Opacity And Incomplete Information Are Driving Tesla’s Share Price
In Wall Street Michael Douglas’ Gordon Gekko says to Charlie Sheen’s Bud Fox, “The most valuable commodity I know of is information. Wouldn’t you agree?” In the case of Tesla stock and, really, the U.S. stock market as a whole, that couldn’t be further from the truth today. Have things really changed that much since Oliver Stone released that film in 1987? I don’t think so.
I was interning with a financial firm as a high schooler when Wall Street was released in 1987 and couldn’t possibly imagine the breadth and depth, and, most importantly, speed of information in 2020. Google certainly would have made my life easier then, but, even now, there are key pieces of information that are impossible to find, mainly because so few people are searching for it.
If you have been reading my Forbes columns you will know that I believe that Tesla stock is wildly overvalued based on the revenue and cash earnings power of the company. As a consumer products company that power is most obviously manifested in unit sales. As Tesla needed a Hail Mary from the 64th-largest country in the world, the Netherlands, to minimally exceed CEO Elon Musk’s guidance range last year of 360,000 – 400,000 units, I believe Tesla’s commercial momentum in the automotive market is grossly exaggerated. With the novel coronavirus hitting Tesla’s crucial market for its made-in-China Model 3s, I see zero chance that Tesla will deliver 500,000 units in 2020, as Musk claimed on Tesla’s conference call two weeks ago.
When the fundamentals diverge from the stock price it is a trading opportunity. But determining fundamentals requires good, old-fashioned research, and even today there are key facts that are not being reported. So, for a consumer products company like Tesla that is valued mainly on its automotive business—the Powerwall energy storage business has shown solid growth while the legacy SolarCity business shrank almost 50% last year in an incredibly strong U.S. economy—it would be imperative to know how any cars Tesla is selling.
The 16-year-old me knew that in 1987 and the 49-year-old me is blown away by what is found when typing “Tesla sales January” into Google. Instead of a barrage of useful information, the top six Google search results are stories written for web-based news services and two of the top six stories, including number one, were written by….me.
Really? Doesn’t anyone else care? Tesla shares have had a parabolic run over the past two months, dominating financial and even social media and purportedly racking up the two most valuable trading volume days in the history of the U.S. stock market last week. And yet there seems to be little interest in seeking out the most basic data regarding Tesla. It’s extraordinary.
So, this is where the other part of my background, 11 years as a sell-side analyst following automotive stocks in New York and London, comes in handy. I will refrain from a rant here, but the research I read from Wall Street firms and the quotes attributed to Tesla analysts on CNBC reflect an incredibly sophomoric and unsophisticated approach to predicting Tesla’s earnings. Yes, hard as it may be to believe, those guys (they are all guys) are modeling Tesla’s earnings without reliable periodic unit sales data, either.
The data I have been able to find and analyze in Forbes—registrations in Europe and BEV competitors’ sales in China—have pointed to a very, very slow January for Tesla in two of its three key geographic regions. Amazingly, U.S. monthly sales and production data for Tesla is not readily available. Of course, there would be hundreds, maybe even thousands, of people split between Tesla’s production facilities in Fremont, California and Sparks, Nevada (and now Lingang, outside Shanghai, China) who are privy to that data, and quite a few in Tesla’s corporate headquarters in Palo Alto that have have access to that data on aggregate basis every day.
What I learned during my time visiting auto plants all over the world and test driving cars on every inhabited continent is that automotive profitability is built through steady production. This is what makes it, to use Musk’s word, sustainable. Linespeed, cadence and frequency of off-line assembly are the key drivers of profit margins. The revenue side is important, too, but ultimately the consumer will set the price, even for a car with the cool factor of a Tesla.
So, dumping a bunch of cars in the final month of each quarter is no way to earn an adequate return on invested capital—which Tesla has never done—and no way to achieve 500,000 units of sales. Tesla sales have been subject to intense cannibalization of new models by old (as evidenced by the decline in sales of the Model S and Model X in 2019 as the Model 3 was fully propagated) and to first-adopter demand followed by a decline in consumer interest.
So, there are some of us trying to divine how many cars Tesla sells every month. That has brought about an unholy alliance between those of us who believe Musk’s company is wildly overvalued and those who believe that Musk can do no wrong and are wildly pro-Tesla. I don’t care. I have industry data sources that I have cultivated over 27 years that are proprietary to my firm, Excelsior Capital Partners, but I also read everything that is on the Internet. I have never bashed any of the Tesla “fanboy” sites in this column, and as long as they keep revealing information that is germane—including sales data—I never will. My job description requires nerdiness; nerds respect the work of other nerds.
But it is really distressing to me that the stock market is embracing opacity, especially at the margin. Apple stopped reporting iPhone unit sales and its stock has more than doubled since then. It doesn’t always benefit valuation, as GM’s decision to cease reporting monthly sales data has coincided with even more underperformance for its stock, but it’s a move in the wrong direction.
Inefficiency is caused by incomplete information. Gordon Gekko and Bud Fox used that to their advantage in Wall Street, but, as someone who worked on the real Wall Street for many years, I can assure readers that information can be just as costly as it can be lucrative. So be careful when buying stocks based on mania instead of data.