Welcome to Investing for Beginners podcast this is episode 36, I’m David Ahern, and Andrew Sather’s here as well. Tonight we’re going to talk about Tesla.
Tesla’s going to be our whipping boy tonight, so I’m going to start off by chatting a little bit about an article that Andrew forwarded to me. He subscribes to the Stansberry digest, and Porter Stansberry is one of Andrews mentors and one of his favorites
He sent me this email a few weeks ago that was kind of awesome, and it talks a lot about Tesla. So I thought that would be a great place for us to start and we’ll just kind of riff off of that.
So I wanted to talk a little bit about just kind of quote here from the article real quick and then we’ll kind of get into it as Porter says.
“As we explained many times. It’s not that we have a problem with the electric carmaker’s products rather it’s Musk’s questionable ethics and the fact that it’s simply a terrible business Tesla has missed virtually every manufacturing deadline and sales target it has ever set.
It loses money on every car it sells, I’m going to say that again it. Loses money on every car it sells. despite forcing taxpayers to subsidize a huge portion of the cost and has burned through nearly 10 billion since 2012, 10 billion, holds another 10 billion in debt and has never ever turned a profit.
And yet somehow we’re supposed to believe the company is worth more than 56 billion today. I believe it is the largest by market cap automaker in the United States as we speak today.”
Which is just obscene, so I think those facts kind of speak for themselves. But I know Andrew has a few things you’d like to say about this, and we’ll get going
Andrew: oh yeah, I mean that fires me up, so it was a very timely email to because one was it back in October 3rd, so that’s when I got this email from them. And then today it’s the 14th when we’re recording this, and it’s big in the news right now that Tesla just laid off 400 workers.
So when you talk about like the whole ethics of Tesla, the company and you know obviously we’re going to get into the financials and the valuation and the stock price and how all of that relates to itself. And so you have to know just like we talked about with snapchat and one of our previous episodes just like we’re always pounding the table about how there are these bubbles.
There’s been bubble mania, tulip mania all these sorts of things that we’ve seen historically and Teslas like a spitting image of that. Today with the way that its stock price has gone and what it’s continuing to do despite the fact that like you just said they are losing money.
Not only from a complete earnings perspective as far as total annual earnings but their car sold. That’s kinda ridiculous, and that’s bad, and a reason that I have such a big problem with it is not only is it against what I how I try to invest.
Obviously, I’m always we’re always talking about going for a margin of safety with the emphasis on the safety. So preservation of our capital is number one, we’re trying to get into these companies that are very strong financially, and Tesla unchecks all those boxes. It’s not in a great strong financial position, it’s not creating lots of earnings and profits and dividends for its shareholders.
Not only that but there’s like the email said there’s like a moral, ethical side to this that that’s not discussed much. And you know I’ll be far from the first person to say that I’m some altruistic guy who has great intention. You know I’m not like the Pope okay, I’m very, very selfish and a lot of the things I do are very stuff selfishly motivated. Then I’ll admit to that however there’s a bait there’s an underlying sense of human responsibility and like empathy, you need to have to understand that there’s a lot of people whose lives and livelihoods are at stake.
When it comes to the way certain corporations are run and so I think Tesla falls into that category of being run in a way that is not responsible and not a prudent thing and it’s not good for shareholders.
Shareholders need to examine that and put the power on their side and understand that they need to recognize if a business is doing yourself good. if it’s treating you right then then you recognize that and you feel safe putting your money into that.
I don’t think Tesla’s in that situation and number two, I feel like there’s a responsibility to the workers there. you don’t want, I don’t know Elon Musk personally and I don’t know you know I don’t want to comment on whether he’s doing a bad job or not. But the fact of the matter is it’s pretty obvious that there’s a big focus on growth and it seems to be growth at any cost. And you know we’re we saw them take a ton of money from the government. they continued to take money this time from investors and that’s how they’ve been able to finance a lot of these losses and sure that works fine in the short term.
And it can make shareholders right now are making a lot of money but it’s all short-term and so if there’s a bubble that’s forming. And historically we’ve seen bubbles and the way bubbles work is at the end of the day a lot of people get left holding the bag.
Those people are going to be shareholders by definition if a bubble pops more people are going to be losing money than less. and so while they’re all seen profits in their in their portfolio now. if it not real if it’s not based on fundamental principles, the real financials of a business and the business growing in a real way and not just because there’s a lot of hype.
