Why start small? Why start with a small unknown business?
Why not start my investment journey with Tesla? There definitely hasn’t been enough spilled ink on Tesla already…here goes nothing.
But first, what I’m jamming to while I write this:
Step 1: Understanding who I am?
When thinking of a company like Tesla all kinds of biases, expectations, assumptions, and opinions come to mind. I instantly get flashes of Musk’s tweets a few years ago about ‘funding secured’ or how annoying Tesla’s owners have become.
Can we all agree that Tesla’s owners have now taken the place of Prius Owners? It’s painful.
With that said, it’s important to recognize my own biases/opinions while taking Tesla through The Rookie Checklist and bringing an open-mind to the process.
Do I understand the business?
High-level Stats:
52 Week Range: $136.61 - $900.40
Market Cap: $660B
LTM EV / EBIT: 303.84x
LTM ROC: 5.8%
LTM Gross PM: 21.2%
LTM Lever FCF: $3,538B
Right off the bat, Tesla doesn’t align well with my personality or investment preference as I generally look for companies with a market cap under $10B.
On the surface, it looks like a ‘metal bender’ with all types of other things going on. It’s got a CEO who I’d want to have a beer with, but I’m not sure if I want to allocate my money to for years.
Tesla is everything to everyone. It’s a scam to some. And to some, Tesla will become the biggest the car manufacturer in the world or the biggest energy company in the world. You name it…Tesla can do it.
On Tikr.com, it’s competition spans across 20 different industries ranging from ‘Automobiles’ to ‘Energy’ to ‘Semiconductors’ and everything in between. Where do I even start with understanding this business?
In their own words, “We design, develop, manufacture and sell high-performance fully electric vehicles and design, manufacture, install and sell solar energy generation and energy storage products.” I like this statement - it’s ambitious. It points to Tesla’s ‘optionality’, but also, points towards my concerns of ‘focus’. Is Tesla a car company or a solar/energy company? Or both?
Here’s example of a focused company, “The Company designs, manufactures and markets smartphones, personal computers, tablets, wearables and accessories, and sells a variety of related services.” Who is this? It’s the biggest company in the world…Apple.
In Q1 2021, they made $10,389B in revenue, $9,002B coming from car sales/leasing, $494B from Energy Generation and Storage, and $893B from Services. Based on how Tesla makes money, it looks to be a car manufacturer and for simplicity sake, I will grade then as such and the ‘options’ as beneficial upside.
So I ask myself…Do I understand this business and do I care to understand it? Yes, but I’m not sure I care to understand the nuance in Tesla.
I found I have NO COMPETITIVE edge in Tesla. The hundreds of Research Analysts that follow Tesla religiously will always beat me. They will always know more, and have better models than me.
If you really want to understand the bull thesis on Tesla check out Ark Invests write ups.
Verdict: Fail for a lack of my own desire and competitive edge
Step 2: Moat and Future Growth/Catalysts
Tesla is such a divisive company - you’ll find research that has Tesla’s moat expanding, or other research that has Tesla losing the EV market and losing focus on their mission.
I think Tesla DOES have a moat, and right now, it’s mostly around Brand, and first mover advantage.
Tesla has an NPS ~37 which is top-tier for car companies. It’s got a religious like following and just a gut-check, I see hundreds of Tesla’s all of the time.
Tesla is winning. They will likely continue to win in the EV space for the near future. But competition is getting better. Just check out this video by Doug DeMuro
Increasing competition will eat into Tesla’s pricing power, margins, ability to scale, and overall market share.
Tesla’s future growth catalysts are numerous (Energy, Ride Hailing, etc) and I won’t get into them here. You can read a more in-depth analysis here on how Tesla continues to grow and expand it’s moat. I have doubts around those predictions/assumptions in the writeup (it’s hard for me to adjust and forecast for anything into 2025), but I appreciate the research. Ark has proven to been right this whole time.
Verdict: Pass, for now
Step 3: Management
Tesla’s management team is divisive. Divisive seems to be the theme when analyzing Tesla.
Some people LOVE Elon Musk and other’s loathe him. I don’t really have an opinion, but there are some things I like:
Elon is a co-founder and CEO, and has a shit-ton of skin in the game
The Management team has all worked at Tesla for multiple years and in multiple roles/functions
One question I have for management is focus.
Can Tesla do everything and still win?
Can it execute at scale in several different categories at the same time while facing more and more competition?
Verdict: Meh
Step 4: Valuation
Here are the rough numbers:
Forward EV / Revenue: 11.2x
Forward EV / EBIT: 58.25x
Forward EV / Free Cash Flow: 186x
I was planning on doing a DCF…but in order to get a Margin of Safety that is reasonable, the DCF would need outrageous assumptions…how I am suppose to know what Tesla’s revenues look like in 2025? Elon Musk doesn’t even know that…
Tesla is expensive. Tesla is expensive compared to its competitors: VW trades at 1.12x NTM EV / Revenue, BMW trades at 1.32x NTM EV / Revenue, and even NIO trades at 8.48x NTM EV / Revenue.
Tesla is more overvalued than what I am comfortable with, but we need to ask ourselves…is this valuation warranted? Divisive…there are some companies that deserve a premium valuation, but I am not sure Tesla is one of them.
Some people say ‘yes’. Some people say Tesla is undervalued at today’s prices with its future growth and expansion opportunities. That could be very TRUE. This is only true, IF Tesla executes on everything and wins in each of its markets.
BUT those are tough assumptions for me to make. Warren Buffett puts it well when he said, “I don’t try to jump over 7-foot hurdles; I look for 1-foot hurdles I can step over”. This is how I feel about Tesla.
I am OK with jumping over 7-foot hurdles, BUT I really need to LOVE the business and have an extremely long time-horizon.
Tesla, at this valuation, is a 7-foot hurdle I don’t want to jump over.
I don’t want to swim in that pool.
Tesla is a FANTASTIC company and outpaced almost everyone’s expectations, but at theses prices, it’s not for me.
Verdict: Fail, but if Tesla’s valuation ever trades near a BMW I may take a second look.
The Rookie Quick Fire Challenge - LINK HERE
Score 48 / 81
Overall Verdict: Fail…but interested