New Math
As a follow up to my last blog, which mentioned the song “Stop Making Sense”, let me share some interesting facts and figures with you. These definitely fall into the category of making no sense at all.
The combined market value of Toyota, Volkswagen, General Motors and Ford Motor Company is $363 billion as of this morning. Between these four auto giants, 2019 car and truck production totaled 34.3 million vehicles. All four companies earned a profit in 2019.
On the other hand, as of today the market cap of Tesla Inc. amounted to $356 billion. 2019 production equaled 367,500 vehicles. Tesla has never recorded an annual profit, losing $856 million in 2019 alone.
Think about those numbers. Four of the five largest auto manufacturers when combined are worth approximately the same as Tesla, as judged by their respective stock market values. The big four have earned large profits for many years, although not every year. Tesla does not earn profits. Toyota, VW, GM and Ford sell 93 vehicles for every one sold by Tesla. And they sell them at a profit. Tesla rarely earns a profit on each vehicle sold, with losses ranging from $5000 to $20,500 per vehicle according to Reuters. In fact, if it were not for the government mandated electric car credits that Tesla generates, the losses at Tesla would be even greater. Yet the collective wisdom of investors says that four equals one. Or maybe it doesn’t.
The meteoric rise in the value of Tesla is mind boggling. Year after year, loss upon loss, the stock keeps going up. And now they announce a stock split, a five-for-one split effective August 31. You should know that stock splits DO NOT change the value of a company. The collective value of the company remains the same whether the share price is $1900 (today’s level) or $380 (1900 divided by 5). It would be naïve to think a split in the shares changes the value of the whole enterprise. It doesn’t.
Wikipedia defines “musk” as a very strong odor that’s hard to ignore. Elon Musk, the CEO and founder of Tesla, is definitely a character that is hard to ignore. His bold statements, marketing pizzazz, and ability to make money from investments is stunning. I have no predictions about the future price of Tesla, nor Ford, GM, Toyota and VW for that matter, but the figures tell a story that makes no sense at all.
Bottom line: Buffett often says the market is a weighing machine. If the market is in fact a weighing machine and not a voting machine, invest where there are profits, not losses. In the long run, profits will win. And if this advice is considered “old math”, so be it.
Ralph McDevitt August 18, 2020
Any opinions are those of Ralph McDevitt and not necessarily those of Raymond James.
The information in this report has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice.
