Co-hosts Steve Davenport and Clem Miller explain why they don’t hold Tesla in their portfolios.
They dissect the electric vehicle (EV) landscape to reveal the burgeoning competition Tesla faces from both American and European automakers with superior customer service and extensive sales networks.
They explore the hazards of relying on an enigmatic, eccentric personality such as Elon Musk, whose focus is divided among his multiple endeavors.
They scrutinize the expiration of tax subsidies on EVs and the consequent implications for EV consumer. Also, they examine the significance of China's dual role as both a battleground for market share and a linchpin in the EV battery materials supply chain, presenting an angle often overlooked.
Finally, they look at how expensively valued Tesla’s stock is, even factoring in its probable growth prospects.
By the episode's conclusion, listeners are armed with an understanding of Tesla that inspires both skepticism and critical thinking in their investment choices.
Co-hosts Steve Davenport and Clem Miller explain why they don’t hold Tesla in their portfolios.
They dissect the electric vehicle (EV) landscape to reveal the burgeoning competition Tesla faces from both American and European automakers with superior customer service and extensive sales networks.
They explore the hazards of relying on an enigmatic, eccentric personality such as Elon Musk, whose focus is divided among his multiple endeavors.
They scrutinize the expiration of tax subsidies on EVs and the consequent implications for EV consumer. Also, they examine the significance of China's dual role as both a battleground for market share and a linchpin in the EV battery materials supply chain, presenting an angle often overlooked.
Finally, they look at how expensively valued Tesla’s stock is, even factoring in its probable growth prospects.
By the episode's conclusion, listeners are armed with an understanding of Tesla that inspires both skepticism and critical thinking in their investment choices.
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Steve Davenport:
Welcome to Skeptics Guide to Investing. I'm Steve Davenport. Today we're talking about Tesla and, of course, Tesla is talking about Elon Musk. Tesla is one of the so-called Magnificent Seven. It also is a common vehicle pun intended to express the theme of climate transition. The company is profitable and revenues and earnings have been growing. Yet, Clem, you don't hold Tesla in your investment portfolio. Why is that?
Clem Miller:
Well, Steve, there are several reasons, and in this podcast we're going to be talking about all of those reasons, but I'll start with my number one reason, which is that Tesla is no longer the only game in town. Tesla faces competition from other companies that are doing EV cars, electric vehicle cars, other US companies that are doing it, other European companies are doing it, and they're gaining ground on Tesla, and some of these companies actually have better customer service. They have a broader ground game in terms of being able to sell these cars, and so they have a broader opportunity ahead for being able to advance in the EV space than say, tesla does. Tesla's carved out a niche for folks who are relatively well off, and you see a lot of these in areas like, for example, the San Francisco area, which is quite wealthy. But I think in the rest of the US and in other parts of the world, it could be that other companies besides Tesla sort of the standard automobile companies would be able to increase their market share relative to Tesla's market share.
Steve Davenport:
When I think of Tesla, I only think about Musk and I hear people who invest just because they want to take advantage of his genius or his leadership. I think about the Edison's, I think about the Bezos, I think about the Gates. There are certain people who come along and people don't necessarily look at the earnings or the assets and they just look at the aura of the leader and it makes sense for them to just invest based on the fact that he's involved. Is that completely wrong?
Clem Miller:
No, I think a lot of folks do invest in Tesla on that basis, I think when you look. I'm not saying to put all your money there.
Steve Davenport:
I'm just saying that as a when you're looking at things, I find that a lot of people I don't know associate with his rebellious attitude or associate with his you know his ideas, and I'm not sure they're necessarily EV people or ransition, environmental transition people. They're just, they're drawn to a personality and his personality. Investing in personality something you do in your portfolio.
Clem Miller:
Oh, absolutely not. I think that I think that to invest, to invest solely on somebody's personality or liking that personality could be could be an issue. I mean, let's, let's look. There have been some articles last few days about how Elon Musk is complaining that he's no longer in control of Tesla. He owns about 13% of Tesla, so he needs other shareholders To agree with whatever he wants to do with respect to Tesla. And what does he want to do? Basically, he wants control of Tesla. He wants to do two things with Tesla. One is to continue to have Tesla be a cash cow to support some of its other operation, some of his other operations, such as SpaceX, and, and some of his newer, more interesting ideas. And also he wants Tesla to be essentially an AI or robotics company. He keeps chafing at the notion that that Tesla is an automobile company Because he doesn't want Tesla to be viewed in the same light as some of the other automakers.
Steve Davenport:
Yeah, he doesn't like the Ford or GM P/E multiples. No, he doesn't If the overall EV market is growing fast enough and does it really matter if there's that much? Competition. Isn't there enough for everybody to go around? Isn't there enough profits for everyone?
