Friday, June 9, 2017

Why Tesla Doesn't Matter

Is Tesla really the wave of the future?   Maybe.

Market Cap is Bullshit.  Buying high and selling low is idiotic.  The financial press thinks otherwise.  In the last few weeks, the financial press has been treating us to the same old crap they have been selling us since time began.   Breathless reports about such-and-such a company is now "the most valuable in the world!!!!" (with lots of exclamation points) based on the myth of "market cap".

They also push the narrative that since something went way up in value recently, you should buy it.   More than one reader has asked me if they should buy Tesla, Gold, or BitCoin, as their values have shot up recently.   And yes, you should buy these things - by going back in your time machine and buying them when they were cheap.   Buying at the top of the market?  Kind of dumb.

And it is funny, during the height of the Goldbug madness, the price went up to $1800 an ounce (briefly) and pompous blowhards on the financial channels would say things like, "Well, Skip, I see my target price for gold as $5000 an ounce in the next few years - maybe $10,000!"   And the reasoning, metrics, mathematics, politics, or other explanation for this was.... nothing.  Nothing other than the person speaking was paid by a gold seller or had an interest in it.

Today, we see the same with Bitcoin, which shot up to nearly $3000.   Pontifactors got on television and said, "Well, Skip, I see my target price for gold Bitcoin as $5000 an ounce $25,000 in the next few years - maybe $10,000 $50,000!"   And the reasoning, metrics, mathematics, politics, or other explanation for this was.... nothing.  Nothing other than the person speaking was paid by a gold Bitcoin seller or had an interest in it.

Bitcoin is a great way to buy and sell drugs or children on the Internet.   It really isn't useful for much else.  As a place to "park" money, it is risky, as despite what you've heard about its value being based on computers solving meaningless puzzles, it really is entirely based on perception - as is gold or even the US dollar.   However, Bitcoin's history of volatility is so extreme, it makes gold look like a safe harbor.  At least with gold, you only lose maybe 1/3 of your investment or remain flat for mere decades.   Whenever there is a Bitcoin "scandal" involving an exchange (and there were many and will be many more) the price takes a nosedive.

And what suddenly goes up in value is.... most likely to go down.   Historically, rapid runups in the price of anything causes the market to seek alternatives, or to stop buying.   We see this with any commodity, whether it is houses, gold, cars, oil, or whatever.   And yes, predictions by "experts" that such-and-such a commodity will remain "rare" forever are often proven to be wrong.   When I was at General Motors Institute, our professors told us that in all seriousness, that the world would be out of oil by 2010 - maybe 2020 at the latest.  Since that time, there have been oil shortages and oil gluts, one after the other.  Just in this decade, we went from $100 a barrel to $20, in a matter of months.

The financial press is moronic, and the reason for this, is the people breathlessly reporting this shit went to journalism school not business school.   And the few that actually have some experience in business or in trading stocks, have horrific records.  The Shouting Guy in particular has a sketchy background and has given horrific advice, which is well known to the public - and yet he is still on the air and people follow his every word.   People are idiots - more idiotic than the financial press.

The latest "thing" we are supposed to obsess about is Tesla.  The financial channels are all getting wet over the price of Tesla stock.  "Tesla is worth more than Ford Motor Company!" they shout, using market cap  as a false indicia of a company's worth.   Again, market cap means nothing, as it merely represents what the small investors (jerks like you and me) overpaid for the last share of stock, multiplied by the total number of shares.   It rarely, if ever, represents the real value of the company.

Recently, it was drawn to my attention that market cap is bullshit for yet another reason:  It fails to take into account the debt load of a company.  Thus, for example, Ford has shareholders who own stock in the company.  They get dividends and get to vote (most of them, anyway) on how the company is run.   Ford also has a lot of debt, too.   Bond holders in Ford Corporate Bonds get interest on their bonds.  The bonds can be traded just like stocks, too.   The only difference is that they don't get to vote on the operations of the company and if the company did go bankrupt, they would likely have their bond interest converted to stock, while the stockholders would be wiped out.

