Context is King.
As soon I saw the headlines of CEO Elon Musk claiming his Tesla (TSLA) stock was overvalued, my eyebrow shot up just as high as anybody else's. Why would a CEO claim his own stock price is overvalued? The quote was rather straightforward, or so it seemed: "The stock price that we have is more than we have any right to deserve." Out came the media rapidly repeating the line like parrots. Seeking Alpha articles likewise have been repeating that line ever since, such as Even Elon Musk Says Tesla Is Overvalued.
Well, that ends it. The stock is overvalued according to Elon Musk, right? Wrong. The Tesla bull in me of course was skeptical, and I decided to take a peak under the hood. My first thoughts were the words "right to" and "deserve." It sounds more like he was being humble rather than giving a fair value forecast. A person only has a "right to" and "deserves" that which it has earned. So far, Tesla hasn't earned much in the way of earnings. We all know that. Investors in Tesla are betting on the future.
Was I reaching too far, I thought to myself, and was I just trying to hear what I wanted to hear? I decided it was time to actually listen to Musk's words rather than just headlines. You can watch and listen here. Here's what Elon Musk really said in its glorious full context:
"The stock price that we have is more than we have any right to deserve. It's not as though I think, oh, I'm not going to sit here and say we deserve every penny of that. I think it's more than we have every right to deserve. We're going to do our best to fulfill the expectations of investors, and I think in the long term that stock price is going to seem fair. It's difficult to predict where it goes in the short to medium term, but I do feel good about the company achieving that value and more in the long term."
Having a full quote make a world of difference. First, he clarified, that over the long term he sees the stock price as "fair." Then he predicted the company will achieve "that value and more" in the long term, meaning he expect the stock price to rise higher than its current price. When you add the context of "value" he clearly meant, and even said, "in the short to medium term" Tesla doesn't deserve the stock price based on historical performance. Going forward, long term, is another story. CEO Elon Musk thinks Tesla's stock price is going higher. He believes it will achieve the current value it trades at "and more."
What does "long term" mean to Musk? How long is long term?
While he didn't specify at the time, there are some clues in the last conference call. First, you have current demand:
Then China and the rest of Asia and other countries, well, if they can be half as good as North America, then we are at the 40,000 unit number and so that all seems pretty reasonable to me.
Next you have his target of "ultimately" producing 500,000 vehicles a year:
It's really quite a large number in order to ultimately [battery] that's producing 0.5 million vehicles a year.
40,000 and 500,000 is quite a large gap. Next Musk gives a bit more color on what it will take to bridge the gap:
So I think there's potential there for, once we are where we have the service centers in more parts of the country and maybe more stores out there and more word of mouth and more Supercharger stations.
Certainly sounds like years. Now for the final clue:
I think there is pretty long way to go. It sort of like an S curve of technology adoption. You got that is the sort of really early adopters, but for the mainstream audience they need to really see a lot of cars that would work for long time to really feel like comfortable buying particularly when it's a new technology like electric cars.
A "lot of cars" and "work for a long time" doesn't sound like a year or two. The average time a person buys a brand new car and keeps it for is close to six years. This means Tesla may be 4 or 5 years out before its cars have proven the test of longevity in line with how long the average consumer expects to hold onto his car. Based on all this, it would appear that Elon Musk believes the stock price is undervalued compared to where it will justifiable be in 4 or 5 years. In the mean time, it's anybody's guess where it will trade.
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