Investor Beware - The Dangers of Tesla's Stock

hey guys it's richard you're watching the plane bagel it's uh been a while since we've done a party pooper video um and the sort of reason for that you know as a channel i don't really want to focus on stock picks and things like that um i'm an analyst and i do that as a living but realistically you know i don't think i would even with that i don't think i would add value to the space i think there's a lot of noise i don't really want to add to that so i try to avoid talking about individual positions often but every now and then i'll see position in the media that's getting a lot of hype that new investors are buying into and especially when i think things are being a little irrational in terms of valuation i like to highlight the risks just to warn people about the downsides of these positions not to say that they're a cell or anything like that but just to say that hey be careful um anyway today's video is on tesla the stock for tesla is up nearly 700 year-to-date uh making it easily one of the best performers for you know companies at size and even avid holders should be aware that the stock is pretty expensive right now not only has the price grown much faster than its actual fundamentals but current multiples right now are just through the roof it has a forward price to earnings ratio for the next 12 months of 182.9 times and a forward price to sales ratio of 15.7 times for the record any price to earnings above 20 times is generally considered on the more expensive side and apple which is certainly a slightly slower grower but you know has larger margins and less debt um it has a forward pe for next year of 32 times and a price to sales ratio of 6.8 times so you can see that tesla is a very extensive stock in terms of multiples so what that means is that people who are buying tesla aren't really buying the stock for what it's going to do next year but they're buying it for the expectations for many years into the future you know they're paying a lot right now hoping that at some point tesla will dominate and not only is that normally risky you know you take any stock and if you are trying to buy it for what it's going to be in two to three years but paying a price today for that value in two to three years i not only are taking risk for downside for the stock to not meet those you know optimistic expectations but when you look at tesla specifically if you actually look at forecasts in terms of how many vehicles it uh it's going to be selling in the future namely 10 years from now the valuation doesn't actually make that much sense so i want to make this video to show people just how expensive the tesla stock really is and you know to demonstrate the risks faced by investors because i think a lot of retail you know traders are buying tesla right now as a theme stock you know just to get exposure to the electric vehicle space uh without really knowing what they're paying for it and i'm fully aware that there's a crowd watching this video right now thinking uh how fun dare you come after our lord and savior elon musk and his model 3 which is going to save the world you know there's a lot of passion behind the tesla stock and before you berate me in the comments section i implore you to just hear me out uh you know none of this is to attack people's intelligence as investors their integrity or their research as investors i'm not even you know staying here making a claim that i richard kaufman believe that tesla will fall i am really just here to highlight the risks and i think if you are an enthusiastic investor you should hear what i have to say it might not turn out as as you know i'm mentioning and the stock might continue to go up that's totally fine and you might disagree with what i have to say but just hear me out and you know please uh you know give me a chance so in today's video i'm going to cover what tesla has done to date in terms of its historical performance what's expected of it in the ev industry and how that compares to its current price and the risks that the company faces in achieving that future state also as a quick note i don't own tesla or i don't short the position this is purely just me you know doing a cursory analysis on the stock as an analyst for a company and sharing what my initial findings were but before we hop into that i do want to cover some assumptions i made with this video the first assumption i guess is that i'm using figures from december 18th so the past friday i take some time to put these videos out and i apologize but i will make a note if anything has exceptionally changed uh from that point the second assumption which i know i'm gonna get some pushback on is that tesla is a car company an automotive firm i know that people love to call them a battery or a power company but at the end of the day you know 94 of their revenues come from the automotive segment you know it doesn't really make sense to treat them as anything other than what they are ensure that you know other six percent might prove to be more valuable in the future but i think most people would agree that the 700 price run up we've seen is tied to the automotive segment not the other 120th of the firm the third assumption i guess that's probably not the right word the third thing is that uh i will be using forecasts from bloomberg and deloitte just a couple um to you know talk about what the industry is going to go into the future these forecasts obviously might not pan out as expected could be optimistic or pessimistic to what actually happens but for now i just