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Circle of Competence Issue #98


"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."― Benjamin Graham, The Intelligent Investor


Tesla: Bears, Bulls, and Spectators

I have been wildly amused the past few months watching the Tesla perma-bears lose their minds (and their shirts) over the stock's hyperbolic move upward. More interesting than funny though, has been the number of people asking me "should I buy?" after the move.

The question amuses me for a number of reasons.

Let's start with first principles. Most things in life exhibit fairly substantial price elasticity, meaning that as price goes up, demand for the good goes down, and vice versa.

So the question is, why is the opposite true for stocks?

This question has been central to the centuries long battle between contrarians and momentum investors and between value and growth investors.

But as Charlie Munger has stated many times before, there's really no such thing as 'value' and 'growth' - there is only intelligent investing and unintelligent investing. Intelligent investing is merely determining a likely intrinsic value of an asset and paying less.

And when a stock like Tesla's - rich with passionate bulls and manic bears - takes a U-turn upwards, it is always interesting to take a hard look at the actual numbers and try to determine what that likely intrinsic value actually is.

After having written Tesla off as a mini-bubble pitched by a huckster long ago, I'd lost touch with Tesla's actual fundamentals. But looking into their last set of financials, I found several surprises:

- In 2019, they sold over 367,000 vehicles.

- Their gross margins were roughly ~20%.

- They generated almost ~$1B in free cash flow in 2019.

While these numbers are impressive, do they justify a $134 billion market capitalization? Hardly, in my opinion.

Or do they?

It all depends on the story you believe.

If, for example, you believe that Tesla will ultimately become the dominant player in the transportation as a service industry (TaaS) - which hasn't yet even become an industry yet - that impacts all of humanity, then this valuation may be too small.

But on the other hand, if you believe that Tesla will merely be a leading, next-generation electric car company, this valuation is rich indeed.

So which is it?

The bulls would say that the market has spoken. Bears would say that it is just another mini-bubble that will correct as the economy cycles.

In my opinion, the opportunity belongs in the 'too hard' pile.

A few thoughts to add into the mix when attempting to tease out Tesla's true valuation:

- Tesla hasn't faced much serious competition...but it is coming from both domestical and foreign manufacturers.

- Tesla hasn't had to weather a recession since it went public in 2010.

- There are numerous technical hurdles between the electric car company of today and the potential transportation platform of tomorrow, the biggest of which is achieving fully autonomous driving in all situations (level 5 full autonomy).

But despite all the messiness around getting to an actual 'value' for Tesla, it is hard not to feel a sense of awe at what Musk has accomplished, despite the bearish sentiment, despite the production setbacks, despite the media reports, etc. He just won't stop.

While I am not long Tesla, I am a Musk fan. It's hard not to be when you look at all of the companies he's had a hand in starting:

- Starlink

- The Boring Company

- Tesla

- SpacEx

- OpenAI

- Neuralink

- PayPal

- SolarCity

- Hyperloop

Is he over the top? Yes, he called a cave diver a pedophile on Twitter and announced he'd secured funding to take Tesla private... over Twitter.

But is he brilliant? Absolutely.

And it is unquestionable that we need more entrepreneurs like Elon Musk who are hungry for a better world. While I can't pull the trigger on Tesla from a valuation perspective, I'm hoping the bulls are right for the world's sake.

I know there are some $TSLAQ perma-bears that are ready to slam this, so please reach out! I welcome your thoughts.



Blackstone's warehouse play challenge's ProLogis' claim to the throne (The Real Deal)

Property investors lure startups with shortcuts to public markets in SPACs (WSJ)

The concentration of economic power has led to spectacular returns (13D Research)

The man who made a killing in the 1929 crash (Novel Investor)

Five lessons from history (Absolute Return Partners)

Luckin Coffee short thesis (Anonymous)


SpacEx likely to spin off Starlink in IPO (Bloomberg)

News in the age of abundance (David Perell)

Can we have prosperity without growth? (The New Yorker)

Qatar hits a new world record for solar cost at $.015/kWh (PV Magazine)

Can AlphaGo move from chess and Go to quantum computing? (Synced Review)

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