Tesla and Hertz – Whatever next…

Tesla’s rise into the $1 trillion club is extraordinary - proving that listening to what the momentum crowd is buying, while suspending disbelief and fundamental analysis is one road to success. Hertz is a lesson in seizing the moment – its stock gains and free publicity from its new EV fleet will likely exceed the cost of the cars!

Blain’s Morning Porridge – October 26th 2021: Tesla and Hertz – Whatever next…

“Democracy is absolutely the worst form of government, except for anything else…”

This morning: Tesla’s rise into the $1 trillion club is extraordinary – proving that listening to what the momentum crowd is buying, while suspending disbelief and fundamental analysis is one road to success. Hertz is a lesson in seizing the moment – its stock gains and free publicity from its new EV fleet will likely exceed the cost of the cars!

As I write this morning’s Porridge I am going to try and not sound like a bitter and twisted old man….

I suppose today’s lesson today might be: “Don’t over think it.” Every morning I wake up and try to make sense of the market noise to discern the big forces acting on markets, the underlying rationales, what the numbers really mean, the potential arbitrages, and the direction of trade flow. But I wonder if I’m doing it wrong.

It’s not what I think that matters. The only thing that’s important is what the market thinks.

The market is simply a voting machine where suffrage is simply the price of a stock. If the market believes Donald Trump’s sight-unseen social media empire is worth billions, so be it. If the market believes Meme Stocks are worth trillions, so be it. Whatever the market believes.. so be it.

As so many clever economists and traders have spotted before me.. it’s the madness of crowds that matters. Over the last few years understanding Behaviours has proved far more useful than forensic accounting skills when it comes to stock picking.

I make the mistake of calling out the inconsistencies of the “drivers” like Adam Neumann, Cathie Wood, Elon Musk and the Eminence Noirs driving SPACs and funds – rather than understanding what makes them look so attractive, clever, clearsighted and intuitive to so many market participants. Promise most people you are going to make them unfeasibly rich – and they will listen.

I make the schoolboy error of asking.. how?

Life is full of regrets. If we let them define us – we truly would be miserable.

Do I regret dumping Tesla in the wake of the cave-diving comments scandal? I reckoned it was massively overpriced around $70. Ever since I have pontificated why it’s not worth a fraction of even that valuation. I don’t regret selling, but I acknowledge I’ve been wrong about the price. But not because I got the fundamentals wrong – I misread the crowd. Failing to understand the momentum was my failure. I am less wealthy than I could have been.

Tesla is worth a Trillion dollars plus. Elon Musk is the richest guy on the planet. These are facts.

Tesla, remarkably, has become a great auto-company. It makes good cars. It understands the logistics of super-charging networks. It has front-run the switch from ICE to EVs, making them mainstream, leading a massive industrial shift, and forced the rest of the sector to play catch up. It changed the perception of EVs from milk-carts to desirable luxury status symbols. It will successfully open new plants and sell more cars. It’s the number one selling car in Europe this quarter – possibly because no one else can get hold of chips!

Perversely, Tesla’s success demonstrates momentum can take a company to fundamental strength. For much of Tesla’s life, sceptics like myself predicted it would stumble and fall, brought down most-likely by apparently insurmountable production problems, its debt load, or regulation. It didn’t happen. Instead it survived, thrived and has been able to reap the momentum and build a strong balance sheet on the back of its extraordinary stock price gains. It could potentially acquire whole swathes of its rivals and supply chain.

It’s been an extraordinary climb from likely disaster to undeniable success – and the one constant has been the support of dedicated Tesla fans. Frankly, it flabbergasts me just how Elon got away with it… but he did.

At this point you are expecting a But…

But…. What would be the point?

In the mind of the crowd facts like how 10-year old Telsa only just started making profits on selling cars don’t matter. Its consistently made profits for the last 2.25 years – largely from selling regulatory credits. Prior to that… Tesla racked up losses. It has consistently failed to deliver so many promises on deliveries, automation and new models. None of these facts matter.

It’s what the market believes that matters.

So, there is no point looking at Tesla this morning and trying to explain how it’s worth a trillion – a multiple of the much larger and more profitable Toyota. Let’s not wonder  why many analysts reckon its going higher. There is no point trying to fathom why a $4.2bn order from newly out-of-bankruptcy Hertz caused the stock price to ratchet up $110 bln yesterday.

