To say that there's an air of confusion between supporters of Tesla (TSLA) and critics of the company from an investment standpoint would be a vast understatement.
Sure, Tesla has its investment advocates, including people like ARK Invest's Cathie Wood, who believes that the stock is worth $4,000 per share, but many people who invest in Tesla stock appear to be ideologues first and investors second.
Don’t get me wrong, there are plenty of qualified and intelligent investors who are long the company. Take Fidelity, for instance, or even famed short seller Andrew Left of Citron Research. But it was evident through a recent conversation that I had in the YouTube comments of one of my podcasts that people just don’t really understand why there are critics of this company to begin with, especially if Musk’s vision is truly to change the world for the better.
To be honest, I can’t blame them. This is a common conflation then that I found myself embracing in years past while investing in several "earth friendly" companies. Of course, this was at a time when I had no clue how equity valuation worked, and the crux of my investment thesis was that if it’s good for the world, the stock should go up. As most people who have any background in the capital markets understand, this simply couldn’t be further from the truth.
Thus, we have a disconnect between some of the most strident critics of the company and some of its biggest advocates. It’s a disconnect that I believe is extremely important to point out for the purposes of clarity, specifically to those who are ardent supporters of the company. Take, for example, Zac and Jesse of the podcast Now You Know - an earnest (and successful) attempt at an ideologically altruistic podcast with nearly 30x the amount of subscribers that I have.
A video of the two hosts, both ardent Tesla supporters, has been making its way around social media over the last couple of weeks. The video is of the two of them being baffled that Tesla stock was falling following the news of the $35,000 Model 3 announcement. This was then followed by horrifically erroneous analysis and assertions on how the capital markets work and why stocks move higher and lower. The clip shows the two hosts, seemingly devoid of knowledge on capital markets, resorting to a conspiracy theory that oil companies must be shorting Tesla stock to explain why it is moving lower (play the lower video).
To be honest, I don’t really blame the two of these guys for this line of thinking. After all, they're not financial experts for a living (I hope), but I do believe that it's important to point out why it's horrifically detrimental to think this way. This line of thinking, in my opinion, comes as a result of not having a proper understanding of equity valuations and specifically how Tesla, as an investment, is valued.
Off the bat, I want to say that Tesla's ideological goals of creating an all electric future and finding new means for alternative energy that will reduce carbon emissions and curb climate change are noble. They are causes that I believe in: I'm not a climate change denier, I'm pro-alternative energy and I do believe that it's eventually going to be the future. However, one can’t conflate that inevitable roadway for the country's energy future with how the equity portion of one specific company is being valued by a public market. I'm not a climate change denier, while at the same time I like to see a return on capital investments that I make personally. You can subscribe to both thoughts.
When you staple the ideology to the investment, you are doing yourself a major disservice. And, contrary to what long investors believe, it's possible to think that Tesla stock is overvalued (and heading for bankruptcy which, by the way longs, can also be in the form of a reorganization) while still maintaining your beliefs and advocacy for alternative energy. I know, because I'm living proof.
But the sooner that long investors realize that the stock price is not a scorecard for Tesla vs. the oil companies, but rather an indicator of how the company is being valued by a public marketplace, the quicker they may come to realize the reality of the situation: stock prices move higher or lower because there are more buyers or sellers in one specific direction, not because the CEO of Exxon Mobil (NYSE:XOM) has an ideological beef with Tesla.
The Model 3 announcement is a perfect example of this type of confusion. For those looking at Tesla through the lens of the company's ideology, the announcement seemed like great news. The company is providing a lower-cost vehicle that will help its portfolio of cars expand its reach across the nation and globally. But as an investment, the $35,000 Model 3 doesn’t provide the company with any type of significant operating leverage that will allow it to turn a consistent profit off of the vehicle. So, as it relates to your investment, this means that Tesla may need to seek out new investors in order to continue to run its business.
What does that mean? Most companies that go public either already are profitable or have near-term plans for profitability. Otherwise, the clock is constantly running on the company's lifecycle and how long current investors can go without being diluted by new capital raises (or how long it will be until the company has to lever itself with debt). Tesla already has increased its shares outstanding consistently and has taken on significant liabilities that continue to balloon, without much to show for it in the form of cash generation. This can only continue for so long.
And so, putting the ideology aside, let’s look at how Tesla has treated its investors. If you owned Tesla stock for ideological purposes, you know that your vision for the future of energy likely matches that of the company's founder. That's a great start.
But the same "visionary" founder has, in my opinion, shown that he's an extremely poor steward and allocator of investor capital. He consistently toes a line between legal and illegal when it comes to securities laws, recently resulting in the SEC pursuing him for aleged fraud. He plays it fast and loose with disclosures and deadlines, often changing on the fly. He is rude and callous to analysts and investors who ask critical questions. He has shown to be wasteful and unprepared in the way that he spends investor money, in my opinion. He's brash and rude to members of the media.
But hey, it's all because he is a "visionary," many ideological based longs will say. But it's worth noting that other "visionary" led companies like Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Salesforce (NYSE:CRM), Twitter (NYSE:TWTR) (many of whom were pioneers in their industry) have not run into such serious roadbumps in dealing with securities laws. In other words, these companies are able to run their businesses and be great stewards of their shareholders capital, while at the same time (mostly) turning a profit.
Investors on the long side of Tesla who are invested for ideological purposes are, whether they know it or not, giving Elon Musk a full pass on the investment and financial side of the business. Ergo, it is my belief that many investors in Tesla who have great intentions and who are good natured and good hearted people are possibly doing themselves and their capital a huge disservice by accepting that their investment is secure in a debt laden company currently under the microscope of the SEC and DOJ, just because it matches their ideology for a green future. Some shareholders and supporters are starting to "get it", like HyperChange TV host Gali Russell, who recently expressed his distaste for how Musk treated shareholders during the follow up to the Model 3 announcement.
Additionally, the YouTube commenter who inspired this write up also seems to now understand. I hope more will follow suit. I'm not saying people should sell their stock, I'm simply saying investors need to understand that the ideology is not the same as the investment.
In my opinion, as soon as long investors can work to learn about the financial position that the company is in and its relationship with its investors and customers, the sooner they may come to the realization that you can support Tesla's goal for a clean energy future without putting your capital at major risk in the process.
Disclosure: I am/we are short TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.