Then you’re going to have a lot of people lose a lot of money once the whole thing pops. so again there’s it’s not the right way to treat shareholders that are trusting and putting a lot all of their money into this company and employees too. because employees are obviously working hard and if you’re building a business model that’s more focused on trying to grow that revenue in that top line rather than create sustainability and create a comfort level that and the stability that when things don’t go right from our earnings or a revenue perspective.
you still have that cushion that be able to keep employees employed and obviously, with what’s going on in the past week we’re seeing the consequences of running the business that’s so focused on growth that you’re building all this hype and you’re you’re kind of taking all other sorts of practical wisdom and just kind of tossing it aside.
you know let’s be honest in it’s all being done to prop up Elon Musk’s name, to prop up and show how innovative and how much achievement he’s been able to do. and while it’s not necessarily wrong I don’t think it’s right to sacrifice the shareholders and the employees just to make that happen.
Dave: agree with 100% what you were saying a hundred ten percent. you know one of the things that were Buffett and Charlie Munger talked about in several of their writings and speeches that they’ve given is when you look at the CEO is it more about him or is it more about the company and the shareholders.
I would argue that in this case it’s more about him than it is the shareholders or the company.
let’s talk some cold hard facts here for just a minute so one of the things that that Musk has been promising people it is this model 3 sedan which is kind of their new car or was supposed to be a more cost-effective, cheaper lower end version that they could produce more of. And that more people could buy, the average person could buy and he promised that they would produce 100 units in August, 1500 in September and a huge 20,000 per month by December.
By the end of the quarter in September they had made 260, that’s it, and that’s it. I mean you know according to Carrie who’s the executive publisher for Kelly Blue Book, that ramp up that he was promising his shareholders and the people that bought these cars is unprecedented even among experienced high-volume carmakers like GM, Ford.
You know Volkswagen any of these people that are doing this you know they can’t even match that production level. So oh you know for people to buy into what he’s selling is just its sad and you know he’s the fulfilling his promises by any stretch of the imagination.
You know there’s all kinds of articles coming out on Seeking Alpha about the production problems are having with this car. and this was supposed to be the car that was really going to put them on the map and you know Andrew was talking a lot about the growth and what kept popping into my head well why I was listening to him talk is what growth? What is he making that there’s no assets in this company, there’s none.
It’s so completely overvalued at this point that the price has really gotten to the point now where it’s all about him and what he says he can do.
yeah with the actual ability of the company to produce what he’s saying he can do and I’ll give him props for being a great salesman he’s obviously a great salesman and yeah obviously he has his followers but the proof is in the pudding and it’s not coming up with what he’s saying he can do and this isn’t just a one-time thing.
This is since the company was founded and it’s been like this over and over and over again. and another thinking that I want to add on to what I’m talking about is there have been in the last two or three weeks there have been announcements from the big you know experienced car producers like BMW, Volkswagen who else was it there was another GM have all announced that they’re planning on going almost all electric cars by2020 or 2025.
That they’re going to stop producing gasoline engine powered vehicles so you think about the resources and the experience that these companies have this is just going to bury Tesla. And you know at some point the bubble is going to burst and people are going to lose so much money and it’s sad and it’s become a company now or I think people are more gambling on shorting the company as opposed to thinking that it has a long-term growth and her long-term plan.
yes if you had bought it when it first was came out you would have made a lot of money but it’s fool’s gold and you know it’s not worth speculating on and this is in my mind is completely 100% a speculation and all the all the metrics that Andrew and I have talked about time and time again.
You can’t even calculate them with this company because they have zero earnings. They’re making no money they’re losing money, I mean you think about yourself if you had, if your checking account was negative- $10,000. Would any would you be able to live anywhere no would you be able to buy any groceries, no. would you be able to buy gas or go out to dinner with your wife, no.
None of those things and so that’s really what this company is operating on their operating on the good graces of other people because they’re losing money. I mean just kind of wrap your head around that for a minute the fact that they have not made a single penny since they’ve started out I mean even companies that you know people will bash and talk about how boring they are like Colgate is making tons of money.
But Tesla who’s exciting and it’s sexy and they have not made one penny for their shareholders, not one. it’s just it’s a scary, scary proposition for me.
