Tesla’s valuation is spectacular nonsense. Tesla is in a bubble — one of the biggest bubbles of all time — and when the bubble pops, overleveraged bulls are going to get killed.
We have seen this over and over throughout history.
Later this week, we will revisit the Great British Bicycle Bubble of 1896. To give you a sneak preview, the Pollyanna optimism and disregard for basic math that drove a bubble in bicycle manufacturers — the original low-emission transport machines — is just as present today, 124 years later, in the wildly overdone hype surrounding the EV (electric vehicle) space. And Tesla is the grand Pooh-Bah of bubbles.
Tesla is also a classic example of how megabubbles work. First you get a whole bunch of investors excited about a story, preferably with the help of a skilled promoter. (Elon Musk happens to be one of the most skilled promoters in history.)
Then you create plausible narrative elements — projections of this or that business line — that stretch the math. And then you throw away the math altogether, and create elbow room for pure fantasy as Wall Street analysts chase the stock upward.
At that point, if it is well and truly a bubble, bullish sentiment will be so strong, and so story-driven, that the sheer impossibility of the math becomes irrelevant. At the same time, there will always be a Wall Street research firm making an asymmetric publicity bet with some new “bullish call” that pushes the stock target ever higher into the stratosphere.
The whole thing goes and goes until the maximum amount of hype and euphoria is priced in, with peak levels of investor capital sucked into the stock. Then momentum finally peters out, leaving gravity to take over. At this point, because the math was always nonsense, and the valuation had left the bounds of reality long ago, the stock goes splat — not unlike Yahoo after its addition to the S&P 500 index in 1999.
Again, this has happened over and over throughout history. It is like watching one of those horror movie sequels where you know exactly what will happen.
And with Tesla, you might very well have one of the purest bubbles of all time, in the sense of vaguely bullish sentiment that has gone global, on almost pure hype relative to the realm of the possible.
Are we short Tesla today? No. You don’t short a bottle rocket while it is still headed up. You wait until the arc of price trajectory no longer points to the sky and starts pointing toward the earth.
As of this writing, Tesla is still heading skyward. The market cap crossed $500 billion this week, with investors still piling in ahead of the December S&P 500 inclusion. As we noted on Nov. 18, the parallels to Yahoo entering the S&P 500 in 1999 are uncanny.
But there is another reason we bring up Tesla this week. The EV sales reports out of Europe are so bearish for Tesla, it is actually comical. When we saw how badly the Model 3 got trounced in October, we laughed out loud.
Tesla is, well and truly, not just one of the biggest bubbles ever, but one of the dumbest bubbles ever. Let us unpack the Europe situation to back that statement.
According to data from Bloomberg and Jato Dynamics, an automotive consultancy, the German auto giant Volkswagen had the No. 1 best-selling electric vehicle model in Europe for October 2020.
So was Tesla No. 2? Nope. That was Renault SA, a French auto giant. Was it No. 3? No. That was Hyundai. How about No. 4? Haha, no. That was Kia.
Already this news is not good. Tesla’s Model 3 was beat out by four competitors — not one, not two or three, but four! — in the most important electric vehicle market in the world.
But then you look at the October unit sales, and the numbers are jaw-dropping. Tesla got crushed:
- Volkswagen ID.3 hatchback: 10,475 units
- Renault SA Zoe: 9,800 units
- Hyundai Kona: 5,300 units
- Kia Niro: 3,900 units
- Tesla Model 3: 834 units
For October 2020 EV sales in Europe, Vollkswagen and Renault crushed it, while the Model 3 (Tesla’s EV flagship) didn’t even crack a thousand units.
Volkswagen, in fact, sold more than 12 times as many units of its top EV model as Tesla. Renault did roughly the same. Meanwhile Hyundai outsold Tesla more than six-fold and Kia more than four-fold.
All told, Tesla’s competitors sold more than 35 times as many units in comparison to the Model 3. Tesla’s percentage of European EV sales — looking at the top five sellers only — was less than 3%.
Now remember, in order for Tesla to justify its crazy-making market valuation of more than $550 billion, Tesla’s future EV sales would not only have to dominate the global market, they would have to slay competitors in the style of Conan the Barbarian.
To justify its current revenue and profit expectations, Tesla would have to own its competition the way Google owns search, or the way Microsoft Windows dominated PC operating systems in the 1990s.
And yet, in Europe — which is, again, the most important EV market in the world, due to its size, growth rate, and level of regulatory support — Tesla was not even competitive in October. Their Model 3 market share couldn’t even crack 3%.
