditional investing standpoint. Perhaps this is also why its price is so volatile. It’s still a largely speculative stock that sees investors constantly buying the dip and selling the peak. Is it at a peak right now? Yes. Could it run much further than it already has? Certainly.
About HYCM
HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Ltd, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East.
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