Stay clear of Tesla (for now)
I am going to be very upfront here. I think Tesla is a cool company. I mean, it’s owned by the richest man on earth, and in my opinion, they produce some of the best electric cars out there. I mean, the cars look cool, they have a much better on-the-road charging network than most competitors, and for many, they are the first thing people think of whenever the thought of a futuristic car goes through their head. However, when it comes to investing it would probably be one of my last recommendations at this moment.
Tesla is ridiculously over-inflated
Under the best circumstances, I would classify Tesla as a risky stock pick. One of the easiest ways to decide that is by taking a quick look at Tesla’s market cap compared to others and then taking a look at sales compared to those same others. For this example, I will be using Ford, Toyota, BMW, General Motors, and Volkswagen. Here is the market cap of Tesla compared to all of those companies combined:
Now, as I am sure most of you know a company’s market cap isn’t the same thing as the company’s value, it’s what the market believes the value of the company to be. So Tesla’s market cap isn’t stating Tesla is worth nearly a trillion dollars, it’s saying that investors think that Tesla is worth almost a trillion dollars. As of September 24, 2022, Tesla sits as the 6th largest company in the world by market cap.
Now the simplest way to determine a company’s value is to look at its financials, how much money it brings in total (gross revenue), after taking out the cost of the goods (gross profit), and final profit after all deductions have been taken into account and taxes have been paid, net profit. Generally, net profit is considered a good indication of a company’s growth and overall value. Overall, using this method to determine value shows the company’s current value, and a rough estimation of possibly growth assuming no changes are made. Keep in mind that Tesla’s market cap being an evaluation based solely on Tesla’s financials would require that Tesla eclipse the other car companies by more than double. The following graph will be referencing Q2, 2022 for data.
Gross Revenue:
Gross Profit:
Net Profit:
After observing the graphs it becomes clear that despite having an enormous market cap far surpassing the other industry leaders a quick look at the financials shows a huge gap between where Tesla should be if based on the market cap and where it is. Because of this, it can be reasoned that Tesla has such a high market cap due not to what Tesla is today, but to what investors think it will be in the future. Many investors believe that electric vehicles will be the future, and in a decade or two, no one will drive gas vehicles anymore as we switch away from fossil fuels. Another reason for Tesla’s huge market cap comes from the fear of missing out, where people hear what Tesla will be in the future, look at it as the next bitcoin, and be so afraid of missing such a big opportunity that they invest in it. In fact, the reason I would normally put up Tesla as a risky stock pick but with the potential for high rewards is because of this. If Tesla ends up becoming huge in the near future it would definitely give a large payout.
Now, regardless of whether or not you think that Tesla is going to be the future of automation, Tesla is still extremely overinflated. Given Tesla’s current market cap, the bet that Tesla will blow up in the future is an uphill battle. The current market cap is the size of a company that dominates its industry, but with Tesla, they haven’t actually met this requirement yet. This means that even if Tesla does become the future of transportation which is a big bet no matter how you look at it, as of now you would be looking at a high-risk, low-reward investment that also ties up your assets for an undetermined amount of time.
Tesla has fallen 30.99% in YTD, which isn’t unusual considering the market is currently going through a bear market. In a certain sense, it might actually be good if you are looking to invest in Tesla because of how overinflated the stock is. Another thing you will notice by looking at the stock price over the YTD is how volatile Tesla is. This is because unlike a market cap based on current financials and a history of steady returns, Tesla’s market cap is mainly composed of the idea of it blowing up in the future. Since the basis of Tesla’s market cap isn’t formed from data in the same way as some other stocks, the stock will be heavily influenced by emotions. One way Tesla could work to counteract this would be by showing consistent growth and reassuring investors that Tesla is a steady and reliable company.
Now, think of yourself as a Tesla investor for a second. Understandably, you would want to stay informed about the happenings of the company you are invested in, right? What better way to accomplish that than following the CEO and largest shareholder, Elon Musk? Because of Elon Musk’s position as CEO, his focus is almost necessary for the company to function properly. Imagine your thoughts when you discover that your fearless leader is currently involved in a lawsuit over the acquisition of a completely unrelated company, launching satellites into orbit, and posting random memes. Notice the complete lack of anything related to Tesla. Not exactly inspiring. Elon Musks’ activities have been shown many times over to directly affect Tesla stock, like in the most current case of how despite not being linked to the trial other than through Musk, the Twitter trial consistently impacts Tesla with many seeing the trial as a huge distraction for their CEO.
Considering the current bear market and Tesla’s overinflation, I wouldn’t recommend Tesla at this time. However, it definitely has the potential for a high-risk high-reward stock pick given some time. Because of this, I recommend waiting on Tesla for now, but to reassess in a couple of months.