Elon's Business, and Tesla's Stock Price
I have a bet with a friend, "Which will go to zero first: Bitcoin or Tesla?"
We made this bet in early December 2017.
At the time, Bitcoin had been soaring. The price had recently crossed $10,000. And over the next few weeks, the price of Bitcoin doubled. It got as high as $20,000.
Regardless of the price, no one could really explain what they were buying.
All they knew was that the price was moving higher.
Most saw a new currency being born. And they were willing to bet on it.
I saw Bitcoin as a redux of the Beanie Babies craze.
In the 1990s, people started to collect and trade stuffed animals called Beanie Babies. At one time, Beanie Babies accounted for 10% of eBay’s sales.
Eventually, the bubble popped in 1999, and stuffed animals went back to being stuffed animals.
My friend said the same would happen to Bitcoin. And because I agreed with him, I needed to find something else with hype that exceeded its value.
After thinking for a bit, I picked Tesla Motors (TSLA).
Let me tell you, this pick made all the sense in the world to me...
Great Business; Poor Stock Price
I don't doubt that Elon Musk, cofounder, CEO, and product architect of Tesla, is a genius.
He could even be the Thomas Edison of our time.
But no question about it, I’d rather be a consumer of Tesla's product than an investor. And here’s why...
There's a big difference between a stock and the business.
In fact, a poor business could be trading at a great stock price. And a great business could be trading at a terrible stock price.
Knowing the difference between the two will make a world of difference in your returns.
Tesla makes a great product.
I've ridden in a Tesla Model S, and the ride was heavenly.
The interior has more cargo room than most SUVs. The car goes from 0–60 miles per hour (mph) in 2.5 seconds, which is super fast. And the car has a five-star safety rating.
After I rode in my friend’s car, I was in love.
If I could ever see myself spending $100,000 or more on a car, it would be a Tesla. No question about it, Tesla cars are how cars will look and perform in the future...
Tesla as an Investment
But looking at Tesla as a stock investment is another story.
Tesla sold about 100,000 cars in 2017, while General Motors (GM) sold close to 10 million.
Although GM sold almost 10 times as many cars as Tesla, Tesla's market cap of $52 billion is about the same as GM's!
Mr. Market is valuing Tesla at a rich price.
But the big problem I see is cash. Tesla is running out of it and needs to get more quickly.
Tesla’s burn rate is huge. At the end of 1Q 2018, Tesla had $2.7 billion in cash on hand and $10.3 billion in long-term outstanding debt:
Cash from the sales of cars isn't coming in fast enough.
The company’s free cash flow, the amount of cash after counting in capital expenditures, has been negative for the past seven quarters:
Tesla has to raise more to stay in business.
An investment in Tesla at its current price of $300 per share is based on hope.
Is this the type of business you'd want to invest in? Although the payoff might be big, the risk of losing everything is great...
Separating the Business From the Stock
When I'm looking to buy a stock, the first thing I do is separate the business from the stock.
I don’t look at the stock price until I finish my research. Once I’m done looking at the business, I come up with the price that I would pay for it.
If you're buying Tesla at $300 per share, you are basically saying, "I’m buying a $52 billion business that is $10 billion in debt and is burning money at the rate of $7,430 every minute!"
The next thing I make sure to do is to not fall in love with the company’s product. Tesla makes a great car, but it's a lousy business.
Manufacturing cars is a hard business. For example, GM has economies of scale. It has the infrastructure to produce 10 million cars a year.
Tesla is a long ways away from that. For example, it's having difficulty mass-producing its Model 3. For weeks, it missed its production goal of 5,000 vehicles a week. In the last week of June, it finally hit its goal. And that was big news.
It takes GM less than two hours to produce that same number...
A Better Buy Than Tesla
Before I buy a stock, I make sure the company is financially strong and is trading at a bargain price.
If the price is a bargain but the company has one foot over the cliff, I pass. And that's no matter how great and life changing the company’s product or service is.
If you want to invest in an auto stock, I'd recommend that you look into Fiat Chrysler Automobiles (FCAU), which currently trades for $20.05.
In June, Fiat reported strong sales of its Jeeps, Ram trucks, and Dodge muscle cars. The company made a net profit of $1.2 billion at the end of 1Q 2018 on $32 billion of sales.
Fiat has more than $20 billion of available liquidity. And its net industrial debt — total debt minus available liquidity — is only $1.5 billion. It's in a much better financial position than Tesla is.
Buying a Tesla vehicle makes much more sense to me than buying one share of the stock.
If you plan to buy the stock, I wish you the best of luck. Because I’m betting against you...
I see the stock price heading significantly lower in the near future.
All my best,
Founder, Park Avenue Digest
Charles cut his chops on the trading floor of the New York Futures Exchange before he moved on to become a wildly successful money manager on Wall Street.
And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball. He's compiled an amazing record of success and posted gain after gain for his loyal readers. He's the founder of Park Avenue Investment Club and Insider Alert newsletters.
Charles is also the author of the highly acclaimed book Getting Started in Value Investing.