Tesla: A Good Product Does Not Make The Investment Great

Tesla Model 3 PictureHow do you determine between someone who is a typical retail investor versus an enthusiastic amateur or a professional?  Just look at the underlying reasons for buying their investments.

Teaching someone to become a good investor is as large a task as training them to become a great sales professional.  There are thousands, if not millions of books written about each subject and every day there are more things to learn.  Most of all, it is not a crystal clear subject with definitive right or wrongs such as perhaps what you would find with accounting or in medicine.   Investing, like sales, is filled with numerous opinions and strategies that seem sound, however it would be tough to prove whether they definitively work or not.

When we, as financial professionals run into people who solicit us for investment advice, we become instantly overwhelmed.  I personally feel overwhelmed because in order to make someone a good investor, there are numerous topics you must understand just so that you can make a semi informed decision.

Much like any great book that is too long to read in one sitting, many investment greats such as Warren Buffet, came up with basic tenets of investing that while they are simplistic, tend to work out. Think of them as the cliff notes version of investing.  While it will give you the plot outline so you have a basic understanding of the story, you will absolutely miss the finer details such as the mood and the development of characters.

One of the major tenets of investing is to invest in companies that create and distribute products you know, like and care about.

When this advice was first crafted, people were passionate about simple things.  Do you have a favorite brand of shaving cream? Buy Proctor & Gamble stock.  Love drinking soda? Invest in Pepsi or Coke.   The idea behind this tenant is this, if You love the products, then likely so do your friends, family and neighbors.  That means the product will sell, and if the product sells, the company will make money, and if they make money, the stock price goes up.

Had my parents invested in either of those two stocks after I was born, they would of been extremely happy. An investment in Coke would net an investment that was nearly 8 times higher in price.  Proctor and Gamble? An investment in P&G would net a gain of more than 4,750%.  A $1,000 investment would now be worth nearly $50,000.

PG_COKE_chart

So what’s the problem?

The problem is this simplistic investment tenet will tend to work itself out over the long term, and quite frankly, many of the products that we as consumers get excited about today, will be obsolete in the near future or the company will not be strong enough to survive on its own two feet.

Today, more than ever it is important to know that good products alone will not translate into profitable companies and over time, great investments.  When we evaluate investments we look at individual companies from three perspectives. 

  1. The Products or Services the company creates or distributes. If it a product that is not needed or is inferior, there is likely a gloomy future.
  2. The financial health of the Company.   Simply put, if the company cannot sell a product for more than what it costs, the company is not making money and simply losing money over time.  You can create amazing things with unlimited budgets and without the need to ever make money… just look at the Space program, or the abundance of projects on KickStarter. 
  3. The market sentiment over the Company’s stock.  Simply put… how much are you willing to pay for the stock? Are you willing to pay 10 times earnings and wait 10 years to get your money back? Or are you willing to pay 30 times earnings and hope the company grows its earnings so that you can break even in less than 30 years?  Is the current market sentiment in line with your investment philosophy? 

Unfortunately most retail investors will never bother to read the annual reports or ever look at a company’s balance sheet.  More than that, they are clueless as to how much they are willing to pay for the stock, and merely buy at whatever today’s market price is, after all, they made their decision to buy today. The majority of retail investors do not understand the difference between the stock price and the market capitalization and merely believe that a company trading for $100 per share is more expensive than a company trading for $5 per share. 

Want Proof?

Twitter (TWTR) is a great product.  I use Twitter every day and I tweet daily through a number of accounts, both personal and business.  Twitter is an amazing social platform but more than that, has tangible assets.  The users and their data are worth a hefty penny.

Would I invest in Twitter? Not a chance.  Not yet at least.

Twitter fits the first criteria, a product that I like and care about. At the time of the IPO, the initial public offering, the market sentiment was certainty bullish on Twitter as people were fighting to get in on the offering.   

And then?

TWTR_chart

An investment in Twitter is down 64% from the initial offering price, all while Twitter has grown as a platform. If you missed the initial offering and invested during one of the hype cycles, you would be down significantly more.

