That’s more than bitcoin… gold… and Facebook (FB)… Amazon.com (AMZN)… Apple (AAPL)… Microsoft (MSFT)… and Google (GOOG) – combined.
I (Chris Lowe) got my start as a financial analyst for Bloomberg competitor Reuters back in 2001. And I don’t recall anything like this.
Tesla now has a market value of $523 billion. That’s more than the world’s five next largest automakers combined.
It’s made Tesla’s founder and CEO, Elon Musk, the second-richest man in the world after Amazon founder and CEO Jeff Bezos.
So today, I’ll try to answer the obvious question: How did the Tesla haters get it so wrong?
Early last year, investor sentiment was so banged up, you’d swear Tesla was going out of business.
Here’s a small sample of the negative Tesla headlines around that time…
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“JP Morgan Is Back to Predicting a Tesla Stock Plunge Because Funding Was ‘Not Secured’” – CNBC, August 20, 2018
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“Tesla’s Troubles Mount: Shuttered Showrooms and Sinking Shares” – The New York Times, March 6, 2019
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“Morgan Stanley Slashes Worst-Case Price for Tesla to $10” – Bloomberg, May 21, 2019
It’s easy to see why so many folks were so bearish.
The company’s share price had gone nowhere over the previous two years.
And Musk was embroiled in a media scandal over smoking cannabis with Joe Rogan on Rogan’s podcast.
Musk had also just forked over $20 million to settle a case with the Securities and Exchange Commission (SEC) for a tweet about having secured funding to take Tesla private at $420 a share.
TSLA was trading at $384 a share when Musk tweeted this. So he was claiming there were buyers at a 9% premium of the share price. And Tesla shares rallied on the news.
Folks were going so far as to call Musk a fraud and Tesla a Ponzi scheme.
Musk had just laid off 7% of Tesla’s full-time staff to try to keep his company in the black.
You couldn’t open a newspaper… or switch on cable news… without hearing about production hassles with the company’s mass-market Model 3 sedan.
This was leading to long wait times for customers who had pre-ordered cars.
Wall Street was souring on Tesla, too…
Take Romit Shah.
He’s considered one of the top tech analysts on Wall Street. He’s also a regular guest on CNBC and Bloomberg. But he was probably best known as a Tesla bull.
In 2017, Shah was telling investors Tesla was “well-positioned to accrue most of the profits in the electric vehicle value chain.”
But in September 2018, he downgraded his rating on Tesla from “buy” to “neutral.” That’s Wall Street code for “sell.”
Then he went even further, telling folks the company was “no longer investable.”
That’s how I put it in the January 31, 2019, dispatch of the Cut.
You see, I wasn’t following mainstream analysts like Shah.
I was going by the bullish research our tech expert at Legacy, Jeff Brown, was sharing with his readers on Tesla.
Since then, Tesla shares have been on a rocket ride.
Instead of plunging, as the bears warned… they’re up 799%.
The big mistake they made is to think of Tesla as a regular carmaker.
Because as Jeff has been showing his readers, it’s really an advanced software and artificial intelligence (AI) company.
This puts it streets ahead of the competition when it comes to our self-driving future. Jeff…
Every other carmaker buys or builds an engine and a chassis, fills in the rest of the details, then writes software to assist in controlling the car. Tesla does the opposite. It has designed a software architecture – including AI – and built a car around it. The software comes first. The hardware… chassis, engine, tires, seats, etc… comes after.
This allows the company to “upgrade” each car several times throughout the year. Anytime Tesla has a software update for its fleet, it simply pushes it out… just as Apple does with updates to its iOS operating system on the iPhone.
With the competition, you have to bring your car back to the dealer to have your software update installed. It’s like having to trek to your nearest Apple store every time a new update comes out for your phone. Most of us don’t want to deal with that hassle. Tesla eliminates that by pushing updates straight to its cars on the road.
It pushed out a new update for its self-driving software… and Jeff says it’s a game changer.
He keeps a close eye on developments at Tesla over at his free daily tech-investing e-letter, The Bleeding Edge. Here’s how he explained it…
What’s unique about the release is Tesla chose to rewrite its autonomous driving AI from the ground up. It scrapped its previous version, already the most advanced on the planet, and rearchitected the software to perform even better.
Not many companies would do that. When most companies have something that’s already the best and still continues to incrementally improve, it’s rare to scrap and rebuild. But that’s why Tesla is such an incredible technology company.
Smartly, it took all of the self-driving data generated from roughly 4.5 billion miles cars using Tesla Autopilot drove, and it redesigned the architecture of the entire software code. I’m absolutely sure the new software architecture will outperform the “version 1” architecture of Autopilot.
History will mark 2020 as the year that gave rise to self-driving cars… just as Jeff predicted last December.
As I wrote to you about on Monday, successful investing isn’t about what you buy. It’s about what you pay.
And Tesla is far from cheap. As Jeff has been telling his readers, at today’s valuations, it’s a “pure speculation.”
TSLA trades at a price-to-earnings (P/E) ratio of 870. That means investors are willing to pay $870 for every $1 the company earns in profits in a year.
Contrast that with another fast-growing tech company, Amazon. It trades at a P/E ratio of 93.
That makes every $1 of Tesla earnings nearly 10 times more expensive than every $1 of Amazon earnings.
In December 2015, Amazon’s P/E ratio hit an all-time high of 1,011.
That’s even higher than where Tesla’s is now.
But Amazon would have been a great investment nevertheless.
It’s up 360% since then.
Over that time, Amazon’s P/E ratio has come down by 90% because its earnings have gone so much higher.
That’s the same bet Tesla bulls are making today. Rising earnings at Tesla will bring the P/E down and send shares rocketing even higher than where they are today.
Tomorrow, the Legacy offices are closed for the Thanksgiving holiday. And I’ll share some special essays on a very different subject – Legacy Research cofounder Bill Bonner’s son’s wine project in Argentina.
But next week, I’ll show you how Tesla’s addition to the S&P 500 index for the first time will act as rocket fuel for its shares.
I’ll also have more for you on a “backdoor” way to play the electric vehicle revolution… without having to buy a single auto stock.
So stay tuned for those updates…
Regards,
Chris Lowe
November 25, 2020
Bray, Ireland