Clem Miller:
Well, you know, I would say that the problem here is that Is that a lot of the EV growth In the world you know the growth in the world is related to tax subsidies. It's really gotten off the ground with regard to tax subsidies and those tax subsidies. They have existed in all the major jurisdictions in the United States at the various state levels federal. You've got tax subsidies in Europe, you got tax subsidies in China and, and, and, quite frankly, a lot of these are expiring over the next year to three years and will they be extended? Maybe, maybe not, but we could potentially see quite a bit of demand destruction For electric vehicles once these tax subsidies ease off.
Steve Davenport:
My understanding is that China is a potentially immense market for EVs. How much do you think this helps Tesla?
Clem Miller:
Well it was, but now you've got considerable domestic Chinese competition for Tesla. Cheaper as well, they are considerably cheaper. You've got, for example, BYD, which is really challenging Tesla in China and could could potentially challenge Tesla and the others on a worldwide basis as well. And it's not just BYD. You have other companies in China that are also challenging Chinese or Tesla's dominance With it in China, and, to the extent that that some of these domestic Chinese companies are Competing with Tesla, they're trying to encourage the Chinese government to take certain subtle protectionist measures that that might favor them and disfavor Tesla. I'm shocked.
Steve Davenport:
You know, some country could be supporting its businesses over the open competition of other countries. Yes, I am shocked, shocked. I think that I understand this but I am shocked. Tesla relies heavily on China for supplies of specialty metals and lithium and other critical minerals. Do you think such reliance is a vulnerability that should concern investors?
Clem Miller:
Absolutely. In the whole international economics, geopolitics world, the supply of critical minerals, the available of critical mineral supply chains, is a very critical, literally critical, element in determining which companies and industries are likely to survive, and in which nations as well. And so Tesla has made a very strong effort to try to secure material flows from China and from other countries of the products that are needed for its batteries, such as lithium and graphite and other minerals for nickel for its batteries. And if, all of a sudden, those minerals were not to be available or were to be in short supply, they simply would not be able to make enough cars. And perhaps its competition might have at some point better access to those minerals, and that could again be the Chinese companies. They might obtain favorable access to the minerals that come out of China. And a little known fact, Steve, a little known fact about you like those.
Clem Miller:
Yeah, a little known fact. People wonder well, why is it that China actually has so many of these critical minerals and not other places in the world, like the rare earth metals and lithium and so on? And the reason for that is because China has not really put any effort into, or has put less effort into, environmental protection than other countries in the world. Some of these things like lithium and rare earth metals there's a lot of this all around the world, it's just a lot of it is in areas that don't like the environmental damage associated with the mining and production of these minerals. So China hasn't cared. They've weighed in on the side of obtaining the minerals, and so that's why they have the production and have an ability to influence markets through the availability of those minerals.
Steve Davenport:
Absolutely. What do you take on Tesla's valuation? Does that figure into your decision not to invest in it?
Clem Miller:
Well, next to the issue of Elon Musk himself, I would say that that's the second biggest issue. Tesla is just so expensive. Even when you look at it on a peg basis forward peg basis and peg being the forward price to earnings ratio divided by long-term earnings growth it's over four. I like to see companies that have peg ratios of between one and two. Nearly all of my portfolio is between one and two. I've got a few that are less than one. I got a couple that are more than two. I don't have anything that's near four, and Tesla is above four. It's just way too overvalued.
Clem Miller:
This, Steve, may go to the point that you made that you've got so many people out there, so many investors or speculators out there, who just like what Elon is doing and have a lot of faith in him as an inventor and as a—they like his kind of persona that he's developed. They invest on the basis of liking his personality and are willing to pay a lot more. Steve, you also made the counterpoint excellent counterpoint which is that he doesn't want Tesla, that is, Musk doesn't want Tesla to look like or to be considered to be similar to the other automobile companies that are racing to catch up with him because those companies have much lower valuations, they have much lower multiples, much lower multiples, and they're going to have more attractive pay ratios. He doesn't want Tesla to look as expensive as it really does. By characterizing Tesla as an AI or robotics company and not a car company, he can create that imagery of yeah, we should be priced, just like some of these newer AI companies. Sure.
Steve Davenport:
I think it's his job really to try to convince investors that they're worth more. I think that's part of the aura of a CEO and I'm not sure it's always a good thing, because I think sometimes they may stretch the truth about their company and about its prospects in order to get investors interested. I'm a big believer in the PEG ratio. Like you said, it's the PE divided by the earnings growth. I look at companies and say, wow, that's a 30% earnings growth, but the PE is 120. I don't want to get involved in that kind of earnings growth If I have to pay that much for it. I would much rather see something that has 15% earnings growth and somewhere around a 20 multiple. That, to me, is more valuable. I agree with the whole concept of PEG. I think it's really one of the episodes we should probably do in the future.