The price drop has nothing to do with the product itself, in fact Twitter and its offerings have only gotten better. The price drop has to do with factors 2 and 3. The company is slowly generating revenue but not yet profitable, and perhaps more significantly, the market sentiment had turned against Twitter.

Twitter Revenue & Net Income

As you can see, since the debut, Twitter has had growing revenues, however has yet to turn a profit for investors.

Other once loved stock? GoPro

GoPro was an even bigger hype job and took in many foolish investors.

GoPro Investment Chart

GoPro Investment Chart

GoPro initially IPOed in the $20’s however on the first market day quickly shot up to over $35 and then $40 per share.  Over the next few weeks, it traded to over $93 per share, more than 4x the IPO price.

Again, GoPro produces a great product and it is tough to argue with that.  The problem is… the company’s fundamentals were never solid however none of that mattered in the middle of the hype cycle.  What happened is that the fundamentals were priced to perfection and investors bought into the hype and priced GoPro not as a hardware company who makes cameras, but as a media company.  After all, GoPro was about the video content channel and not the cameras, right? 

As with anything, the euphoria wears off and people start seeing and acting with clarity, especially after a few quarters of bad earnings.

GoPro, simply put was destroyed.   If you bought it at the initial offering price, you are down about 65% on your investment.  If you purchased near the peaks in the $70s, $80s or $90s,  your investment loss and the tax write off is likely worth more than what the shares are worth today.

 

So What About Tesla?

Whether you like Tesla (TSLA) cars or not, they are the current market leader in electric vehicles.  Tesla owners resemble a close knit cult who pray at the alter of Tesla and Elon Musk.  Tesla can seemingly do no wrong.   Being a high priced item, Tesla owners also tend to be Tesla investors, and so far… it has worked out well for them, as long as they invested before 2014.

Tesla Chart

Since 2014, the stock has been quite volatile, bouncing between $175 and $275 per share, and that all centers around the tug and pull between the Tesla hype which the cult buys, and the Tesla bears who are looking at the company fundamentals which are quite scary.

Tesla Revenue Earnings

Tesla, since inception has not been profitable.  Even though since 2013 the revenue has been sharply rising, their losses have been accumulating.   All throughout, Tesla has been raising money from investors and using it for operations.  Furthermore, products have been consistently over promised and under delivered and seldom on time, a look at the Model S and Model X in particular is the latest example.

The question really becomes, when will investors stop buying the hype and start treating Tesla stock like any other investment and look at the underlying investment fundamentals? 

Unless Tesla starts turning around their fundamentals,  it is quite likely that Tesla stock may start looking like Twitter, GoPro and others.

For Tesla investors, the question should be… how is a company that loses nearly $1 billion per year worth $32 billion at today’s market-cap?  Or are Tesla investors just buying to support the company and have no expectations for return of capital.

Tesla is a cult, and Elon is the grand puppeteer, and a great one at that.

I am a fan Tesla cars and I buy into the idea of clean energy.   I am not however naive enough to invest in something that has not yet shown an ounce of proof that this is also a solid investment.  

When has Tesla shown a profit? Never. When has Tesla returned any capital gains? Never. When has Tesla paid a dividend? Never.  

The only gains from Tesla came from one investor selling shares to someone who is willing to pay even more for the dream of eliminating the internal combustion engine and have clean air.   

Tesla is NOT about the cars.  All you have to do is watch any of Elon’s videos such as the Model 3 introduction.   The first thing discussed is why Tesla exists. Tesla is ALL about a greener and cleaner planet.  The cars are merely HOW they do it.   Any profits are clearly not the top priority of Tesla’s management. 

So far, Tesla is succeeding at its mission of putting more electric cars on the road and inviting competition to do the same.   In that sense, Tesla is a success, all paid for by the equity holders who have been giving money to the company and have been getting further and further diluted with every capital raise. 

Bottom line… “invest” in Tesla because you care about the environment and believe in Elon Musk… but don’t invest in Tesla expecting a return on your investment because the company has done nothing to show that it can, or seemingly cares to.

 

Update: This article has now been published on Seeking Alpha 

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