kind of took these estimates at face value and i went from there and finally what's probably the most rough assumption i make with this video is that i assume that unit sales growth so the number of cars sold that growth rate will be equivalent to dollar sales growth this is simply to simplify you know the brief analysis i do and if anything it actually gives tesla the benefit of the doubt because the company is trying to lower the cost of its cars to consumers so by assuming that the company will grow as expected and be able to maintain the same car price should be kind of an optimistic assumption to have but with all that put aside let's hop into it i'll start by quickly shooting through what tesla has done historically starting with their sales growth rate their cumulative average growth rate over the past five years is 50.4 which is pretty good um not to mention that for year to date uh from january to september the revenue for 2020 grew 20.9 percent uh which is less than their average but pretty good considering uh that it's 2020. and also for the full year of 2020 consensus estimates are that sales will reach 30.9 billion dollars which we'll use later on for our forecast now an important thing about this year 2020 is that tesla turned profitable which is a really important step for any company that investors are putting their money into um the company is expected to achieve an adjusted ebitda of 6.1 billion dollars on forecasted sales that's a margin of roughly 19.7 percent and it's expected to achieve a net income margin of 7.8 which is in line with its peers but certainly at the higher end and of course a lot of the stock performance has been tied to more qualitative factors for the company um recently management announced that they were planning to vertically integrate their supply chain to mine their own lithium and things like that they had their battery announcement and uh they recently joined the sp500 which is sort of a you know seal of official status if you will um it often opens you up to more investment from other investors and you know just kind of shows that you've made it that you're in the big leagues now so that's what tesla's done and they're pretty good results um but admittedly nothing that kind of warrants a 700 price return but the reason investors are paying up so much is because they believe that the future of tesla has grown by nth degree um so it's the expectation of the future performance of the company is going to be so you know such an outperformance that justify is paying such a high price now so i want to take some time to go over what the industry is expected to do and how that compares to what tesla is trading at today to kind of demonstrate you know how expensive the stock is according to deloitte total electric vehicle sales are expected to reach roughly 2.5 million for 2020 um of which roughly three quarters are battery electric vehicles like tesla so call it 1.9 million vehicles sold the lloyd is forecasting that battery electric vehicles will reach 25.3 million new vehicles sold by 2030. uh so that represents a cumulative average growth rate of 26 which is pretty good for an industry this forecast is in line with what bloomberg is expecting so that 10-year period is really going to be that high-growth uh you know acceleration of the electric vehicle demand now for tesla the company is targeting to reach 500 000 cars sold for 2020. so i'll assume that they make that um that represents roughly 26.3 percent of the total electric vehicles sold which is quite a big chunk of the market now assuming that the company keeps its roughly quarter share of the market for electric vehicles over the next 10 years uh that means that its sales growth rate will be the same as the industry right but let's give tesla the benefit of the doubt and say that the company will achieve a 50 market share by 2030. so one in every two electric vehicles sold in the world uh battery electric vehicles will be a tesla even with that the total sales growth on an annual basis will average 38.1 percent now that's impressive don't get me wrong but if you compare that optimistic forecast to what the stock is currently trading at if you do a price to sales ratio of today's price over 20 30 sales in this optimistic 50 market penetration scenario the company's trading at a future 10-year price to sales ratio of 0.85 times um for the record gm ford honda and toyota all trade around 0.5 times of next year's sales so even if you bought the stock today and the company fast forwarded you know 10 years into the future you know next year and became the goliath that's been forecasted in this optimistic scenario it would still be relatively an expensive car company at today's price in other words if you bought the stock today and held it for 10 years time and the price did not change it stayed between 600 and 700 uh then the stock would still be expensive relative to car makers now before we comment anything i totally understand why people believe that tesla should not be valued at the same multiple as a toyota or whatever um you know they have electric vehicle subsidies in their favor a growing industry and things like that but you know think of it this way if today investors decide to value tesla like any other car company its price would fall over 95 so you know i appreciate that tesla might be more valuable than a honda on a valuation basis uh because it has you know larger margins maybe less debt larger growth certainly but you know is it worth twice as much five times as much 10 times in this case 20 times as much i don't