Tesla have made the headlines in recent weeks after investors became excited about the prospects of the company in China and India.
The electric car company has soared on the stock market in recent months, reaching an absurd valuation of $320bn – which is more than Toyota and Volkswagen combined.
As of the 21st of July 2020, Tesla stock has increased by 507.47% in the last 12 months, which of course is a remarkable return on investment.
There is no doubt though that Tesla stock is in a bubble and that the company is vastly overvalued.
In my view, it takes a brave person to invest in Tesla and here are 3 reasons why.
At present, Tesla is valued at $320bn, which is incredibly high when the company are yet to have a profitable year. In the last 5 years, Tesla have lost at least $650m in each year. In 2017, the company even lost $1.96bn.
With that in mind, it’s important to reflect upon other aspects of the company’s balance sheet. As of the end of 2019, Tesla currently has $6.27bn in cash, $34.31bn in assets and $13.42bn in debt obligations.
This essentially means that the net asset value of Tesla is $27.16bn, yet investors have valued the company at $320bn.
To his credit, even Elon Musk recognised how ridiculous the stock price of Tesla is.
Elon Musk is incredible at one thing: marketing. This is particularly important when it comes to investing in Tesla because you need to question what is true and what is not true about the company.
Musk has done a remarkable job at convincing the world that he is a modern day Albert Einstein, however, he has shown his incompetency on more than one occasion.
The Tesla CEO constantly dishes out big promises but often doesn’t live up to expectations. For example in Australia, Musk claimed in 2017 that he could fix the energy problems in South Australia within 100 days. Unfortunately for him, it didn’t work out like that and the system that he installed only started to have some benefit after 2 years.
In addition, Elon Musk doesn’t follow the rules. As much as this is good for innovation, this is particularly problematic when he has been accused of stock market manipulation and has repeatedly gotten into trouble with the SEC.
In August 2018, Musk casually tweeted that he would take the company private at $420 a share – which is a breach of the SEC regulations because executives are not allowed to give misleading information with regard to potentially meaningful corporate events.
When it comes to investing, it’s important that you trust the management of the firm and for me, Elon Musk is a liability.
Legendary finance academic, Benjamin Graham, claimed that you should never trust an analyst to inform your investment decisions. The reason for this is because analysts play a significant role in helping to convey the company story to shareholders.
The problem is though that the story is often not based on facts and is purely speculative to help boost the stock price of said company.
When the reality becomes clear, stock prices often fall when the performance of the company doesn’t meet expectations.
Investors are clearly excited about the prospect of Tesla’s China business but it’s important to remember that China is still a developing country and that many people will be unable to afford the $40,000 asking price for a Tesla.
In addition to that, China is notorious for producing copycat versions of popular products. It wouldn’t at all be surprising if fake Tesla’s become popular in China as opposed to the real thing.
So there are question marks over the potential financial benefits of Tesla selling their cars in China.
Of course, Tesla will sell cars in China, it’s more of a question of how many. Will it be enough to warrant the 500% growth in the stock price? Probably not.
In summary, Elon Musk has done a marvellous job of marketing the prospects of Tesla, so much so that the share price has exploded. There are very serious question marks that can be raised about the company that every investors should consider before decided to invest in Tesla – namely the valuation, Elon Musk’s character and the reality of any analyst forecasts.