This is the 3rd of a series explaining why the US stock portfolios which we work on have held Tesla at zero weighting even before the recent headline problems. The first outlined the serious problems the company has recently run into. The second outlined troubles which could be spotted through a close look at financial statements. This article looks at the question of valuation.
A friend of mine likes to say, "There's no such thing as a bad bond; there's only a bad price for a bond." The same goes for a stock. No matter how big the risks are, unless there's a guarantee that there never will be a dividend and that the stock price will go to zero, then there's always a price low enough that it's worth buying.
I've outlined how Tesla was a risky stock in many ways. But the question is, was the price low enough to justify the risk?
No, as of January, it was not. Typically, when one looks at valuation, one looks at some comparison of price to earnings. The problem with that is that Tesla doesn't have any earnings. It loses money: roughly 1 billion dollars per quarter. But the company is 14 years old, hardly a startup. It's long past time to make money. This is especially a problem given that up until recently, Tesla had a market capitalization higher than any other car company.
By every measure we considered, Tesla was a high-priced stock. In other words, its valuation was out of kilter, not only in relation to its (negative) earnings, but also in relation to its sales. It was both very high in market cap and also very high in debt. It wasn't worth the considerable risk. Of course, after recent major sell-offs, it would be wise to re-look at valuation levels. But this essay is a case study in how to guard a portfolio against the kind of return environment which Tesla has delivered year-to-date, so it is told in retrospect.
All of this raises an important question. Where was the board in all of this? And where were the shareholders? The answer is that Tesla has shown a long-term problem with its leadership and governance, which created incentives for the type of problems we've seen and offered little by way of structural oversight of the board over the CEO, or of the owners over the board. We'll look at the leadership and governance flags in the next article.