know but the more you know times you are more valuable versus it's your peers the more risk there is that you know things will correct towards the peer group and all this assumes that tesla would achieve its remarkable market penetration in 10 years time and it would lead to a sales growth that really is unheard of for any company its size uh amazon for example for the past 10 years has seen sales growth of 27.6 a year uh and that's a company that's revolutionized how we shop and and you know certainly focuses on cheaper things that are more resilient through recessions and things like that and you might argue that the exuberant multiple is justified given the other business streams but if tomorrow tesla sold its you know automotive segment it would largely be seen as a speculative company based on that other you know six percent of the firm because it doesn't have a solid footing in those other areas they're still largely experimental and it's not to say they won't turn out but it's certainly higher risk to rely on that you know penning out than to focus on the automotive so already you can see that tesla is a really expensive stock but there's of course the risk that the company doesn't achieve that optimistic forecast in fact there's a risk that tesla falls short that it you know suffers at it it loses market share and i think that's something that a lot of people discount there's competitive risk uh the double-edged sword of being in such an attractive industry is that it attracts new entrants and we're already starting to see that and there's certainly the risk that over the next 10 years someone comes forward with a product that's better or at the very least competitive to the tesla you know model 3 or whatever not to mention that the industry incumbents you know the fords and the toyotas are all dedicating multi-billion dollar budgets towards electric vehicle development because for them it's their survival right so you know when you have all these new entrants and these old incumbents all vying for that throne there's a lot of risk that at any point someone comes forward and says hey we happen to have a better technology or a better product than tesla there's also operational risks that the company doesn't meet deadlines that it you know misses targets which it's already done in the past and you know with things like vertical integration into the lithium mining space which is certainly in economies of scale play there's a lot of risk there uh you know it's kind of foolish to assume that company that's never mined lithium before will be able to enter the industry without any bombs along the way you know they might do well but again it's just more risk and finally there's you know economic risk that even with you know government subsidies and you know an attractive you know well-built product that people can't afford it or that you know the demand goes elsewhere because of more cyclical factors uh the fact of the matter is that the electric vehicle is a very expensive capital good that requires the installation of a home battery and if gasoline becomes cheaper like it has recently in 2020 it could eat away at electric vehicle demand right because it becomes more competitive to to buy a gasoline vehicle and i really do think that company the size of tesla is going to have a really hard time achieving the growth rates we've mentioned before uh given the nature of its product you know one of the reasons amazon did so well is they sold you know anything from paper and pencils to larger items like computers and whatnot and to me that stands as a more you know defensive uh offering than something like a vehicle like a brand new car so for all those reasons i'm out none of this is to say that tesla won't be a successful company that it doesn't have an exceptional product but even an exceptional company might not be a good investment if it's too expensive which as you can see it seems to be the case right now there are plenty people out there saying that tesla's a sure thing that it's it would be foolish not to buy into the future but you know nothing's guaranteed in investments there's no perfect investment out there that you know promises to earn you high returns it just doesn't exist when there are positions that people perceive will have that what happens is the price tends to rise higher and higher as people bid into it to the point at which it no longer becomes attractive and with so much retail demand for tesla there's certainly a risk that that's happened with this company and if you disagree with me that's totally fine in fact i would encourage you to share you know any conflicting points or any conflicting forecasts or data that goes against what i've shared i'd like to think or i'd like to believe that i'm a objective enough investor that if presented with the right evidence i would change my opinion on 180 but i just ask that you please support it with research and you use a different argument aside from well you know the price is up anyway that's the video guys thank you for joining me today if you liked the video make sure to hit the like button and subscribe and if you disagree with what i said and hate my guts as a result uh that's okay uh you can like and subscribe if you want to uh but anyway i appreciate you joining me today if you're going to tear me apart in the comment section please go easy on me and as always be safe out there

Channel: The Plain Bagel

Views: 258,683

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Id: Nz7hsHC2ORE

Length: 15min 13sec (913 seconds)

Published: Mon Dec 28 2020