The other difference is that bonds have to be paid back, but stocks do not.  But usually bonds are paid back by issuing new bonds in their place to pay off old bonds.   And some companies do buy back stocks on occasion, (as Ford has done in the past) to drive up stock price or to increase value for shareholders.   But when you get down to it, both the bondholder and stockholder have equity stakes in the company.   Only one of their equity stakes is counted toward market cap.   Market cap is bullshit.

In this modern day and age when corporate bankruptcy is the new norm,  maybe being a bondholder is a better deal than a stockholder.   So if you have a company with a billion in bonds and a billion in outstanding stock, it has a market cap of a billion, as the debt doesn't count toward market cap.   Say a second company has no debt, but two billion in stock outstanding.  Its market cap is twice that of the first company.   But in reality, both companies have the same capital to spend on machinery, tools, or other investments.   The financial instruments used to operate the companies are just slightly different.   And if you wanted to "buy" either company in its entirety, the price would be the same, two billion dollars.   Market cap is bullshit.

Maybe we need a new metric to evaluate the worth of a company, to include the debt load as well as the market cap.   Maybe such a metric already exists.  (UPDATE: Yes, it does, it is called Enterprise Value).

But getting back to Ford versus Tesla, we are comparing one of the largest car companies in the world with a niche product maker, whose product will likely remain niche for quite a long time.  While electric cars are the wave of the future, they won't supplant the IC engine for years to come.  A 300-mile driving range sounds swell, until you realize that when you went on your last vacation, you drove more than that in a day.  The cost of the vehicles, without subsidies, has to come down much further as well.   Tesla is a classic example of the market "buying ahead" of itself based on the idea that the company will do better in the future.

Ford has an astoundingly low P/E ratio of about 11.   Tesla has has an astoundingly high ratio of over 370.  What does this mean?   You buy a share of Ford Stock, you make back your money in 11 years.   For Tesla, your great-great-great-great-great-great grandchildren break even in 370 years.

But of course, Tesla is more than just cars.   There is the home battery packs and roofing tiles that are slated to hit the market soon, promising to rescue the nascent solar industry.  But is this enough to make Tesla worth 370 times earnings?

One has to hope that either they can expand their profits by a factor of 15-18, in the near future to even make the P/E ratio somewhat rational.  Or they would have to cut costs by a similar amount.  The latter seems less than likely.

In order to increase profits by that amount, they would have to expand sales dramatically - by a factor of 15 or more.   And yet, the idea of $50,000 electric cars in every garage seems somewhat overstated, in an era of $2 gasoline.   On a personal level, the electric car doesn't make financial sense for most people.   Sure the tech-savvy and the early adopters all want one.   Mr. and Mrs. Middle-America can't afford one.  Joe Redneck "blowing coal" in his Dodge Truck would rather kill himself than own an electric car.   This is not a product that is going to achieve 100% penetration anytime soon.

The solar panel thing has similar issues.   Companies have gone bankrupt when subsidies for solar panels dry up.  Utility companies in State after State are pushing to pass rules limiting their obligation to buy-back power from consumers to wholesale rates, which in effect makes rooftop solar unaffordable.  In a recent anti-dumping case at the ITC, one bankrupt solar company wants the trade commission to slap a nearly 100% tariff on imported panels, which some experts say could utterly wreck the industry.   Meanwhile, utility companies are winding down the huge solar installations (such as Georgia Power's massive grid in Western Georgia) as the 30% tax credit is set to expire in 2020.   The future of solar under Trump looks grim.

Musk offers an end-run on this.  His solar roof tiles would store energy in a home battery back, thus negating the need to "sell back" surplus electricity into the grid.  You would be getting, in effect, retail prices for your juice, as you would be using it yourself.   However, the cost of the tiles and battery pack would be higher than a plain-jane rooftop panel alone.   And other problems exist as well.

