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I am a first-time investor – should I buy Tesla?

Paul Rickard
20 May 2021

There is an investment adage that goes “when the taxi-driver starts the conversation and offers you some share tips, that’s close to the top of the market and it’s time to get out.” This explains why I was absolutely blown away when a close family friend, who has never owned a share outside their compulsory super, asked me on the weekend to advise on whether he should buy $20,000 of Tesla shares.

One of the most volatile “large cap” stocks in the world, if not the most volatile, Tesla is also one of the most expensive. In fact, its market capitalization of US$556bn exceeds the combined worth of the four largest car manufacturers: Toyota, Volkswagen, Daimler and General Motors.

I am a huge fan of the Tesla product. The vehicles are absolutely brilliant – well designed, they look great and who doesn’t enjoy the idea of being able to go from 0 to 100km per hour in just 2.4 seconds. Moreover, they are green, and we all know electric vehicles are the future.

But that doesn’t mean that I am an investor.

The Tesla “believers” are extremely passionate about the company and CEO Elon Musk. They marvel at his audacity, his ingenuity, his brilliance, his unorthodoxy and his entrepreneurial spirit. The electric vehicle and lithium-ion battery revolutions are here, and Tesla is leading the way. Through SpaceX, Musk is working to democratise space travel (although the payback comes from launching satellites and space delivery vehicles).

The “non-believers”, and there are many in this space, look at the valuation of the company. It trades on a forecast enterprise value/revenue multiple of 11.2 times, on an astronomical trailing price/earnings ratio of 579 times and on a forecast forward PE multiple of 93 times.

They scoff at the volatility of the share price, which at US$577.87, has put on 1,209% over the last five years. Yet over the last year, it has been as high as US$900.40 and as low as US$157.00 per share.

Tesla (TSLA)- 5/16 to 5/21

Those looking to the future point to the enormous investment by Tesla’s competitors in electric vehicles. In fact, this is the only investment going on as car manufacturers rush to comply with a forthcoming European Commission ban on the sale of cars and vans with internal combustion engines. Volvo, Jaguar, Ford Europe and Bentley have said they will move to an all-electric line-up by 2030, while Volkswagen and General Motors will offer a majority of zero-emissions vehicles within the next 15 years.

With Joe Biden in the White House, there is a similar momentum building for electric vehicles in the USA. On Tuesday Biden visited Ford’s EV plant in Michigan ahead of the launch of an electric vehicle model of its F-150 Lightning truck, Ford’s biggest selling vehicle (by Aussie standards, a big ute).

While Tesla has a huge lead in EVs and batteries, the other manufacturers are coming. The dilemma for Tesla is how to respond. Does it stay “up market” and offer high margin, low volume “luxury EVs”, or does it go “down market” and compete in the low margin, high volume mass market? One thing is for sure: the price of EVs will come down over the next years as competition hots up.

Betting against Tesla is Michael Burry of The Big Short fame. According to a filing last week, he has taken a US$530m position that will pay handsomely if Tesla’s share price falls. As it is mainly through put options, his potential losses are capped, but it is nevertheless a big call.

If he wins, he will be one of the few to profit. Many have tried short selling Tesla shares, only to fall foul of Musk and a rising share price. A master of self-publicity, Musk has used Twitter and other media to energize the troops to lend support.

I am somewhat ashamed to admit that I have no firm idea where Tesla’s share price is heading. I think it is over-valued and will invariably face the headwinds of competition. But I can also see the army of “believers” who want to back Tesla and Musk, including a number of institutional investors. So, it might go up or it might go down – which is sounding like a 50/50 play.

My advice to my friend? Well, if you have done your research and most importantly, it is money you can afford to lose, go ahead. The Tesla share price might go back up to test its US$900 high, or down to test support around US$180.

If you can’t afford to lose the money, or don’t like 50/50 plays, don’t invest in Tesla. Consider some lower risk options like FANG (an ASX exchange traded fund from ETF Securities that tracks an index of 10 tech stocks including Tesla), or onshore, some “blue – chip” stocks such as CBA and CSL. While the latter may go down in the short term, over 10 years, I reckon it is a 90/10 play that they will higher in price than they are today (plus pay some dividends along the way).

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