I’m watching the inflation of the great Tesla stock bubble with great amusement. I never dabble in the stocks which I write about so I can afford to spectate with anticipation of the grand finale. The higher it goes, the more compelling will be the story of its downfall. It’ll make for a great book one day. How did Tesla’s stock get to this point and who was driving the big deception?
It’s recent run up notwithstanding, Tesla is still a company in financial shambles. The two things that have helped the stock price increase are temporary blips. First, the profit last quarter. Since the release of more financial data we can now see that this was driven largely by accounting gimmicks. It was evidenced by plummeting revenue on greater unit sales.
This is still a company that hasn’t found a way to sustainably manufacture cars at a profit. This is a huge problem. Second, the record deliveries announced last week. Well, guess what happens when 12/31/2019 is the expiration date for thousands of dollars of tax incentives? That means people who probably would’ve purchased a car in 2020 move up their purchase to take advantage of the soon-to-disappear rebate. If you take just the country of Norway out of the picture, Tesla would’ve had declining unit sales from the previous quarter.
Tesla paid for this record delivery quarter by giving up 2020 sales. Nothing has changed. Demand is still trending down as evidenced by lower average selling prices. And now Tesla is going to face new competition in 2020 with an increasingly obsolete product portfolio. It’s about to go from bad to worse for Tesla’s investors.
And the root of the problem for Tesla’s investors is the fact that the stock price isn’t tied to any real profits. Normally, I like to say that the stock price reflects the present value of future profits. However, Tesla has never had a single profitable year. Even though they occasionally show a quarter or two of profit, these are largely due to income statement manipulation of the timing of payments or revenue recognition. They aren’t real profits and are swallowed up by losses that many times larger. In fact, Tesla’s annual losses are larger than ever.
Long ago in my younger days, I used to work as an International Inventory Specialist for the Amway Corporation. I spearheaded ERP system implementation for the inventory modules when we opened a new international subsidiary. Working for a company like Amway, which was often accused of perpetuating a pyramid scheme, meant I received a lot of training on what was the true nature of a pyramid scheme.
Here is the crux of what makes up a pyramid scheme. The profit is dependent on attracting new investors and not related to the profits from selling products. Amway always made the point to explain how all Amway distributors derived their sales commissions from the profits from the products. Even if Amway was never to attract new distributors, all current distributors would continue to receive commissions from the sales of the products which get delivered.
In a true Ponzi scheme, all profits are dependent on attracting new distributors or investors. The “commissions” come from the fresh infusions of cash from these new distributors. There isn’t any profits from the business to support payments to distributors or investors.
This is exactly what we see with investors of Tesla. Since the price of Tesla is disconnected from real profits and performance, it’s dependent on attracting new investors. Tesla investors get their wealth from convincing someone else to buy in at a higher price. This is Ponzi 101.
The normal argument of buying the future profits of a company don’t apply to Tesla because Tesla has never been valued based on fundamentals. There is no history of producing products at a profit and sharing those profits with their investors via dividends. Tesla’s stock value is not derived from the manufacturing and selling of durable goods.
This is different from other Wall Street companies. If you own shares of GM or Apple, you still get your share of the profits in the form of dividends. If you own stock in GM or Apple, it’s not a Ponzi scheme because you are buying the profit that is derived from delivering products or selling services.
Even if Wall Street delisted Apple, investors would still get their share of Apple’s profits via dividends. Apple shareholders are not dependent on someone in the future believing Tim Cook’s story and buying in at a higher price. They simply need Tim Cook to be a competent manager and sell more products at a good margin. No “story” required.
This is not the case with Tesla. And it appears farther away than ever. Instead, if you buy stock in Tesla, you are buying a story from Elon Musk and your profits are derived in the necessity of new investors buying into that story. Tesla is a Ponzi scheme destined for a spectacular fall. My guess is by the summer of 2020 we’ll at least start to see some cracks in the façade as the reality begins to dawn on investors.
Even now, it’s already begun. After Tesla’s most recent announcement of an engineered profit guess who refused to buy more shares of Tesla stock? The current crop of large institutions. None of them added to their positions. Very interesting.
There’s a scene in one of my favorite TV Shows, Star Trek Discovery, that sums up my view of Tesla’s stock price pretty well. The heroine of the series, Michael, gets a visitation from the future from her mother. The scientific minds put together a plan to “capture” her while she is in the present and keep her from returning to the future. However, they soon find out that the longer she is in the present, the greater the natural forces are building up to return her to the future. No amount of energy in the present can keep her from eventually snapping back to where she belongs in the future.
This reminds me of Tesla’s stock price because the company is over-valued. Musk and his associates can plan and scheme all that they want to artificially elevate or prop up the stock price. And it may work in the short term.