For example, it has been noted that solar installs in States where utility rates are lucrative are already slowing down, as the "early adopters" all have their panels in place, and each additional conquest sale gets harder and harder.   It is a huge financial commitment, and leased panels raise all sorts of interesting questions, such as what happens when you sell the house?  Do the new owners take over the lease?  And is this a selling point or does it detract from the resale value?

For me personally, the idea of a solar roof seems interesting, if it weren't for the trees.  Not only do they block the sun for much of my roof, they drop huge limbs that bounce off an asphalt roof, but would likely damage glass solar tiles.   How well would these hold up in hail, by the way?  And my house is like millions of others - shaded by trees, oriented the wrong way, not set up for optimal solar usage.   It is not a panacea for everyone - it is not a one-size fits-all solution.

People who live in apartments and condos, for example, can't take advantage of solar roofs (maybe the apartment owner can, though).   And not only that, they can't run an extension cord out their window to plug in their electric car.   These technologies have social hurdles to overcome.  And as I have noted in the past, it is these social hurdles that are the main roadblocks to implementation of technology, not the engineering or even financial problems.

Then there is natural gas.   Nuclear power is in trouble because natural gas is so cheap that the cost of electricity from nuclear power plants is actually higher than that from a natural-gas fired plant.   And when it comes to Natural Gas, we are the Saudi Arabia of it - but not quite the Qatar.   It is a popular fuel and its popularity is increasing as tankers full of the stuff, in liquefied form, ply the sea lanes worldwide.

When Enron built an LNG fueled powerplant in India (before the company spectacularly went bankrupt) people called the project a white elephant (which it was and is).  Today, new LNG plants are being proposed - some floating offshore, to avoid the financial problems with building in third-world countries.  Maybe Enron was ahead of its time, or just in the wrong market.  Regardless, cheap natural gas remains one of the biggest problems solar is going to face over the next decade - unless subsidies and carbon emissions credits continue to be forthcoming, allowing solar plants to offset some costs.  Oh, but wait, we bailed on the Paris accords, didn't we?

So, given all that, is Tesla "worth more than Ford"?   Even assuming Market Cap accurately reflected some real value (in terms of buyout price) of the company, it is quite clear that Tesla is wildly overvalued and Ford maybe undervalued.  And the reason for the latter is, ironically, the same reason Tesla is overvalued.   The marketplace is irrational.

Small investors are fearful and greedy.  They want to get in on the "ground floor" of Tesla, and they are scared of losing their shirts in bankrupt car companies.   Ford, GM, and Chrysler are not strong players in the market yet.   Chrysler is trying to sell itself to whoever will buy.  GM sold off its money-losing European subsidiaries, closed its Australian plant, walked away from Venezuela, and today is trying to close its money-losing Indian line of cars (except those made for export to the US!) concentrating instead on a two-market strategy of the USA and China.  Ford has taken on a lot of debt and sales of cars are down.   The auto market is headed for a mild recession after selling cars like gangbusters over the last few years.   Outside investors, interested more in stock price than long-term survive-ability, are trying to jigger the stock values, which so far, shareholders have wisely turned down.

But the market is guessing that things in the future won't be so good.   Whether the market is guessing right or not, is hard to tell.   It seems that they are being overly optimistic about Tesla and overly pessimistic about Ford and GM.

In the end, despite all this "market cap" hoopla, the old-line car companies are churning out more cars in a week than Tesla does in a year.  Tesla will remain a niche player for many years to come.

So which do you invest in?   Beats me.  Quite frankly, both scare me to death.   Tesla has nowhere to go but down, in my opinion, since their profits are not going to increase by a factor of 15, even if they meet the ambitious production goals for the new model-3.   Ford is facing strong headwinds and a high debt load, and a dearth of new-car models.

Sometimes, maybe it is best to just sit on the sidelines, rather than jump into these things.  You don't have to invest in everything that comes down the pike.  And if it is even mentioned in the financial press, it is probably a bad bet, period.