Elon Musk admits: Tesla shares could get ‘crushed like a soufflé’

Simon English
·4-min read
Tesla Model S
Tesla Model S

Elon Musk was back in the news this week, a surprise for such a shy, unassuming fellow.

The Tesla founder was handed the Axel Springer Award, in person, a gong which honours “the inventive spirit and innovative power with which Elon Musk has revolutionised several industries”.

He joins Jeff Bezos and Mark Zuckerberg on the list and is well pleased. One day Musk will distribute his own gongs. Perhaps he can give Donald Trump the Elon Musk award for being completely off your cake.

Also this week Musk warned staff that Tesla’s high-flying stock is dependent on profits rising. If it looks like they are not, the shares “will immediately get crushed like a soufflé under a sledgehammer”, as he told them to cut spending.

The stock is up almost 600% this year, a rise somewhere between sensational and unsustainable, depending on your point of view.

Just recently I wrote that Tesla’s shares are overvalued, expecting some blow back from Tesla fanboys who think Musk is basically Jesus.

One very cross correspondent thinks I have made the mistake of comparing Tesla to mere carmakers. This fellow, I note, likes to reply to Musk’s tweets with “I agree with you mate!”

Musk has 40 million followers. He has six. Well, seven now, I felt sorry for him.

<p>Elon Musk</p>AFP/Getty Images

Elon Musk

AFP/Getty Images

A couple of my readers have zero Twitter followers, something I didn’t realise was possible and is sort of cool.

The objections to my piece fall into three categories. 1) I’m an idiot. 2) I am in the pay of powerful Wall Street hedge funds that are shorting Tesla stock. 3) I’ve misunderstood the business.

Let’s take 1) as read. As for 2), well, no, but if they want to get in touch and make me an offer…

Let’s look at 3).

One correspondent took on my description of Tesla cars as iPhones on wheels by noting that iPhones sell rather well. Fair point. But for now, Tesla cars do not.

Even if it is as far ahead in electric and battery technology as fans claims, the gap must be closing.

One fund manager, who regards Tesla as a “faith stock” which attracts true believers, says the company spent just $1.3 billion on research and development last year. That compares unfavourably with $16 billion by VW and $10 billion by Toyota.

VW already outsells Tesla in Europe.

Alan Miller of SCM Direct adds: “the only question is whether the Tesla share price peaks the day it enters the S&P 500 (21st December), or just before that.”

Another correspondent says it is a mistake to see Tesla as either a car company or a tech giant, writing: “It’s neither; it’s an energy company. As an investor you need to value a company based on its future earnings potential, not what it is today. By the same measure you’d have stated that the Amazon of 1997 was an overvalued bookseller.”

Amazon was certainly a small company back then, but its sales were rocketing exponentially, by something like 3000% a year. It did not have profits to justify its soaring shares, but it sure had sales momentum.

So let’s say Tesla does indeed transfer its genuinely impressive tech into energy storage and distribution. That could be good for the planet, but they are far from the only player or the first mover here.

Bill Blain, market strategist at Shard Capital, tells me: “Tesla’s defiance of any economic or market logic has empowered its’ cultists, giving them a spurious credibility to abuse anyone that dares question their narrative. They swagger and strut across the markets, jumping on dissent. They take their lead from Musk’s own behaviour – rules are for other people! More and more retail investors are now on the fringes of the cult. Any rational economic analysis of Tesla is ridiculed by the “markets only ever go up” logic of the new Robin Hood day-traders. It's all made Musk phenomenally rich. Beware of financial gravity. Anything that goes up… comes down even faster.”

He adds: “The stock price has gone stratospheric. That story may yet change. As Tesla becomes part of the S&P, every index tracker will become a holder. A wider and more conservative holding base may cause more investors to start questioning the assumptions made about the stock, and the frankly absurd beliefs that underlie its current valuation – but let’s wait and see what happens.”

Indeed, let’s see.

Before the fan boys come back, let me note I have nothing particularly against Elon Musk, and as some of them have noted, even if I did, why would he care.

The guy put one of his cars in space, after all. That is cool.

But I remain a seller of the shares. That’s good though, because it just leaves more of them available for you to buy, right?

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