The Tesla Melt-Up: Scary or Justified?

Tesla melt-up

There’s just no way to conclude this week without a discussion of  the Tesla melt-up.

Who knows where the price of Tesla will be between the time I write this and you read it, but suffice it to say, Tesla’s 120% rise in a matter of weeks…

Tesla

followed by a 20% dip in matter of hours…

Tesla

… reminds me a helluva lot of the dot.com growth stock volatility I witnessed just before the NASDAQ’s big “uh-oh” moment in 2000…

In short, the price moves seen this singular week in Tesla are just plain ridiculous no matter how you look at it, be you a Tesla bull or Tesla bear.

Tesla: Game Changing Innovator of the Future or Just Another Sucker’s Bet?

But is “ridiculous” a fair word to describe Tesla’s admirable rise? Are we being too cynical, like so many others who once disparaged (or even successfully shorted) Elon Musk in the past?

That is, is the Tesla melt-up  just screaming evidence of another growth disaster story in the making, seducing suckers toward a cliff of pain, as I have admittedly believed, or…

…is Tesla about to breakthrough from a niche “fantasy 1.0 idea” into an entire, disruptive ground breaking 2.0 technology poised to make Tesla the iPhone of the auto industry–in other words: A game changer?

Many Tesla car owners and stock holders understandably believe that the Tesla Model 3 is poised to become for the 21st century what the Ford Model T was for the 20th century.

For many, Tesla IS the future, so a Tesla melt-up only makes sense as a bet on that future..

If so, five years from now, the stock could easily trade anywhere from $1,000 to $2,500, conservatively.

Then again, if Tesla’s story turns out to be more hype than profits, that same stock could be anywhere or from $400 to $100 by 2025.

Below, I’ll make a pro and con case for the Tesla melt-up and stock in general, and then, more particularly, I’ll address the question of whether YOU should be dabbling in this stock.

As we’ll see, much will hinge upon whether you’re an investor or a trader, a risk taker or a risk manager.

In addition, much will depend on the macro’s here and in China.

In short, there’s a ton of risk as well as uncertainty surrounding  the Tesla melt-up, and thus a ton of speculation and facts to consider outside the recent headlines.

Let’s dig in…

Tesla Valuation—the Numbers

First, let’s look at the numbers rather than the “story.”

Tesla’s balance sheet is rather telling—that is say: Un-remarkable despite a remarkable melt-up.

It has total cash of $3.69 billion, total current assets of $8.3 billion and a “total assets” figure of about $29 billion against total current liabilities of $10 billion and a long-term debt cannon ball around its ankles of $9.4 billion.

To pay off this debt, Tesla made negative $670 million in 2016, negative $1.9 billion in 2017, negative $976 million for 2018, and for 2019 (just a couple months back), Tesla made a negative $862 million…

In short, the math behind Tesla’s financials objectively confirms that Tesla has had NO earnings for the last 4 years.

And yet its stock recently hit an all-time high of $980.00/share, placing its market cap well past $140 billion, which is the highest in the entire auto industry, beating all other auto-makers but for Toyota.

So, what gives?

How can a stock with no PE ratio (as it has NO earnings), be the belle of the NASDAQ ball? Have the markets (and the herd investors making a ton of money this week, despite the falls) lost their minds?

Are Tesla shareholders about to get crushed far more than the recent price tanking seen this week, or is Tesla now on the road to electric Nirvana as a genuine game-changer company?

Well, it all hinges upon the STORY that is Tesla and the Tesla melt-up, rather than the current MATH behind the Tesla melt-up.

The Tesla Story—Fairytale or Horror Show?

The narrative for Tesla and the Tesla melt-up may have indeed reached a legitimate tipping point. There’s no denying the progress Tesla has made for years in shaking up the old ways of the auto industry.

Such a collision between the outdated ways of industrial age, old-model cars has undeniably been disrupted by an info-based, new technology that is software-driven, making the coming generation of cars essentially “computers on wheels.”

Throughout history, such disrupters have followed a legitimate pattern where the old (think Blockbuster Video) is left behind and the new (think Netflix) takes the stage and where the new winner takes all.

Is Tesla that for the automotive industry? Anything is possible, and Tesla is nothing if not innovative, I’ll confess.

In addition, with the extremely bullish move and announcement of the Tesla factory opening in Shanghai, the potential for Tesla to corner, or at least capture, the massive China market is an undeniably good sign for the Tesla story and the Tesla melt-up.

Additionally, Tesla’s China operation is the first foreign auto brand with FULL ownership of its operations in a market like China. This too is extremely positive (and tactically clever) for Tesla, as well as a huge plus for Elon Musk’s checking account, which is why he was recently seen dancing on CNBC.

Drivers of Tesla are also extremely impressed by the innovative product Tesla manufactures, and no one can or should fault the progresses made in the car itself, despite a few embarrassments here and there.

Consumers genuinely believe in the enhanced driving experience that is Tesla, just like they believed in the enhanced data experience of the iPhone over other competitor phones.

VW and BMW, for example, are 3-5 years behind Tesla’s technological speed, depth, growth and quality, on everything from drive-trains, batteries, and autonomous driving data, to its ever-expanding super-charger network.

In short, the Tesla bulls can be proud of the company’s first mover advantages.

Competition from others in the Electronic Vehicle (EV) space has been slow to catch on, giving Tesla similar advantages and narratives as enjoyed, for example, by Netflix as it steadily took out the 15 other competitors in the streaming space, proving that passionate disrupters can take the spoils.

Many rightfully see Tesla (and its Artificial Intelligence and ergonomic breakthroughs) in an identical light. Indeed, it will be a challenge for most automakers, seemingly asleep at the wheel, to catch up with Elon Musk.