Andrew: yeah there’s so much in there that I’d love to talk about specifically you know you said that there are a lot of people who are shorting the company and betting that the company is going to fail. Because a lot of you know while a lot of people are just throwing their money and kind of buying into the hype.
You’ll even see online people will say yeah I’m buying because it’s Elon Musk like there’s no like it gets just literally like fanboy is just throwing money away.
if you look at like a simple metric that that tells you how much people are shorting there’s a metric called short flow and this is on finviz right now it’s at 24.15 percent which is very high.
a lot of people are betting that the company is going to go down and that this isn’t sustainable. what’s interesting about that and something you should understand about when there’s a lot of shorts is that that’s what actually causes the stock to pop up really quickly at times.
so they’re called like short squeezes so when the stock gets like forward momentum and you’re shorting it then because the way shorts work is you’re borrowing money to bet against the company. And so if you start to lose money on that short position the broker is going to call you up and tell you need to put more money down as collateral or else we’re going to close your position.
what that does is it squeezes the people who are shorting the stock and so as those what they call margin calls as those margin calls come in some people aren’t able to make those margin calls or than I able to put capital whatever it may be so it’ll it will push that stock up even higher because that short position gets cancelled and so you’ll have like these really high increases in just a couple of days and so that’s why you’ll see Tesla on the news a lot. And they’ll be talking about how oh you know Tesla went up 10 percent today, 12 percent today.
it’s because must said this or you know it’s because of the new model 3 coming out when in reality a lot of the stock gain is coming because of these short squeezes. So at the end of the day if what Dave and I are saying is correct and a lot of these shorts believe is that this company is crazily overvalued.
Well sure that you might see these short squeezes and these and this kind of run ups here, in the short term. But over the long term is this really a company you want to be owning until 2020, 2025 when they’re going to have steep competition.
They’re not turning a profit even though they said that they would be turning a profit at this point and it’s just all the numbers are showing that it’s just what Musk has been doing this whole entire time.
He’s been over-promising under-delivering and it’s going to really hurt a lot of shareholders, and so it’s one of the big reasons why we’re so adamant about you know you can go into the market.
And sure you know guys like us we don’t know everything about the market we don’t you know it’s impossible to know every single analysis about every single company. we’re not trying to say were the next Warren Buffett’s or anything like that, but we do recognize that you can give yourself a significant advantage over the average investor by simply staying away from these companies that are screaming that you shouldn’t buy them.
yet people time and time again throw money into them, and so yes while the stock has grown a lot.
Yes, tesla is a very cool car you know they’re saying how it can go zero to 60 in under 30 seconds it’s quite extraordinary, but at the end of the day this is you putting money into the stock market. This is you buying ownership, buying shares as a part owner of a company and these are things that you need to consider.
So another point you made Dave, was that this company has no assets and I completely agree. If you look at one of the simple valuations, you know if you’re a beginner and you don’t know where what valuations to start at. when we’re talking about valuations or what metrics to start at when we’re talking about metrics either listen to the episode, we did we did a complete episodes, a complete guide on valuation and a lot of the valuations you’ll hear us talk about in the whole show you can hear about there. Or you can also download the e-book at stockmarketpdf.com that goes in the middle and the end of the episode that you hear about you can read that ebook and it will also tell you about these metrics that we’ll discuss.
So when we talk about assets and we talk about a company’s price to book is a good way to look at the relation of a company’s assets to how expensive it is.
so if it’s a very high price to book that means either it’s doesn’t have many assets or there’s a ton of liabilities that go along with their assets or the company’s really expensive compared to its assets or a combination of all three. so I mean in the sense of Tesla a lot of it is really just being low in assets and high in price the price to book. right now according to finviz is11.5, to give you some perspective on that I’m looking at the rest of their competitors, these auto manufacturers that are at least 10 billion or more so it’s like you know significant.
but we’re not talking about little players but big players in the auto industry the rest of these guys. let’s see well there’s Toyota at one point one, Tata I don’t know who that is but that’s 2.6 and there I guess they’re in India and they have a huge market cap so this huge company. General Motors 1.5, here we got Tesla 11.5 and then you got like Honda 0.82, Ford’s at 1.4, and then the only other company that’s like at just as high of a price to book as Tesla is Ferrari.
So you have all these competitors and they have these assets, so it’s like a real business with real value and then you have Tesla. And Tesla has just been getting all of this attention and like they’ve said their negative earnings, they have little assets.