So, why did Tesla get trounced? Likely because of a single five-letter word: Price.
For status-seeking showboats, owning a Tesla is a lifestyle statement. It is a way to tell people you have money (Teslas are expensive), while doing your part to help the planet.
But for most people, and especially in Europe, an EV is just a sensible vehicle choice. It is a means of getting from point A to point B, preferably at the lowest cost possible.
Electric car ownership has taken off in Europe in part because gasoline and diesel fuel have always been painfully expensive — far more so than in the United States — and in part because environmentally conscious European governments have pushed hard to favor EV ownership.
At the same time, European EV initiatives are growing more aggressive by the day. A case in point, as we wrote about here on Nov. 23, is the UK decision to ban sales of new gas and diesel cars by 2030.
As the EV market expands, the market share dominators will compete on cost, not sex appeal. Felipe Munoz, an auto analyst with Jato Dynamics, said as much to Bloomberg in explaining Volkswagen’s October sales jump.
“The reason why the [Volkswagen ID.3 hatchback] is a success could be down to its relatively affordable price,” Munoz said. He then suggested Volkswagen’s upcoming EV model, the ID.4, could be even more of a crossover hit.
The fact that established automakers can even compete with Tesla on price says something else important. It says that the performance characteristics of the Model 3 are not differentiated enough from the “good enough” EV models that other big players are already churning out.
Then, too, those good-enough competitor models are arguably improving by the day. And when local municipalities start looking into the purchase of self-driving electric car fleets, which could largely replace individual car ownership in dense urban centers, guess what their main criterion will likely be? Price.
What we are seeing here is the visible manifestation of something that was obvious all along:
- Tesla is not a software company. It is a car company, and a tiny one to boot (in actual volume terms). As Tesla attempts to scale, it will not only incur staggering capital expenditure costs — it will be hugely expensive to build out all that capacity — it will run into a brick wall of competitor volume.
- Auto industry competition has always been brutal, and profit margins have always been comparably tiny as a result. Tesla won’t change that. There is no magic technology bullet that justifies the choice of a Tesla over any other affordable EV. If there were, the Model 3 wouldn’t be getting crushed in the European EV market.
- In the auto industry, the only way to maintain high profit margins is to stick with high-end luxury vehicles, which are much more profitable to make, but also move in relatively tiny numbers. The market cap for Ferrari — the quintessential luxury-and-status car brand — is only $53 billion, because Ferrari’s volume is capped by the fact only rich people buy them. To justify a market cap above $550 billion, Tesla would need luxury-style profit margins with mass-market volume. Barring a patented technology breakthrough akin to a miracle, this is literally impossible.
- The mass-market electric vehicle space is going to be a low-margin, high-capex grind, just like the rest of the global auto industry, with giant competitors like Volkswagen, GM, Renault, Toyota, and others pouring tens of billions into the space. And the vast majority of EV units sold will ultimately compete on price — which means Tesla will never, ever, under any conceivable configuration, achieve the revenue or profit margins bulls now anticipate.
To get a sense of the incredibly tough competition Tesla faces, let’s return to Volkswagen for a moment. In 2019, Volkswagen announced a five-year research and development budget of 60 billion euros — or $72 billion at current exchange rates — devoted solely to electric vehicle sales.
We are already seeing the fruits of that investment, with Volkswagen’s ID.3 hatchback rising to the top of the European league tables. The ID.4 will likely be even more competitive — and with each iteration Volkswagen is likely to compete ruthlessly on the price and affordability factor.
And that is just one of Tesla’s deep-pocketed competitors. Just one! Nearly all of those deep pockets, if not every single one, will be striving to compete more on price and affordability than sex appeal — because price and affordability are the main factors when it comes to production volume (luxury-level profit margins are for niche players).
We aren’t saying Tesla will go out of business. At some level the company could be a buy — though that level might be 60% lower or even 90% lower. We are in fact saying, as clearly as we can, that Tesla’s valuation relative to cold, hard competitive reality is one of the craziest things we have ever seen.
We still struggle to find the words. The bullish expectations now priced in for Tesla are akin to, say, a belief that Tiffany & Co. will somehow achieve the revenue footprint of McDonald’s, while still maintaining the margins of a high-end jeweler, because the CEO-founder is a magical genius with secret powers.
Mere weeks ahead of the big S&P 500 inclusion event — which we foresee being looked back on as a Yahoo style debacle that all parties will regret — the level of sheer, gravity-defying ridiculousness in the Tesla share price is somewhere between sublime and exquisite. It is a bubble for the ages.