Clem Miller:
Yeah, I would just say on PEG that to a degree you have to discount the denominator that is earnings growth, because that earnings growth, forward earnings growth is a function of what analysts are thinking about future earnings growth. Sometimes they can be a bit on the optimistic side.
Steve Davenport:
Correct. Everybody wants people to understand why they have a buy. Sometimes I think they stretch that earnings growth number beyond reality. I agree with you that Tesla is a questionable company in terms of valuation.
Clem Miller:
Just to take that point even further if you compare Tesla and Nvidia on PEG, tesla looks a lot more expensive relative to its perspective earnings growth than Nvidia does. Nvidia is considered to be quite expensive. Tesla is beyond the bounds. Nvidia might be borderline extreme, but Tesla is outside the outer bounds of being extreme.
Steve Davenport:
Yeah, we got a question from the mailbag that says either of you currently own Tesla, and I think this can be a very short answer. The answer is no, all of the above. The only thing I would say is that he is doing some interesting things. One company that I'm interested in is Albamarle (ALB) produces special metals that are used in the batteries. To me, if you want to play the EV space, that's how I would think about it, because they supply Ford, they supply GM, they supply Tesla with some of the basic components of the batteries. To me, if EV wins AL B, wins. I think that I would much rather do that than something that's as specific as the CEO is the reason why I'm buying it. Then he goes smoking pot during a podcast. I don't like to depend on people that I'm not sure about. I would much rather feel good about a business and buying the business versus buying a personality. Do you have anything else to add on?
Clem Miller:
I would just say that again with regard to Musk, look what he did to Twitter, now X. He really ran that thing into the ground, changed it a lot, made it much more political. I just think he could potentially do the same kind of damage that he did to Twitter to other companies where he has some influence. I would be quite concerned as a potential investor in any of Musk's companies. To me, the one that might be the most interesting down the road is SpaceX. Even there I would be concerned about-.
Steve Davenport:
I think he could have an advantage in incorporating self-driving technology. I think that that's the area that I think that could make his lower-end cars good candidates for taxis, because they've been working on this for a while. I know a lot of people have been working on self-driving technology, but I'm just saying there's a possibility that they become the de facto first to market and that there is some advantage to that, and so I think when we look at this, I think you have to do the hard work and look at the numbers to try to determine whether the company is what you want to be investing in on self-driving.
Clem Miller:
Tesla faces some competition too, namely from Google, alphabet, on their Waymo product, and Google that is, Alphabet has a whole laboratory, so to speak, that works on things like that. Some of us of a certain age will remember Bell, or at least have heard of it. Bell Labs was the think tank, think tank internal to AT&T that is, the old AT&T and they would come up with all sorts of inventions and it's sort of an unlimited budget. They're like an internal NASA or DARPA to the AT&T group and that's essentially what Alphabet is doing. They're cross-subsidizing their other projects and of course, the Waymo project is one of those.
Steve Davenport:
No, Is there anything else you want to say about Tesla or this concept? Is there a stock that you think of besides ALB, that you would think could be a beneficiary of AI? I mean of EVs, yeah.
Clem Miller:
I think not really. When I think of the minerals producers, lithium and so on, yeah, I mean there are some out there, but in my investment process and sort of more on the judgmental side as opposed to the quantitative side I just think of commodity-oriented companies as being a bit too volatile for my taste. They have ups and downs on share prices. That being said, I'm not totally against them. I own a uranium company and uranium has been doing extremely well in recent years, so I'm okay with that. But uranium deposits are very limited. Narrow Lithium they're trying to develop in many parts of the world now, knowing that there is this increased demand, so I just don't know where Lithium is going to go. So you and I might have a difference with respect to Lithium miners.
Steve Davenport:
I just think that sometimes you've got to go back to the basics and think about what's going to affect everybody. I've owned glassware Corning for a while because I thought that to work with the phones glass, and then, I think, with some of the work with these, when you're looking at new homes and they talk about the ratings of the windows and how they take in the sun when you need it and they don't take, I think eventually the solar technology in that whole space has a lot of ideas that could lead to something interesting.
Clem Miller:
Yes, I mean you're talking about a more generic investment topic, which I think you and I both agree on, which is that you don't necessarily have to invest in the well-known companies that make the products that we're all aware of. You can invest in the suppliers to those companies and the contractors to those companies.
Steve Davenport:
I appreciate your work today. I think you did a great job of summarizing Tesla Clem. I think that our listeners really appreciate the insights. Everybody out there for Skeptics Guide to Investing, thanks for listening. I hope you enjoy this and I hope you send us some comments and ideas and just keep being skeptical out there. Nonsense when non straightforward, straight talk for all. Thanks, have a good day.