Shorting Tesla - GUH Weekly Recap #1
This week I'm talking about Tesla and why Michael Burry is (most likely) shorting it.
The Weekly Recap will not have the news anymore. It made sense when it was daily but weekly, financial news are not really worth it. Maybe I’ll add a section “What to look for next week” for the next one. Also, expect tomorrow a long form article about Biden’s budget proposal because it’s a quite interesting thing. Also, not native english speaker, so sometimes I express myself poorly, sorry about that. Anyway, enjoy!
If you've ever tried to do a fundamental analysis of a company, you've had to look at their numbers. But if you only pay attention to their revenue, market share, P/E ratio and so on, you're missing on a very important piece of information : the story behind those numbers.
A sentence that I like to say is this :
Valuation is about telling a story where the fundamentals are your constraints.
It's pretty inspired by Aswath Damodaran's keynote where he talks about the valuation of a company. And this sentence is a pretty good summary of it (although I highly recommend you to watch it).
Since valuing a company is looking at the numbers and coming up with a story from them, the valuation depends on your experiences, personality, culture, creativity and emotions that day. Your valuation of a company can be vastly different from mine because the CEO reminds you of someone that really succeeded and it made you much more optimistic as a result. And this is fine. Better, it's actually good!
Now if you have to tell a story and the numbers are your constraints, then the less numbers you have (basically the younger the company is), the more freedom you have and therefore our stories might differ even more. In the case of a startup for example, if you have a very pessimistic view of the company, you might say that the product sucks and they will never sell that shit, but if you're the CEO and a high valuation is in your best interest, then you might say that it will change the world or something. And that's what they do.
But then, as your company matures and as "it gets more numbers" (more earning reports to look at, more news about your company, and overall more stability), the more boring your story will become but more importantly, the less optimistic it will be. If your company is already 5 years old and all you've done is a social media app, you will have a harder time saying that you're going to change the world.
Somehow, by an ungodly miracle, Elon Musk managed to extend that first stage to a point never seen before. Tesla wasn't just a car company! Oh no no no no! It was a software company mixed with a battery company with a supercharger network that happened to be selling cars. That idea that it's not just a car company spread everywhere and Tesla's valuation was no longer constrained by the expectations of a classic car manufacturer.
And it didn't have that much historical data to give a more realistic outlook of the company. And it was in a new untapped market. This is hard to make a good valuation on a new market that has yet to be fully mature.
Also, Elon Musk's behavior contributed immensely to this insane valuation. He essentially became a memelord and this rallied a lot of retail investors to his cause. I talked about it in this daily recap but essentially, Tesla's valuation is based mostly by the hype and the memes.
So at the end of the day, the story that we had for a long time was that Tesla is a good innovative company, the first mover in a exponentially growing market (EVs) and is run by a bold (and sometimes a little bit crazy) CEO.
But now that we have more numbers, that the company and the market it's in mature, the story becomes : good company, encouraging fundamentals but a lot of competition is comming to get a piece of that EV space. Which is a bit less optimistic than before, isn't it?
Also, being the first mover in a new market has very rarely been good for the company itself. The first movers usually pave the way. Then, other companies take their idea and improve on it thanks to their own expertise. This makes their products much better and you become the one that's lagging behind. And there are countless examples of that : Yahoo, MySpace, AOL, and a lot of startups that you don't even know because their ideas have been taken by big corporations that have the ressources to crush any competition.
So a lot of competition is comming and historically, being the first is not very good, that says a lot about Tesla's future as company but what about its valuation?
Well, as Tesla becomes older (or more mature), the expectations become more realistic but also its "meme power" goes down, just like any other meme. And that leads to a much lower valuation. And the more, the meme goes down, the more Elon Musk's attempts at reviving the meme goes from the cool hip dude to the "How do you do, fellow kids" guy.
You can already see this happening with Bitcoin that became this old cryptocurrency that is now for institutions so younger people no longer care for it. Now, Dogecoin is the new cool kid in the block.
Same thing with Gamestop and AMC. The same way Bitcoin's journey to become mainstream killed the meme, Gamestop becoming completely mainstream made them switch to AMC almost exclusively to the point where Thursday for the first time, AMC went up a lot and Gamestop stayed pretty much flat.
So basically : Tesla has less meme power (I can't believe I just said that to talk about a $600bn company but here we are), is more mature so there are more constraints for the story being told, and there are more competition which makes Tesla being the first a liability instead of an asset.
So that's very likely why Michael Burry shorted it and that’s the whole point I was trying to make all along. At least it would fit his strategy pretty well.
As for what I think : Elon Musk's undisputed genius, insane work ethics and meme status paid off big time for a long time. His crazy behavior also worked in his favor as it gave him and his company free publicity. This works well for the investors that look for younger companies because they're looking for unique and bold guys and he definitely fits that character perfectly. But this does not work well for investors that want to invest in $600bn businesses. Those investors prefer stability and Elon Musk is not really a stable guy. So as the company matures even more, Elon Musk will need to get his ego in check and accepts to appoint another CEO to lead this more mature company or else it will not thrive. I'm pretty sure he will do this because he would much rather have his vision become real than having his ego satisfied. As for what I think will become the next Tesla (or the next EV meme stock), Ford seems to be the next one. And if you think "Dude, it already went up 3 times in the past year!", you should probably look at the Tesla stock chart one more time.