In late 2018, I began acquiring Tesla shares at a split adjusted price of $68 per share (Tesla shares ended Monday trading at $706). In early 2020, I purchased more shares at $84 believing Tesla possessed insurmountable advantages not easily replicated. After realizing that Tesla shares had grown to represent over 60% of my individual stock valuation, I reduced my exposure to 30% in January 2021 by selling shares at $730. In June of this year, I slashed my Tesla holdings again to 15%, selling stock at $596.
The return on my Tesla investments have been exceptional even with a decline this year of nearly 5%.
“I would never buy [Tesla], and I would never sell it short.” - Charlie Munger
What has kept me from selling all of my Tesla holdings given the tremendous growth in the company’s valuation and the looming competition? I continue to hold shares because of an interesting answer given by Charlie Munger (vice chairman of Berkshire Hathaway and partner to Warren Buffet) when asked about Tesla and Elon Musk recently.
“I would never buy [Tesla], and I would never sell it short,” which is a technique investors use to bet that a stock will decline. “I have a third comment,” Munger said. “Never underestimate the man who overestimates himself… These weird guys who overestimate themselves occasionally knock it right out of the park.”
Tesla’s stock already is at “knock it out of the park” levels. At a $699 billion valuation ($706 per share), it’s the sixth most valuable company in the S&P 500. Earlier this year Tesla reached even higher levels as the stock climbed to nearly $900 per share, increasing the company’s value to $874 billion at the time. As a comparison, Toyota, is valued at $272 billion. Yet, Toyota sold almost 10 million vehicles in 2020 (nearly 20 times more vehicles sold by Tesla).
Tesla sits at a crossroad today relative to its valuation.
Some believe Tesla will eventually sell between 10 million and 20 million electric vehicles. At 2.6 times the value of Toyota today, Tesla would need to nearly double the number of vehicles Toyota sells to justify its current valuation. Frankly, I do not imagine Tesla will ever sell 20 million vehicles globally (nearly the combined volume today of Toyota and the VW Group). Even accounting for the higher margins enjoyed by Tesla selling electric vehicles versus gas cars, it seems many investors are willing to believe Tesla will reach Toyota plus VW Group sales volumes in the future to justify its valuation today. This seems misguided. Unless…
In the next newsletter I will describe what Tesla must accomplish to justify its current valuation. If it does, then today’s stock or higher may be reasonable. But competitor efforts in the space will matter as well. And these competitors are not just the legacy automakers.
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Disclaimer
TaaSMaster, LLC is not a registered investment advisor or broker/dealer. All investment opinions expressed by TaaSMaster, LLC are from personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors may occur.