The Big Short investor, Michael Burry, who made a huge profit betting against the US housing market at its hype back in 2007, has indicated that Tesla stock predictions will implode in a similar fashion.
He added that its share price could probably plunge 90%.
Well, personally I’m not sure if that 90% drop will happen eventually, but definitely Tesla’s valuation is sky-high now.
And here’s why.
Tesla Stock Price
First, Tesla’s stock price has rocketed more than 800% since the beginning of 2020. Since then, it has lifted the company’s market capitalization to $600 – $700 billion.
Michael Burry, the Scion Asset Management Chief, slammed Tesla’s sky-high valuation. He related the valuation to its paltry sales, minimal profits, and massive market cap relative to other automakers.
Tesla Stock Predictions: Tesla vs Global Auto Industry
Source: Visual Capitalist / How Much Revenue Automakers Generate Every Second
Take a look at this interesting chart, showing you the revenue made by 19 major car brands, including Tesla. Volkswagen and Toyota are clearly the market leaders with annual sales of around $290 billion and $270 billion respectively.
Comparatively, Tesla’s sales was a mere $24.6 billion in 2019.
Let’s put that into perspective.
Take a look at this table, listing down all the automakers, including Tesla at the bottom.
Observe that the global auto industry has $2.3 trillion in sales. This is more than 90 times that of Tesla’s sales at only $25 billion for 2019. Well in 2020, Tesla’s sales increased to $31.5 billion. But it’s still far from the $2.3 trillion sales for the whole auto industry.
Then look at the earnings side, or the EBIT column (Earnings Before Interest and Tax). The auto industry has a $100 billion in EBIT in total, compared to Tesla’s -$69 million EBIT figure for 2019.
Yet, the market cap for Tesla at $600 to $700 billion range is only 20% lesser than the total market cap of the whole auto industry valued at around $800 billion.
To put it in another perspective, global auto industry sales is 90 times more than that of Tesla’s sales number. Yet the whole auto industry market cap is only 20% higher than Tesla’s.
In another word, the global auto industry has a price-to-sales ratio of only 0.35 times. Whereas Tesla’s price-to-sales ratio is at over 20-folds.
Now you can see why Burry is short on Tesla’ stock. And why potentially it could plunge 90% from its current value, to below $100/share by later this year. And that’s what he said.
Tesla Stock Predictions: Investing or Speculation
Some may say that Tesla is years ahead in terms of its technology. Well it may be true, and it may position the company to capture a good market share.
But what is the potential return for investors to invest in a company with the anticipation that it will capture 80% of the market and that this assumption is already priced into its stock price?
Don’t get me wrong. I have nothing against Tesla. In fact, i think it’s a great company and i love what they are doing. And Elon Musk is a great entrepreneur.
But again, we shouldn’t tie entrepreneurship too closely with investing.
The risk and return curve is definitely skewed unfavorably to investors at this point in time. And our job is to highlight to you, to help you make better decisions and assess Tesla stock predictions.
Is Tesla A Renewable Energy Company or An Auto Maker?
Well, some may argue that Tesla is not really a car maker. It is a renewable energy company. So it’s not fair to just compare the company to the auto industry.
Yes it may be true.
But at this point in time, let’s take a look at its revenue breakdown first.
Source: Tesla Annual Report 2020 / Revenue
Out of the $31.5 billion revenue in 2020, more than 80% of it comes from its automotive sales, at around $26 billion.
Source: Tesla Annual Report 2020 / Cost of Revenues and Gross Margin
What about the breakdown in terms of gross profit?
See this table. Gross profit total automotive stands at $6.9 billion for FY2020. On the other hand, total gross profit for the whole company is lower in value at around $6.6 billion.
This is because its Services and other segment is making a loss. Meanwhile, its Energy generation and storage segment is making minimal profit for the company at this point in time.
So together, the revenue and profit breakdown suggest that at this point in time, Tesla is still mainly an automaker.
Cathie Wood said that the potential of Tesla’s technology is years ahead. She is referring to its battery and even licensing its software as a service for autonomous-driving taxis in the future. However, the latter is highly speculative to actually price it in to a higher Tesla stock predictions.
At this point in time, the technology on autonomous driving software licensing is not ready to hit the market yet. And betting everything on Tesla is not investing, but more of a speculation.
The cost of technology is always coming down. You will not know somebody esle somewhere can be creating that piece of technology to compete head-on with Tesla.
Especially those bigger automakers or even tech companies. They have ready free cash flow from its core businesses that can be pumped into developing such technologies.
As investors, we need to see the traction and evidence showing the economics of such business. Otherwise, it’s not called investing.
Again, I want to stress that Tesla is a great company. And I believe great entrepreneurships will continue to thrive. And all these foreseeable technologies and greener energies are going to come eventually.
Until we have more data to price such growth confidently, we think Tesla is overvalued at this point in time
In the meantime, check out other insights and analyses that we have done.
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