Now’s The Time To Hop On The Tesla Wave
One of the highlights of my childhood was going to the beach. I enjoyed building sandcastles and eating ice cream, but my favorite activity at the beach was playing in the water. Along with friends, family or even strangers, I would take my boogie board and go where the waves were biggest. The thrill of riding a wave to the shore and feeling the rush of water beneath me was unbeatable.
Chronologically the activity breaks down into five parts: swimming out to a good spot in the ocean, preparing oneself to “catch” a wave, spotting a desirable wave and lastly “catching” a wave and riding it out. This process is then repeated over and over again.
The Beach Safety Organization says there are two alternating phases of waves at the beach. Lull waves are small, not “rideable” waves and in boogie boarding lulls are used by riders to prepare themselves for the big waves. The big waves are called set waves and a series of set waves are called a swell. WikiHow explains that the most challenging aspect of boogie boarding is not the sport itself, but spotting the best wave in the swell and timing the “catch” just right.
With all the research that has been done on oceanography and the sport, there is no method to determine which wave in the swell is best or how to perfectly “catch” it. Tristan Roberts, an APB (Association of Professional Bodyboarders) World Tour Champion in 2019 and 2020 said in an interview with YAAS, “[boogie boarding] has taught me a lot about how just when you think you are prepared, the ocean proves you wrong”. The ocean, like many things in life, is hard to predict. Specifically comparing the ocean to the economy, they both oscillate between lulls and swells and no one knows when the best wave is coming or how to “catch” it.
More specifically, Tesla (NASDAQ: TSLA) has been one of the most attention-attracting stocks in the market over the past few years. Looking at a graph of Tesla’s performance, it literally mimics a wave pattern.
This past year has been a tough time for the market, one of inactivity and pessimism. Many investors and analysts have been reconsidering the value of companies trading at high P/E multiples (The price/earnings multiple is a common metric used by financial analysts to determine the value of a company’s stock price in relation to its earnings, also called net profit. This metric is commonly used to compare similar companies and determine which ones are undervalued, accurately valued, or overvalued.) Even accurately valued companies’ stocks have been suffering due to a lack of economic activity.
Seemingly, Tesla's stock performance displays a clear pattern since October 2021 — the stock rallies periodically, then proceeds to crash to a price point lower than before the rally. Most recently, investors have judged Elon Musk, the company's CEO, unfavorably for his acquisition of Twitter and taken it out on Tesla’s stock. Since Musk’s announcement on April 22 of his plans to acquire Twitter, the stock has halved in value.
Tesla has been in the spotlight for negative reasons several times in the past that have made investors pessimistic about the company’s performance. These reasons include inadequate manufacturing infrastructure, insufficient charging network, supply chain issues, inability to keep up with demand, failure to maintain promises, and radical actions taken by Musk (related and not related to the company), to list a few. On top of these negative factors, there is no shortage of investors and analysts who have been calling the stock overvalued for quite some time. These investors have claimed the public is treating the auto manufacturer too similarly to tech companies, or worse, a meme stock.
Just to drive home this point, here is a quick recap of Tesla's and some of its competitors' stocks as of December 15th, 2022. Tesla (NASDAQ: TSLA) has a 48x P/E multiple and a market cap of $500B. Rivian (NASDAQ: RIVN), the most similar electric vehicle only auto manufacturer to Tesla, has no earnings and a market cap of $22B. Honda (NYSE: HMC) has a 9x P/E multiple and a market cap of $44B, Ford (NYSE: F) has a 6x P/E multiple and a market cap of $52B and Volkswagen (OTCM: VWAGY) has no earnings and a market cap of $85B.
The closest car company to Tesla in terms of stock performance is Toyota (NYSE: TM), which has an 11x P/E multiple and a market cap of $230B. For perspective, based on the two companies' number of units produced this past year, Toyota produced around 8 times the amount of cars as Tesla, yet Tesla’s stock’s P/E multiple is around 5 times that of Toyota’s.
But is it accurate to compare these companies to Tesla?
Tesla has changed the way the world thinks about cars, and not just by being the first to prove you can mass produce high-quality electric cars, but also by changing the other traditional conceptions of cars (utilizing a minimalistic design, adding a massive touch screen to the dashboard while removing everything else from the dashboard, implementing adaptive cruise control and having a trunk in the front and back of the car, to list a few). The introduction of Tesla cars into the market was incredibly disruptive to the entire automobile industry and since their introduction, every other automobile company has and continues to put effort into making their own all-electric Tesla competitor vehicles.
The automobile industry is one of the largest in the world. Insider Intelligence cites the automobile industry as having spent the second most amount of money on advertising from 2016–2020. Yahoo puts the automobile industry as the ninth largest in the world with a market value of $3 trillion in 2021. That means, using macroeconomic data from the Statistics Times from that year, consumers spent 10% more on automobiles in 2021 than the total value of goods and services produced (GDP) by the entire continent of Africa. Looking at Tesla’s consistently increasing amount of sales, with the exception of the beginning of the pandemic which created a standstill across the industry, and increasing market presence, it is clear the company is claiming greater chunks of the car market. In 2021, Interbrand cited Tesla as the fastest-growing brand on the globe, with a 184% increase in brand strength. While Interbrand’s 2022 rankings show Tesla as having grown less, Tesla is still ranked #2 in terms of global brand growth and ranked #12 in terms of global brand equity. Out of the car companies, the Tesla brand is #3, behind Toyota and Mercedes, but percentage-wise experienced three times more growth than them this past year, even with its poor stock performance.
Moreover, Tesla has higher profit margins than most other car manufacturers and an incredibly high free cash flow yield. Forbes notes in the first quarter of 2022 Tesla's operating margins were three times the industry average.
Tesla is still a young company, having only first turned a profit two years ago, and announced at their Cyber Rodeo Giga Event this past year a series of anticipated announcements that will further increase their portion of the vehicle market, brand strength and revenue yield. Over the course of 2023, Tesla will begin producing the much-anticipated Cybertruck, new Roadster model and Semi Truck. That means over the course of 2023 Tesla will almost double the number of models it currently sells. Additionally, Musk showcased their newly developed battery and announced that they will begin performing wide beta testing of their full self-driving software. Lastly, Musk announced that they hope to release the first version of their humanoid robot, Optimist, in the coming year.
Tesla’s recent humbling stock performance fits with the current macroeconomic trends. The lack of activity has caused investors and analysts to be less optimistic and Tesla’s stock has fallen victim to this. From this perspective, it's easy to look at Tesla as a company past its heyday. However, when considering the uniqueness of the company, its fast pace of growth, easy access to capital and ambitious attitude toward the future, the company’s future upside looks great. This past year’s performance is merely a humbling hiccup in the company’s long-term trajectory. As any good boogie boarder or economist knows, there are times of lulls and times of swells. While the current economy is in a lull, swells will come in the future. Tesla is well positioned for growth and now is the best time to get on the Tesla wave.