Wednesday, May 25, 2022

Trouble For Tesla?

Live by the bot, die by the bot...

A lot of people are freaking out, wondering if this is the big crash that we've all been waiting for.  During the Obama years, we had a slow and steady recovery from the crash of 2008.  During the Trump years, we had tax cuts and other means of "goosing" the economy - and then stimulus spending for both individuals and corporations, to keep the party going during a pandemic.

It all had to end sometime, and the longer we "goose" the economy with low interest rates and deficit spending, the worse the hangover will be.

Tech stocks are taking a beating lately, as many of these companies are not making any money or are not making enoug money to justify their crazy stock prices.

Elon Musk has used an army of bots and useful idiots to pump up his stock price.  It is classic "projection" that he claims that Twitter is dominated by bots, when his own posts are upvoted by millions of people who may or may not actually exist. Granted, there are simps and fanboys who think Musk is Space Jesus, but it seems lately, the Internet has turned on him.

The problem with having a company with a charismatic leader is that if the leader dies, is involved in scandal, or just loses his mind, the company is in trouble.   Warren Buffet made noises about retiring and was going to hand-off his company to a subordinate.  That did not go well with shareholders, so he is back in the saddle, apparently until death do us part.  When the inevitable happens, well, Berkshire-Hathaway may have to struggle a bit.

Apple has survived this only because Steve Jobs, while a charismatic leader, was more of a salesman and a promoter than a "hands on" leader.  The company has survived without him, and without a new charismatic spokesman.

The problem for Tesla is that the fanboys and meme-stonk buyers have hyped the price of the stock to the stratosphere.  The P/E ratio was in the hundreds - the thousands at one point - and has dropped back to Earth to less than 100 today.  Meanwhile, GM is loafing along at under ten.  Which is a better buy?

The thinking was, Tesla wasn't a "car company" and thus the P/E ratio should be more like a tech company, where profits could expand exponentially as they take over the market.  When you have a de facto monopoly (for the time being at least) your stock price may soar based on the expectation of future earnings.  Whether or not these grand plans materialize is anyone's guess.

The problem is, of course, that Tesla is a car company, and that conventional car companies are getting into Tesla's space quite rapidly - often with products that are better than what Tesla is offering.  I noted before that the Ford Mustang Mach-E is a better product that the clunky Tesla Model X "SUV" with its leaky gull-wing doors and crappy quality or its smaller cousin, the Model-Y.   When Tesla was the only game in town, people bought.  but once they have choices, will they still buy?  VW is selling nearly as many EVs in Europe as Tesla is, and they are new to the game.

But then factor in the charismatic leader.  People don't like to mix politics with their spending choices, and any good company knows that you should appear to be politically neutral, at least on the surface, if you are serving the public.   There has been a backlash against wealth inequality and people realize that when they buy a "Starbucks" the person behind the counter isn't happy in their job or paid well - and that the founder of the company is a right-wing billionaire.  Maybe people are so addicted to the coffee they will continue to buy.  Or maybe, like with Chik-Fil-A, there are enough customers who actually endorse the company's religious and political views (which they keep trying to distance themselves from!) so it doesn't make a difference.  In my town, many fundamentalist Christians view going to Chik-Fil-A as an atonement for missing church on Sunday.

The problem for Tesla isn't the loss of a charismatic leader, but the retention of one.  Musk comes across as a petulant middle-schooler on Twitter, making oblique giggly references to drug use and threatening those who dare criticize him.  The political leftists who embraced Musk as a visionary who would wean us from fossil fuels will no doubt have second thoughts about him.  Many are pointing out that far from being a "visionary" Musk was merely the lucky son of a gem mine owner in Apartheid South Africa, who bought his way into Tesla with profits he made from PayPal, and used government-backed carbon credits to pump up the profitability of his company.  Even Space-X would not have survived without generous government infusions of cash.  The "free market maven" is, in fact, suckling on the government teat, big time.  No wonder he is turning Republican!

But taking all that aside, I think the Tesla "meme stock" bubble is just deflating as it would have to, eventually.  There was no way Tesla could ever justify its dramatic run-up in share price.  A P/E ratio of 1000 or more would mean you'd have to wait 1000 years to make your money back, or that the profitability of the company would have to increase by a factor of 50 or more.  And the automobile business is a business of narrow margins.  You make a profitable product and your competitors copy it - often today using the same components from the same suppliers.

It's also a horribly cyclic business, with sales taking off every four or five years and then tanking, often taking out entire divisions or car companies in the process.  Over the years, almost every car company ever founded has faced bankruptcy or has been forced to merge with another, due to changes in fortune.

I noted before - time and time again - that "market cap" is a mythical number based on the number of shares outstanding times the share price the last meme stonk buyer on Reddit paid for a share.  Just because some idiot living in his mother's basement paid a lot of money for 1/10th of a share of Gamestop doesn't mean the company is poised to take off and make huge profits in the future.  The stock market is not a rational market, particularly when small retail investors are involved.  Particularly when social media - which has been shown time and time again to distort people's world view - manipulate share prices.  And old Elon has done this on multiple occasions - sometimes with just a Tweet, much to the SEC's dismay.

So this "richest man in the world" nonsense is just that - nonsense.  His wealth is measured by the "Market Cap" of Tesla, and that isn't money you can spend, it is a number on a piece of paper - a number he has borrowed against.   If the stock price continues to fall, well, he may end up in a bit of a pickle as those loans backed by shares as collateral, are called in.  He would then have to sell off more shares to pay back loans, further depressing share prices.

Maybe his new pals in the GOP can bail him out.  You laugh, that might very well be his strategy.