If you look at being like price to sales they’re like 5 to 10 times more expensive than the than these other competitors on the price to sales perspective as well.
so a lot of different things that are going wrong for it besides just the fact that you know it’s losing money on every car manufactured so these are some of the type of things that you should look for that will signal to you that yes not only is the company possibly a bubble because a lot of people agree it is.
But these are the cold hard facts, these are the numbers these are the numbers that everybody can see that are in our company’s financials that tell us that. yes this company is not a good investment and it would be best for me to keep my money away from it, so that when the bubble does pop. I’m not left holding the bag.
Dave: exactly you know and Sasha gave a really good analogy for why you should not invest in a company like this because a lot of people out there we’re probably saying. Well yeah, if I if I buying it now, if I set a trailing stop on it and then I can just get out of it.
Well, it’s not quite the always that easy and there are a limited amount of buyers and sellers in the market and the way the stock market works is for every time you have to sell, you want to sell a company. There has to be somebody willing to buy it and if the bubble bursts on Tesla and it will. Then you may get left caught holding the bag just because he used an analogy of if you’re in a room and somebody pulls the fire alarm and everybody tries to get out of the room and there’s only one door in the room. Only so many competing get out at a time and it’s kind of like a balloon, the air is going to go out one place and it only so much air is going to go out of this at a certain time.
and so it’s only so much can get out and it’s kind of the same situation with this so you know if you’re one of these people that buy it and you expect it to go up and let’s say it does go up for a period of time and you’re thinking sweet this is awesome. I’m going to make all this money, but the flipside is that if it does burst and you’re on vacation or you’re not paying attention you could lose everything because if you’re not on top of it 100% of the time then you can really get burned.
I’m not saying that that couldn’t happen in the stock market overall but it’s something in a situation like this where it’s just so obviously a speculation. It’s something you’re going to have to watch every single day and are you really committed to doing that and that’s really where it can really bite you in the butt.
That’s why you know Andrew and I stay away from these kinds of things and that’s why we talk about companies like this and snapchat is because they are it’s all hype. there’s no real assets there’s, nothing there’s nothing there that you’re really buying you’re buying a stock you’re buying a business. it’s simple economics and when you buy this kind of stuff you’re speculating you’re gambling.
And you know like Andrew was saying about the fanboy, you’re much better served to go out and buy the your favorite album or two and listen to that for the rest of your life because you’re going to get far more enjoyment out of that then you are the money you’re going to blow on investing in Tesla. it’s just not a good investment, it’s just it isn’t.
And I’ll give you another a little quick story and then I’m kind of out an info for me. so you guys all know I used to work for a bank. I remember very vividly one day a couple came in and wanted to borrow some money to buy a car and I thought okay great, we could all help you with this. so we sat down and we started talking and I asked them what kind of car do they want to buy.
they said we want to buy a Tesla, I said okay and I really didn’t know that much about the company or the car. I’d heard of him but I wasn’t really connecting, anyway so we got to the point of the interview where I have to ask them all these questions and the question I had to ask him at that point was how much do you need do you guys need to borrow and they said a hundred thousand dollars! I said, I’m sorry and they said we need yeah that’s how much the car costs and I thought well yeah this is going to be difficult. so that is an amount that was above my limit, so we had a private banker who was also a licensed banker, and I went chatted with him for a minute and suggested that maybe these people should sit down with him because he has a bigger limit that I can borrow.
They went over and sat down with him and he did a little more digging and he found out that that they were going to, they wanted to buy this car but here was the kicker. They had to borrow a hundred thousand dollars but they weren’t going to get the car for three years!
so they were going to pay on this loan for three years before they’re going to get that car and of course Wells Fargo who I worked for at the time was like not going to happen. they a didn’t make enough money and we were never going to allow them to you know buy that car.
they just because the bank has to have an asset if there’s ever a default on the loan so they can try to recover their money.
you think about that for a minute, that that’s their business model is that they got people coming in floating this money, waiting for these vehicles. so you know when Elon Musk goes on TV and talks about all this production, he’s selling these cars and you can argue about the you know ethical aspect of this.
but these people are trying to borrow a hundred thousand dollars to buy a car that they’re not going to get for two or three years or longer because the company can’t produce them fast enough.
so you know just wrap your head around that for a minute.