General Motors Will Make Tesla Shareholders Cry From Frustration Within 5 Years
- Why Tesla will keep falling.
- The fundamentals point towards an imbalance between Tesla and its auto peers.
- General Motors appears highly attractive by comparison.
Tesla (NASDAQ:TSLA) is dropping like a rock over the past few days. There are three main reasons why I believe the end is not in sight.
TSLA Price data by YCharts
Tesla is led by a celebrated CEO and these type of companies tend to underperform. Tesla is trading at fundamental valuation multiples that exceed that of the market and its peer group. Finally, the company is bringing a product to market but isn't actually there yet.
To illustrate why I believe Tesla's stock has a long way to fall, I've contrasted the company against its well known U.S. competitor General Motors (GM).
The fundamental truth is that Tesla is a high risk stock while it is priced as if it is already successful. General Motors can be bought at a sales to revenue multiple that is 20x smaller. A book to price ratio that is 10x smaller while it is spending a smaller amount of revenue on CapEx. That means it has much more Free Cash Flow.
In fact, General Motors trades at an Enterprise multiple of around ~6x cash from operations. Tesla trades at 112x.
Tesla is investing the funds it raises by issuing stock to build out its production lines, finance its R&D and market its products. There's an anomaly called the Asset Growth Effect and Quantpedia cites seven studies confirming it. The most important one being (Cooper e.a 2009). From Quantpedia:
Stocks with high asset growth underperform stocks with low asset growth. The effect is stronger in small cap stocks but is also statistically significant in large cap stocks; therefore, it could easily be implemented with small trading and slippage costs. The anomaly is robust and returns are strong even after risk adjustments. One more strategy advantage is its negative correlation to the equity market factor.
GM Total Assets (Quarterly) data by YCharts
The Bolt Vs. The Model 3
Meanwhile General Motors actually put the bolt out there a while ago. It is actively getting feedback on a model that's out on the road. It sold 1425 of these last month:
The car compares reasonably well with the Tesla Model 3 as shown in the BI table below. The Bolt even got more range on it, which is a pain point with EVs.
Does a slightly different product justify a difference on the cash from operations multiple of 6 to 106?
Shouldn't the company with a similar product out on the road trade at a premium? Shouldn't a company that still has to fine tune a production line trade at a discount because of the risk of delay or failure? This is a rare case where the market answers these questions: no.
Source: Business Insider
Elon Musk is the personification of EV driving and I don't doubt for a second he's going to justify the difference in multiples based on both companies' EV business. His Twitter following illustrated in the infographic is testament to his celebrity status. Companies run by celebrated CEOs tend to underperform (Malmendier Tate 2009).
Envision a race between General Motors and Tesla for the highest return to shareholders. General Motors is going to outsell Tesla by something like 17 million vehicles next year and ~16 million vehicles the year after that. By that time, a General Motors shareholder has been the beneficiary of ~$36 billion of cash from operations. A Tesla shareholder will have been the beneficiary of a few hundred million of cash from operations.
In two years, General Motors' shareholders will have returned $36 billion in cash from operations on its $51 billion market cap. While Tesla will still not have returned much on its $47 billion market cap. Even if you are right and Tesla ultimately proves to be the superior bet, it is highly unlikely it is winning this race in the next five years.
This article was written by
I gravitate towards special-situations. That means situations around companies or the market where the price can move in a certain direction based on a specific event or ongoing event. This eclectic and creative style of investing seems to suit my personality and interests most closely.
Since 2020 I host a podcast/videocast where I discuss (special-situation/event-driven) market events and investment ideas with top analysts, portfolio managers, hedge fund managers, experts, and other investment professionals. I highly recommend it (pick episodes around topics that interest you) for the amazing guests that come on with regularity.
I've been writing for Seeking Alpha since 2013 after playing p0ker professionally. In 2018 I founded Starshot Capital B.V. A Dutch AIF manager. Follow me on Twitter @Bramdehaas or email me Dehaas.Bram at Gmail
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