This morning analysts are predicting Tesla stock will go higher, building from the “breakthrough phycological level of $900, right through the key $1200 milestone level, and then the next level is $1500.” There was nary a mention of its PE, fundamentals, margins or such irrelevancies… just that its going higher.

Meanwhile…

The Hertz trade is fascinating – Hertz has generated tremendous publicity for its re-launch, and enough stock upside to pay for the cars! It steals a march on any other hire firm wanting to build a fleet of EVs. Hertz went bust early in the pandemic and sold its whole fleet. But, as signs of economic recovery first appeared it became the perfect recovery play. After a bidding war, it was bought out from bankruptcy and restarted with a clean sheet. It now has its very own army of meme stock proponents. Its stock price has more than doubled to $12 on the OTC market.

The fact car hire firms are vulnerable businesses in a highly competitive market, or there are now literally hundreds of new EV makers, in addition to the incumbent ICE automanufacturers – all now competing in the EV space for Tesla’s lunch – doesn’t matter.

For now.

Always bear in mind Blain’s Market Mantra no 1: The Market has but one objective: to inflict the maximum amount of pain on the maximum number of participants.

No time for five things this morning… Out of time and back to the day job.

Bill Blain

Strategist – Shard Capital

18 Comments

  1. “There is no point trying to fathom why a $4.2bn order from newly out-of-bankruptcy Hertz caused the stock price to ratchet up $110 bln yesterday.” Love this one.

    Great story. Reading the crowd, very complex indeed.

    • I find it very difficult to read the crowd – I do my homework on things and question the validity of statements and projections, getting into the nitty gritty of why things might or might not work. I am not an engineer, but I want to be aware of risks that might scupper the investment. Thus get a handle on the Tech and the market, and the projections.
      In other words… not the way the market works now..
      I think if I just start believing in fairies I will get rich – its worked for the fanboys!

    • Think of it a bit differently – If Hertz is buying 20 percent of their entire fleet form Tesla at full price (already confirmed by Elon), what does that say for the tipping point for future demand for EVs and Tesla? It’s like when online sales in the US went to 5 percent of total sales and was growing 40 percent a year, what did that say about Amazon?

  2. We have a crowd of novice investors that think that the only way is up. Obviously did not learn anything about gravity at school.

    They will however eventually learn about it, in the real world

    • I think “Only Way is Up” was a hit for Yazz back in the day… great song and utterly not the way markets should work.. but hey-ho!

  3. I think this is one of your best summations to the entire craziness we are now in. Facts don’t matter, logic doesn’t matter as a matter of fact, nothing matters other than narraitve. Pure and simple. In todays world we’ve gone from “The one eyed man in the land of the blind is king.” to now “The man with any sight is worse than blind, possibly contagious, and must be exiled immediately!” It’s all summed up in the money quote of this article.

    “It’s been an extraordinary climb from likely disaster to undeniable success – and the one constant has been the support of dedicated Tesla fans. Frankly, it flabbergasts me just how Elon got away with it… but he did.

    At this point you are expecting a But…

    But…. What would be the point?”

    Truer statement of fact has yet to be said.

  4. I agree with most of what this article is saying – but market mania based on intangible strengths is effecting the entire market – just not Tesla’s valuation. However, despite having a gut feeling that electric vehicles are far too early to the marketplace – outrunning electrical charging capacity and disadvantaged by EV’s limited range – I think Mr. Musk has exhibited genius in the development of these cars despite his myriad critics. I traveled to Hong Kong in 2014 and to Amsterdam in 2018. Teslas were all over Hong Kong and at Amsterdam’s airport they were being used as a taxi fleet. This is a great testament to the car’s durability, economy and strengths. The naysayers are mostly wrong and are exhibiting MDS (Musk Derangement Syndrome) and we should be wary about the immediate conclusions made by commenters about the accidents and battery fires. There should be a study comparing these incidents to other similar brands of EV’s. FInally, Musk has done the world a great service by pioneering and advancing the technology as the world moves towards a better technology for personal ground travel.

