Tesla. Enron. TENRON.
So my brother recently asked me to offer an opinion on whether or not he should invest his bonus in Tesla shares.
Here’s what I said.
What if I told you that there’s a business out there, that since 2003 hasn’t generated more than a few quarters here and there of positive free cash flow from its core operations?
What if I told you that same business has had 5 profitable quarters out of over 70?
What if I told you that it has made an annual profit from its core operations just once in almost 18 years.
What if I told you that this very same business pretty much made those profits by selling carbon credits to other automakers and messing around with bitcoin, rather than actually building cars?
And what if I told you that this is a business in the S&P500 (the largest stock index by market capitalisation on earth), which is also a household name.
What, if I told you this was Tesla?
Park that for a moment, and we’ll look at something equity analysists call fundamental analysis.
On January 26, 2021, Tesla shares traded at $886. This propelled Tesla into the same stratosphere that businesses like Apple, Google, Amazon and Microsoft occupy.
Bear in mind that for the year 2020, Tesla’s earnings per share (EPS) was 64¢.
Leaving aside that this 64¢ EPS was a 165% decline year-over-year, that means the price to earnings ratio (PER), which is share price divided by earnings per share is an almost unfathomable 1,384.
If you’re not familiar with stock market parlance, what this means is simple: the price of the shares is 1384% of the earnings the business makes and keeps from those same shares. What you as the stockholder then get out the other end is called a dividend. Normally, that’s a slice of the EPS.
Oh, yeah, I forgot. Dividend? Tesla doesn’t pay one. LOL.
Say you bought ten Tesla shares on January 26. The cost to you? $8,860. What the company would retain as earnings — sales minus costs — on those same ten shares if 2021 is a repeat of 2020, is $6.40¢.
Most high school kids can see this is a mismatch. But if you’re still not with me, try this: at the rate of earnings reported in 2020, for Tesla to earn back enough money for it to re pay you the $8,860 you gave it on January 26 for ten shares (aka the pay-back period), you would need to wait 1,384 years.
Read that again.
Investors are literally going to have to sit on their shares for over a millennium to get their money back, unless Tesla starts to scale its earnings dramatically.
Compare this with a super aggressive, high growth stock. Visa. Payback period? 42 years. Apple? 28 years. The S&P500 index as a whole? Average yield over the long-term is a shade over 4%, so around 25 years. Now compare this with an average UK commercial property outside of London: rental yield of 8%. Payback period? 12.5 years.
I would like to remind you at this stage that on 26 January 2021, Tesla’s payback period was almost 1,400 years. Or about the same period of time from the fall of the Roman Empire to present day.
I know what you’re thinking. Elon knows his shit. Tesla will sell lots more cars and that payback period will drop to something more reasonable as their sales and profits sketch out that hockey-stick shaped curve that we all know and love.
Hmmmm.
In 2020, Tesla delivered 499,550 cars to customers. Call it half a million.
In 2020, 63.2 million cars were sold worldwide. Call it 63 million.
Assuming all of them were electric (in 2020, electric cars accounted for 2.6% of all car sales globally — Tesla is about 1/3 of this total market already), Tesla could, theoretically scale its sales up by 126X.
If Tesla managed to make the same profit out of that massive increase in sales — there are myriad arguments as to why it would and would not be able to match its 2020 profitability by suddenly growing turnover by an order of magnitude — that would mean EPS would be ¢64 x 126 = $80.64.
This means that the PER would drop to around 11. Again, the price to earnings ratio is how much you’re willing to pay for every dollar of earnings. If a company’s stock has a PER of 11, investors are willing to pay $11 for every $1 of earnings.
On January 26, 2021, the largest bank on the planet by assets under management, JP Morgan Chase had a PE ratio of 15. British aerospace and defence comapny BAE Systems currently runs at a PER of 10.5.
For Tesla to get anywhere near this, it would literally need to put every other automaker on the face of the earth out of business.
House of cards comes to mind.
Kind of like Enron.
