Elon Musk is reducing his ownership stake in Tesla Inc. TSLA-Q to focus on other opportunities, raising the question of whether besotted investors should follow his lead.
Mr. Musk, of course, has been having a good run as an entrepreneur and chief executive. Driven largely by his large stake in Tesla, he has become the world’s richest person.
Investors who have sided with him have done well, too.
The electric carmaker’s share price has soared nearly 1,700 per cent over the past three years alone. A US$5,000 bet on the company in April, 2019, would now be approaching US$92,000 – easily enough to pay for a Model Y.
That is, if you decided to cash out of your investment rather than hold on for, well, what exactly?
After striking a deal to buy Twitter Inc., Mr. Musk sold US$8.5-billion in Tesla shares to help finance the US$44-billion takeover. He also sold more than US$16-billion worth of shares last year.
Admittedly, this is a small slice of his holdings. He still owns about 16 per cent of the car maker, making him the company’s largest shareholder.
Still, you have to wonder about the bullish case for the stock if Tesla’s enigmatic leader – arguably a key factor in attracting investors to the stock – is looking elsewhere for opportunities.
Yes, Tesla has revolutionized the market for electric vehicles (EVs) and remains a clear leader. People love the cars. The Tesla charging network appears to be years ahead of competitors.
But Tesla isn’t alone in this market any more.
More traditional car makers are getting serious about EVs, with affordable models emerging from the likes of Hyundai, Kia, Volkswagen, General Motors, Ford and Toyota – in additional to high-end offerings from BMW, Audi, Porsche and others. And Ford is now introducing an electric version of its hugely popular F-150 pickup truck.
As the market becomes crowded with viable alternatives (full disclosure: I own one of them), many of the numbers underpinning Tesla make less sense.
The company’s market capitalization, or the value of its outstanding shares, is about US$910-billion. That’s double the combined market capitalization of Toyota Motor Corp., General Motors Co., Ford Motor Co. and Volkswagen AG.
Yet this overwhelming size isn’t justified by Tesla vehicle sales. U.S. deliveries (which the company does not disclose) were estimated at 330,000 in 2021, according to Cox Automotive. That’s just 2.2 per cent of the 15 million new vehicles sold in the United States last year, or a fraction of vehicles sold by GM and Toyota.
Gaining significantly more market share is a challenge. While Mr. Musk once promised EVs priced at a more reasonable US$35,000, the cheapest Tesla Model 3 now sells for US$47,000 (before incentives, but not including pricey self-driving software).
The high prices suggest that the brand remains largely out of reach of most car buyers, which limits the company’s growth potential.
Yes, Tesla’s growth is impressive nonetheless. Global sales increased 87 per cent in 2021. Mr. Musk told shareholders last week that he expects vehicle production to increase another 60 per cent in 2022.
But the stock’s valuation appears to reflect near-limitless growth that appears hard to justify. The shares trade at 74-times estimated earnings, according to Morningstar; GM’s price-to-earnings ratio is just 7.5. Tesla trades at 16-times annual sales; Ford’s price-to-sales ratio is well under 1.
If 2021 market volatility has delivered a key lesson to investors, it’s that valuations matter. As interest rates rise, particularly lofty stock valuations have been compressed as share prices have fallen.
Tesla’s stock – which is hugely popular among retail investors – is one of these casualties: Its share price is down nearly 28 per cent from the intraday high in November, suggesting that industry-leading sales growth is no match against central-bank monetary policy.
Now, investors must also weigh another potential threat to Tesla’s valuation: Mr. Musk is focused on remaking Twitter as he attempts to lower barriers to free speech at the social-media platform, which banned former U.S. president Donald Trump last year.
Whether Mr. Musk can embrace the importance of fringe views without offending the environmental sensitivities of many EV buyers – who have options at other car makers – is an open question.
Sure, loyal Tesla investors see Mr. Musk as a genius without parallel. It may be true. But the genius is now selling his Tesla shares.
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