  5. I used to see articles like this all the time about Amazon in 2000 and 2001 and Amazon was not even within 5-10 years of being cash flow positive. Tesla is massively profitable and generates $1 billion plus plus in cash now and that’s increasing due to software services and demand. You can do the math on Tesla’s 2023 P&L when they will sell 2 million cars (just based on current capacity, not new capacity) and the cash flow generation is massive. You may want to revisit how you look at this stock. I am not saying it’s cheap. But it is not grossly over-valued. By the way, the Porsche Tycan is launching now at more than double the price and half the range (203 vs 405 miles) as the Tesla model S. Good luck to them

    • Thanks Robert for this.
      I see your point – but Amazon completely changed the world by reinventing mail order delivery to click-delivery. That was massive.
      What Tesla has done is very effectively re-invent the car. All the other aspects like autodriving and using it to generate income as an automous taxi are way way down the road if ever. Its also very vulnerable to increasing competition in the space – its moat is shallow.
      Amazon very quickly built its dominant position, and a very deep moat, and still looks unthreatened.
      BB

  6. Tesla makes a fine EV car and that is why I ordered a Model S in March 2021. After eight months, I still don’t have my new car and the delivery date has been moved seven times. Not even once has anyone from Tesla reached out to me to explain what is causing the delay in the delivery of my car. I have written letters, sent emails and made phone calls but to no avail. The Tesla organization simply does not care about having satisfied customers. One day their supply will be greater than the demand, and Tesla will wish they had treated their customers better. Creating positive relationships with their customers is of no interest to Tesla. Meanwhile, I continue to wait.

  7. As always, the market is a reflection of humanity’s current level of wisdom and intelligence – in other words, as of 2021, it’s incredibly dumb.

    Tesla is worth a trilly, Biden is president and Reality-TV reigns supreme. Need we say more?

  8. I hate to use the following expression, but “back in my day” when there were brokers called Solomon Brothers, Oppenheimer, Lehman ; when options only traded over the counter and not on any exchange; when Solomon invented block trading and Oppenheimer’s head of trading had a degree in psychology which he used to suss the market and Lehman was a small partnership with a Paris Office (where I worked); one had a method of reading the market. No sour grapes here either, but the kids have taken over and that I accept. I also still think that the old adage that there are 3 market participants called the Bulls the Bears and the Pigs still applies and I think there is a little piggy-ness involved here! As Andrew Carnegie said to the fellow who asked how he got rich in the market, his answer was,” I let the other guy take the first 20 percent and the last 20 percent and I take what is in the middle.”
    -Steve Sands

  9. Saudi Aramco’s market cap as of yesterday was valued at £2 trillion.

    Proven oil reserves v ?

  10. As one person said, “gravity”. Case in point; WeWork.
    It goes to the moon until it doesn’t.
    As quickly as the crowd buys up, it sells quantum leaps faster down.
    So who gets the chair when the music stops.

  11. Seems odd to write about the madness of crowd, the importance of logic and fundamentals, while also revealing that you dumped tsla “in wake of” (which I can only interpret as “because of”) the pedo guy scandal which frankly has nothing to do with anything..

    • Actually.. Musk’s behaviour has everything to with everything.

      A key metric and indicator of future success for any successful company is the quality of its corporate governance. I consider Musk’s abuse of the British cave diver who dared challenge his stupidly naive suggestion of sending a submarine down a cave system by accusing him of peodophillia was the kind of childish, self-entitled arrogant BS that typically destroys the credibility of companies. It was a disgusting insult and heaven help the legal system that let him away with it…

      Following Musk’s outburst, I made a conscious forward-looking decision Tesla was unlikely to solve its production issues, survive its debt crisis, and recover if it was led by such a narcisitic charlatan.

      I was wrong… despite Musk’s despicability the company thrived. What does that say about the future of capitalism? THat its admirable to be a bully? To use ones financial might to belittle others who disagree with you?

      In a world where every investor claims to be following ESG principals I am shocked more large investors have not called out Tesla for its social issues – the consequences of lithium mining and disposal, and its appalling corporate governance record.

      Bill Blain

  12. Great article with many laughs for me. As for Tesla I’ve never owned the stock and always thought Musk needed meds, but I am an ecstatic Tesla owner (have2) and they are fast, fun, no maintenance and cheap to charge. Road charging can add 150 miles of range in less than 20 minutes, barely longer than an ICE gas refuel. The world is buying the cars because they are best product out there.

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