But eventually, no amount of manipulation can prevent market forces from forcing a correction. Market forces will eventually win and the longer Musk puts off the inevitable, the more violent the swing to the proper valuation will be. The big question is when.
Valued like other automakers, Tesla is at best a double-digit stock price.
This is still a company that hasn’t found a way to sustainably manufacture cars at a profit. This is a huge problem. Second, the record deliveries announced last week. Well, guess what happens when 12/31/2019 is the expiration date for thousands of dollars of tax incentives? That means people who probably would’ve purchased a car in 2020 move up their purchase to take advantage of the soon-to-disappear rebate. If you take just the country of Norway out of the picture, Tesla would’ve had declining unit sales from the previous quarter.
Tesla paid for this record delivery quarter by giving up 2020 sales. Nothing has changed. Demand is still trending down as evidenced by lower average selling prices. And now Tesla is going to face new competition in 2020 with an increasingly obsolete product portfolio. It’s about to go from bad to worse for Tesla’s investors.
And the root of the problem for Tesla’s investors is the fact that the stock price isn’t tied to any real profits. Normally, I like to say that the stock price reflects the present value of future profits. However, Tesla has never had a single profitable year. Even though they occasionally show a quarter or two of profit, these are largely due to income statement manipulation of the timing of payments or revenue recognition. They aren’t real profits and are swallowed up by losses that many times larger. In fact, Tesla’s annual losses are larger than ever.
Long ago in my younger days, I used to work as an International Inventory Specialist for the Amway Corporation. I spearheaded ERP system implementation for the inventory modules when we opened a new international subsidiary. Working for a company like Amway, which was often accused of perpetuating a pyramid scheme, meant I received a lot of training on what was the true nature of a pyramid scheme.
Here is the crux of what makes up a pyramid scheme. The profit is dependent on attracting new investors and not related to the profits from selling products. Amway always made the point to explain how all Amway distributors derived their sales commissions from the profits from the products. Even if Amway was never to attract new distributors, all current distributors would continue to receive commissions from the sales of the products which get delivered.
In a true Ponzi scheme, all profits are dependent on attracting new distributors or investors. The “commissions” come from the fresh infusions of cash from these new distributors. There isn’t any profits from the business to support payments to distributors or investors.
This is exactly what we see with investors of Tesla. Since the price of Tesla is disconnected from real profits and performance, it’s dependent on attracting new investors. Tesla investors get their wealth from convincing someone else to buy in at a higher price. This is Ponzi 101.
The normal argument of buying the future profits of a company don’t apply to Tesla because Tesla has never been valued based on fundamentals. There is no history of producing products at a profit and sharing those profits with their investors via dividends. Tesla’s stock value is not derived from the manufacturing and selling of durable goods.
This is different from other Wall Street companies. If you own shares of GM or Apple, you still get your share of the profits in the form of dividends. If you own stock in GM or Apple, it’s not a Ponzi scheme because you are buying the profit that is derived from delivering products or selling services.
Even if Wall Street delisted Apple, investors would still get their share of Apple’s profits via dividends. Apple shareholders are not dependent on someone in the future believing Tim Cook’s story and buying in at a higher price. They simply need Tim Cook to be a competent manager and sell more products at a good margin. No “story” required.
This is not the case with Tesla. And it appears farther away than ever. Instead, if you buy stock in Tesla, you are buying a story from Elon Musk and your profits are derived in the necessity of new investors buying into that story. Tesla is a Ponzi scheme destined for a spectacular fall. My guess is by the summer of 2020 we’ll at least start to see some cracks in the façade as the reality begins to dawn on investors.
Even now, it’s already begun. After Tesla’s most recent announcement of an engineered profit guess who refused to buy more shares of Tesla stock? The current crop of large institutions. None of them added to their positions. Very interesting.
There’s a scene in one of my favorite TV Shows, Star Trek Discovery, that sums up my view of Tesla’s stock price pretty well. The heroine of the series, Michael, gets a visitation from the future from her mother. The scientific minds put together a plan to “capture” her while she is in the present and keep her from returning to the future. However, they soon find out that the longer she is in the present, the greater the natural forces are building up to return her to the future. No amount of energy in the present can keep her from eventually snapping back to where she belongs in the future.
This reminds me of Tesla’s stock price because the company is over-valued. Musk and his associates can plan and scheme all that they want to artificially elevate or prop up the stock price. And it may work in the short term.
But eventually, no amount of manipulation can prevent market forces from forcing a correction. Market forces will eventually win and the longer Musk puts off the inevitable, the more violent the swing to the proper valuation will be. The big question is when.
Valued like other automakers, Tesla is at best a double-digit stock price.
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