Since listing publicly for the first time in June of 2010, Tesla (NASDAQ: TSLA) has been driven by the innovative brilliance of billionaire inventor and investor, Elon Musk. As if being co-founder of PayPal wasn’t enough to establish his genius, Musk has gone on to pioneer innovation through various other ventures including his aerospace company, SpaceX. Needless to say, I’m a fan – but I can’t say the same about Tesla stock.
If you’re a growth investor then you probably love Tesla, especially if you got in early. If you’d bought $1 000 of Tesla stock at its first IPO in 2010, it would have been worth $147 400 by August of 2021. That’s an annual compound growth rate of 45%, which is not bad, to say the least. So that’s the bullish case for Tesla but that’s where it ends for me as a value investor.
According to Warren Buffett, value investing in a nutshell means assuming two things when buying a stock: first that you’re buying the entire business, and secondly that you’re buying to hold for life. In his annual letters to the shareholders of Berkshire Hathaway, the Oracle of Omaha has consistently emphasised that his model for looking for long-term value means considering only businesses that are trading at a significant discount to their perceived intrinsic value, have shown consistent earnings power, and earn good returns on equity while employing little or no debt.
Based on the above, I would not buy Tesla stock at its current price based on pure fundamentals. At a current price-to-earnings (P/E) ratio of 414, this stock is trading at an incredibly high premium relative to what it’s actually earning. By comparison, when Buffett bought Apple in May of 2016, the P/E ratio was approximately 10.39.
Of great concern to me is that in reality, Tesla has little to no competitive advantage. The car manufacturing industry has always had notoriously poor economics by virtue of its highly competitive nature. This is due to the high capital expenditures and research and development costs required just to stay afloat in this industry. Tesla is highly dependent on the automotive sales part of its business and therefore is no exception.
Of the $31.5 billion that Tesla made in revenues in the second quarter of 2021, it netted just 2.2% of that (which is an improvement considering it netted negative zero in literally every other year before that) and 81% of its revenues were generated from their automotive sales division. Bottom line – Tesla does not make money and the little it does make is from one of the most competitive industries in the world where it has no evident advantage.
To bolster this point, Tesla has a market capitalisation of $786bn, making it the largest car manufacturer in the world in terms of valuation, but it doesn’t even make the top 10 on the list of largest car manufacturers in terms of actual revenue. It also carries incredibly high amounts of debt on its balance sheet right now, and of concern is the frequency of share issuances in the last couple of years, which have diluted the overall value of Tesla stock.
In conclusion, any bet on Tesla on my part would be based purely on Musk’s ability as an individual. The actual underlying economics of Tesla as a business leave a lot to be desired in my opinion.