Ironically, Tesla’s biggest competition comes from China itself and companies like Byton, who are now going after Tesla with comparable products. Elon knows this and hence bravely went to the backyard of his competitors, who are in China not Detroit or Stuttgart.

For this, even I must hand it to Musk, someone I have bashed (for good reason) in 2018, but who has since made a tactically strong move in China.

What to Do About a Tesla Investment?

Although the Tesla melt-up–and Netflix melt-ups for that matterhave horrific balance sheets, their stock price is driven by growth traders not balance-sheet geeks.

Growth trades are made by those who are confident that such companies’ future growth and excellence will justify current over-valuation and other operational or macro risks.

Such true believers have faith that innovators like Tesla will kill the competition in their sectors in ways that Amazon killed retail or Google killed the other search engines in their path.

This is indeed possible, I’ll confess.

But possible doesn’t always mean probable, and informed stock investing is all about probabilities and position sizing, not just faith and hope.

Those who benefited from Tesla and Bitcoin growth melt-ups, of course, feel pretty informed, and they are certainly getting a good (though perhaps not final) laugh right now at balance sheet geeks like me. in short, the Tesla melt-up confirms their argument.

To the extent you believe in Tesla’s long game (or technical signals) we, as risk managers, advise small, rather than large, allocations.

Why?

Because today’s joy quickly turns into tomorrow’s despair in such growth names, and such stocks (like the Tesla melt-up) are thus more suited for those who can expect, tolerate and afford such risk.

For those with absolute faith in Tesla, including some who’ve owned Tesla stock since it was at $30 per share, the recent gains will trump any short-term cynicism or concerns about price volatility, as such investors have more than enough money built up by now to largely ignore any interim price swings.

Newer fans of Tesla, however, should be more cautious in their FOMO—or “fear of missing out.”

What we are seeing with Tesla’s recent valuations is a near carbon copy of the crazy “herd-driven price inflation” seen in the last tech bubble, which lost trillions in a matter of days.

During that bubble, I saw stocks like Qualcomm rise by 557% during a 3-year-low-to-high melt-up which surpasses even the 396% rise just enjoyed by Tesla over a similar time-frame.

Cisco, Microsoft and Yahoo, for example, were similar fairytales at the height of the dot.com bubble, and although they are still in business today, their stocks tanked by anywhere from 50% to 70% when the enthusiasm (and distorted balance sheets like Tesla’s above) died in the backdrop of a market crash driven by debt cycles—i.e. macro realities.

Those macro realities, we’ll remind you, are as much (in fact, more) in play today as they were in 2000, so caveat emptor

The macro headwinds facing China, global credit markets and the greatest debt bubble in history remain all too real, which means those same headwinds will eventually humiliate even the best innovators (like Tesla).

In other words, Tesla’s stock, down the road, will see just as many dramatic falls in prices as it has seen absurd rises. The Tesla melt-up points almost like a big “I dare you” toward a later melt-down.

When interest rates, for example, rise, that $10 billion debt hanging over a still non-profitable Tesla can turn to extreme pain, not dancing on CNBC.

So how do you play the Tesla melt-up or Tesla in general?

Again, the answer depends on individual approaches to risk vs. uncertainty, being informed vs. uninformed, and realistic rather than speculative.

If you’re a sophisticated trader or investor, you can TRY to time and track this absurd volatility with careful stop losses and price targets.

But with the kind of irrational market moves we’ve seen this week, even the best Tesla traders (including Steve Eisman) can get burned, as they will constantly be stopped out of their positions or caught in short-squeezes that kill overall portfolio returns.

As for the Tesla true-believers who will just continue to buy and hold, we understand the faith and conviction you hold, especially if Tesla truly does become the “Ford” of the 21st century.

If this indeed occurs, those who bought early will be rewarded. I’ve been so lucky before as well.

If, however, Tesla’s profits never match its hype, much of the un-realized gains the Tesla-faithful have made thus far will vanish day by day.

I’ve seen that happen many times, in many markets as well. That’s not bearish, just facts spoken from a veteran of two market crashes in less than a decade’s span.

And yes, markets this inflated, this euphoric and this absurd do crash.

Few want to hear or believe this when the headlines are loaded with triple digit melt-ups like we’ve just seen in Tesla. For me, however, such dramatic price moves are a sign of desperation and danger, not signals of good times ahead.

As for my closing thoughts on Tesla, I must confess that the stock itself has true-believers because the underlying product is legitimate in its comparative quality to other EV products, and the efforts made by Elon Musk and his team to develop the best software, technology and market penetration deserve real kudos.

That said, the stock price moves we’ve seen this week are entirely beyond kudo’s—they’re just classic signs of a melt-up, which, we remind you, are always followed by meltdowns.

Furthermore, once Elon crossed the line to dishonesty and stock manipulation in August of 2018, I lost much of any respect for Tesla (ethical management matters to market valuation) and I remain skeptical that the projections Musk has made will ever be realized before other competitors or a bear market beat him at his own game.

As stated above, Tesla is in a race against time to make an actual profit before the macro’s send the global markets into a headwind that even the best Tesla ergonomics can’t withstand.

For now, of course, Tesla has enjoyed an undeniable bull run, as many growth stocks (and leading innovators) have done and will continue to do.

Indeed, Tesla and the recent Tesla melt-up is not the open joke that is WeWork, but I still believe there will be many hard days ahead for this ticker and its infamous founder. Less dancing, and perhaps more tears.

Enjoy the weekend. Back to you on Monday with a fully-updated What’s Happening Now.

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