Wall Street and investors would like to believe that having access to information at the click of a button leads to rational and orderly investing habits. However, it doesn't always work out this way.
Back in 1999, during the dot-com boom, Wall Street and investors also had easy access to information. Yet investing in 1999 seemingly had little to do with what was on a company's income statement or balance sheet and more to do with pie-in-the-sky promises regarding e-commerce potential. As a result, investors could seemingly throw a dart at the newspaper and come out a winner.
Of course, hindsight being what it is, we know how the dot-com era ended -- and it's wasn't pretty for investors.
Tesla's stock hits ludicrous speed
Now, cue the curtain for electric vehicle (EV) manufacturer Tesla (TSLA -2.76%), which has gone parabolic in recent days and is partying like its 1999 all over again. Over the trailing five sessions, through Feb. 4, Tesla's share price was up by 57%. Looking out a bit further, the company's valuation has doubled in a month and climbed by nearly 380% since the end of May. With a market cap of $160 billion, Tesla is now larger than General Motors, Ford, Fiat Chrysler Automobiles, and Honda Motors combined... and it'd still have a few billion in market cap to spare. It's now the king of U.S. car stocks. Tesla is also within a stone's throw of surpassing time-tested giants like McDonald's, Nike, and Netflix in market cap.
Why the monumental rally, you ask? Honestly, Wall Street doesn't even know that answer. One strong possibility is simply the fact that Tesla is executing on something that hasn't been done in more than five decades. CEO Elon Musk has taken his automotive EV concept and is turning it into a viable mass-produced offering. It probably doesn't hurt that Model 3 delivers also came in ahead of expectations during the recently reported fourth quarter.
Tesla has also opened a second production facility in Shanghai, China. With the company no longer solely reliant on the Fremont, California, facility for production, Musk anticipates that Shanghai will be responsible for producing 150,000 Model 3 sedans per year, when operating at full capacity. Tesla is in the process of lining up local parts sourcing at its Shanghai factory by year's end, which should have a notably positive lift on margins.
Then again, the parabolic rally in Tesla also has the making of a massive short squeeze. It's no secret that Tesla is the most-shorted publicly traded company, and since losses aren't limited for short-sellers, their need to cover may only be furthering this uptrend.
We've seen this play out before, and it won't end well for Tesla's shareholders
But the fact is that history tells us such a move is unsustainable. We may not know exactly how high Tesla's stock will ultimately go in the near term, but it almost assuredly will not end well for investors.
Perhaps the biggest argument bulls are making to justify this rally is the idea that Tesla isn't just a car company. Optimists suggest that with Tesla you're buying technology on wheels. Yet there's a fatal flaw with this argument that plagues every next big thing investment. Namely, investors always overestimate the uptake and impact of new technologies.
When the internet was invented, B2B commerce came to the forefront, the human genome was being decoded, 3D printers became popular, and blockchain emerged, all were expected to change how we live -- and some very much have. But not a single next big thing investment opportunity over the past quarter century has lived up to its billing, at least initially. This isn't to say that EVs aren't the future, so much as to suggest that market share growth for EVs, relative to combustion-engine vehicles, is probably not going to be as impressive as initially imagined.
Aside from investors chronically overestimating the maturation of new technologies, I believe they're placing far too much credit into the hands of Elon Musk. Don't get me wrong, Elon has done an admirable job of getting Tesla into position to be the first successful automotive start-up in over 50 years. However, Musk has been notoriously overzealous with regard to launch dates and production totals to the point where it's become difficult for investors to take any of his projections seriously. With Tesla's valuation having gone parabolic, I'd consider Musk to be more of a liability than ever for his company.
The company's operating results also do the company far fewer favors than you'd think. Sure it's production is ramping up, and Tesla did record its second consecutive quarterly profit. But utilizing generally accepted accounting principles (GAAP) and removing a number of one-time benefits yields the truth: an $862 million GAAP loss attributable to shareholders in full-year 2019, which is only a modest step forward from the $976 million GAAP net loss for full-year 2018. Without the aid of tax credits and a host of one-time benefits, Tesla's operating results look a lot less impressive.
Finally, I strongly believe that investors will eventually treat Tesla for what it is: a start-up company, and not an established or time-tested business. Despite its valuation, Tesla has encountered numerous production hiccups, and Musk's foray into solar via the SolarCity acquisition has been a complete disaster. This is a company that's making a lot of mistakes and learning as it's going because it's trying to do something unprecedented. While that might one day merit a $160 billion valuation, such a valuation shouldn't be granted for a business that hasn't even proved the ability to generate a recurring GAAP profit.
Again, I'm not trying to be a top-caller here, but this isn't going to end well.