Why you should NOT buy Tesla shares now.
By: George Salapa
Tags: Finance, Market, Investing, Business, Tesla

What’s happening?

Beginning in the Q4 last year, a series of triumphs for Tesla began proving Tesla critics one-by-one wrong. But these concrete achievements invited calls for Tesla’s absolute supremacy that rest on a number of esoteric claims which are hard to prove or disprove.

Tesla opened its Shanghai Gigafactory in December to fanfare that rivaled any of its previous achievements. The speed and efficiency with which Tesla managed to build the factory, together with the very high expectations that Chinese customers will began buying Tesla 3s in droves persuaded investors. On the back of this momentum, the company promised to increase its global vehicle sales 500,000, up from 367,000 last year.

Tesla beat its earnings forecast last week, and crucially promised to stay profitable going forward, which looked believable since this was the second consecutive quarter of profitability.

The company’s turnaround was truly stunning: Tesla’s stock now far exceeds the infamous $420 level that Musk put on Tesla to take it private, which led him to a spat with SEC and an uproar in the market, which combined with other Musk flops led the stock down for the most part of 2019. This encouraged Tesla critics to do short-selling — borrowing the stock from their brokers to sell it in the market in hope the price would fall further down, so that they can buy it back for less. With the parabolic rise in the stock price, short-sellers found themselves forced to buy back at a loss to avoid further losses. This, in effect, drove up the stock price higher still. Mike Novogratz has famously made the same losing bet going short before last week’s earnings announcement which sent stock soaring.

In November last year, Elon Musk announced the Berlin Gigafactory — an in-your-face to German engineers.

So, all of this is great, but it doesn’t explain Tesla’s vertical trajectory up on a chart that reminds everyone of bitcoin (before its fall).

There is a larger elusive story that fuels the massive bull run, and it reminds (very much) of other past historic market bubbles.

Tesla will dominate the global auto industry because: 1) the competitors are failing to match Tesla’s technical superiority, 2) learning lessons from the first Gigafactory, Tesla has learned how to generate superior gross margins forever, and 3) Tesla is further than anyone in autonomous driving (primarily) thanks to collecting orders of magnitude more data than any of its competitors from its Autopilot.

Analysts discuss these reasons in news on TV less critically than they should, using expressions like the “flywheel” effect, which should worry us.

While the reasons 1) and 2) are true in the short-term, it is complacent (and potentially dangerous) to extrapolate them into future. Porsche Taycan, for example, has outperformed Tesla with its superior performance. BMW, which is lately being criticized for lacking innovativeness sold 500,000 of its electrified cars in 2019, fa exceeding Tesla. And the German engineer has not been awakened yet. It would be foolish to think that the auto nation won’t be able to match Tesla’s technology or (perhaps even more so) quality.

Tesla’s superior gross margins are a thing of two quarters — input prices may change significantly. The fact that Ark Investment are happy to extrapolate Tesla’s gross margin growth into very far future, while adding questionable factors like Wright’s law into their model to spit out a $7,000 target price, and few dare to criticize them, tells you that we may really be in a bubble territory. There is also another, perhaps more worrying side to Ark’s argument of Tesla’s superiority due to lesser capital intensity of EV production in comparison to combustion engine. If this holds true, there will be lower barriers to enter the EV production, and Tesla is soon to face stiff competition.

The reason 3) is arguably the most difficult to assess but it is, of course, the wildcard that excites investors. The big story is that Tesla could turn to a fully autonomous taxi network (similar to UBER’s pitch). While it is difficult to evaluate how far Tesla is technologically, it is important to understand that this shift would require developments exceeding just tech. There are significant legal and regulatory hurdles that would have to be overcome, and that is likely to take years if not decades.

Tesla is a great company that became the bubble stock of 2020.