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The Making of a Bubble: Tesla

Author:

Jack Lee, a retired engineer, worked at IBM for 28 years. He has traveled all over the world and has been an active investor for 10 years.

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Introduction

In the past 20 years, we have seen a few bubbles and experienced their devastation of our investments and retirement funds. Today Tesla—which trades on NASDAQ with symbol of TSLA—is a bubble in the making, in my opinion. Here is a company that has basically one product which has not made money since its inception and now is touted as the next big thing. The electric car industry has not done well in recent years, despite the advances in battery technology. It has been propped up by government subsidies as part of the green movement. With the election of President Trump, these subsidies are due to expire and probably won't be renewed. Where does that leave Tesla?

- Apr. 2017

Updated Jan. 2020

Updated July 2020

Background

The stock market is unlike any other market. It fluctuates up and down on a daily basis and sometimes due to public perception more than reality. If something is cool or the latest sensation, it cause a distortion of the market place. For a brief time, a stock value can be inflated based on perception and good will. Just as quickly, it can drop based on some negative or bad news. That is because there were no fundamentals behind the rise. The earnings and sales may not meet expectations.

TSLA has risen in the last 6 months from an average of $200 per share to $303 per share. That is a 50% rise. Meanwhile, it has a negative price/earnings ratio. It has failed to deliver on the projected number of cars shipped. The price of the car is still very high compared to comparable gas-powered cars. Recharging stations are still few and far between outside of California.

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Compared to DOW and NASDAQ

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DOT COM Bubble

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Record Market Capitalization

Another key factor to look at is market capitalization. That is the value of a company based on the number of outstanding shares multiplied by the current stock price. By that calculation, Tesla is higher than GM or Ford, who manufactures and sells over 1 million cars a year with multiple models. By comparison, Tesla only sold an estimated 80,000 cars in 2016 with only 3 models. How did their market capitalization reach this level if not for a huge bubble?

Two Items to Watch For..

With the new Tesla electric cars, there are two things to watch for. First, a large cost of the vehicle is the lithium ion battery packs located under the carriage. As anyone knows who have owned cell phones, the battery is one of the first to go. After repeated charges, they degrade and will eventually not hold the charge. These cars are still new on the road, less than 10 years. Some gas engine powered cars are on the road for 20 years. Their lead battery having been replaced every 50 thousand miles or so. What is the effective life of Tesla's battery? Does anyone knows?

The second item to watch for is the dashboard interface. Tesla has replaced the traditional dashboard with a flat screen panel. This is a mistake in my opinion. My experiences with touch screens has been awful. How many times have I flown on airplanes where the touch screen did not work properly? Either it locks and fail to respond or the registration is off and the action I wanted to press is off target. The viewing ability is impaired sometimes due to reflections and sunlight. There is no mechanical backup. When the power goes, you are basically blind. For these problems, I think the Tesla dash is a disaster waiting to happen. In human factors engineering, where I studied 40 years ago, the first thing about machine design is that it must accommodate the humans using it. The second thing is to always provide a backup mechanical interface where even if power is out, the system may still function.

A good example learned the hard way was the power locks on doors and trunk and hood. Most well designed vehicles have a mechanical override to open the doors or hood or trunk. The reason is obvious. When a battery dies on a car, there is no way to open the door or hood to jumper the car. The same goes with power windows. Once the power is lost, how do you open a window without breaking the glass?

Continued Rise...

Tesla stock reaches new record on 5/1/2017 at $324 per share. In the first quarter of 2017, Tesla delivered a record of only 25,000 cars.

6/5/2017 - TSLA close at above $347.

The Bubble is Bursting...

Mar. 27, 2018. TSLA fell below 280.

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Second Wind or Third...

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Wow, Tesla going Private at $420?

Elon Musk tweets he is considering taking Tesla private.

This is insane!

TSLA - One Month Aug. 2018

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Roller Coaster Ride

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September 7, 2018

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May 23, 2019 - Shocking Decline

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June 3, 2019 - Tesla Lost Nearly 50% of its Value Since Jan. 2019

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Summary

I am just stating the obvious. I guess there is always a chance I could be wrong here. Tesla may just be the next Amazon or Apple...or it could just be similar to the dot.com bubble.

The Bubble Part Deux - Jan. 2020

It appears the investors of TESLA are at it again. With no earnings, the stock price are reaching new highs...Why???

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The Insanity Of This...

At $540 per share, the market cap of TSLA is $90 Billion. That is more than GM and Ford combined. This is just insane.

There is no way this company could command that valuation. It has not made money at all. Why?

This bubble has been pumped up by die hards. It will go down in history as greed gone amok.

Here is my prediction. This company will reach a point where the business will dictate what the price will be based on earnings and revenue and balance sheets. The luster of a new technology will subside. It will have to deliver quarter after quarter of earnings that cannot be realized. It will crash and burn like any other company with such high expectations. The market is just not ready for all EV on the scale we are talking about. The same goes for self driving technology. It is a shame that responsible people who should know better are making outrageous projections.

Like the stock prices hitting $6000 per share.

Jan. 30, 2020

TSLA reached a high of $640 a share. A bubble is about to bust. Despite a great report for 4th Quarter 2019, the challenges are many. They just stopped production in China plant due to the Coronavirus...

Feb. 3, 2020

TSLA now at $738 per share with Market capitalization of 133 Billion.

This is just insanity.

When will this bubble burst?

I am afraid we are now in uncharted territory.

There is no end to human greed and irrational exuberance.

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Feb. 28, 2020 - A Week of Decline

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Latest Bubble - Even higher... July 2020

TSLA has defied all logic and common sense. It is now the most expensive auto manufacturer in all of history. The current stock valuation is a lofty $1544 per share.

Something is crazy about all this. As far as I know, they have not made a dime of profits.

Here is a 5 year plot of its stock compared to the NASDAQ index. TSLA has risen 5 fold in the last 5 years comparing to NASDAQ which has increased 111% in that same period.

TSLA Plot VS. NASDAQ last 5 Years

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Tesla-Related News

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2017 Jack Lee

Comments

John Dove on January 18, 2020:

Hi Jack--

You are very wise in not being short. That's a good way to lose a lot of money, as TSLA short-sellers can confirm with the recent rise in TSLA stock price.

John

Jack Lee (author) from Yorktown NY on January 18, 2020:

John, I don't believe in shorting of any stock.

I agree with Elon Musk on this. Shorting should be illegal.

I wrote this article as a public service.

Just to warn people the potential pitfall.

This company does not warrant this high valuation.

It has yet to show a profit.

The very definition of a bubble...

I realize the latest rise above $500, but that just prove a new bubble in the making.

John Dove on January 18, 2020:

Hi Jack--

I sure hope you're not short TSLA. Last time I checkeded it was $510 per share.

Best, John

Jack Lee (author) from Yorktown NY on August 28, 2019:

Thanks for checking in. My article is about a bubble. This is just one manifestation of the same mentality. A common trait is - “this one is different...” Tesla is fueled by an idea but not profits. In the long run, if a company cannot make money, it will go bankrupt. Right now, it is receiving help from big donors and the federal government with subsidies and tax credits. Those will go away soon and the company will suffer even more. The price of gas is also dropping which makes alternative EV less competitive. All those reason, I advice investors to watch out. Remember the DeLorean...

Jack Lee (author) from Yorktown NY on April 11, 2017:

You can like the car but stay away from the stock. That is my humble advice.

WandaShip on April 11, 2017:

Im not sure about the bubble but I do like that new electric car they came out with