The Math On Tesla Inc (TSLA) Doesn’t Add Up

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The Math On Tesla Inc (TSLA) Doesn’t Add Up
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In his recent interview with Tobias, Drew Dickson of Albert Bridge. discussed The Math On Tesla Inc (NASDAQ:TSLA) Doesn’t Add Up. Here’s an excerpt from the interview:

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The Math On Tesla Doesn't Add Up

Mine is it would keep me away from owning something like Tesla, unfortunately, because I can’t get there, even in the most– Toyota and Volkswagen both were founded in 1937, and they’re just incredible global-scale businesses. They, after decades, have arrived to the point where they have 10% or 7% global market share and are extremely profitable. You can make all these fast forward assumptions about EV being 90% of every car that’s sold in 15 years and you can start to flex on what kind of margins these players will have in that.

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You look at the capex that Toyota itself is spending, add up all the capex of all the auto companies and it’s over $100 billion dollars and Tesla will spend $4 billion. I think it’s going to be a rude awakening. You’ve heard these arguments before.

Let’s say that I’m wrong. Let’s say that Tesla does become a Toyota or a Volkswagen, let’s say they become twice the company that those two, but let’s say they have 20% market shares of all EV sold. They do net margins that are higher than what Tesla does today, because of the software add-ons and things like that. Even doing that, you can’t get to more than $350-$400 billion market cap, which means even in that incredibly, almost impossible scenario, you’re paying another $600 billion for whatever it is he’s going to do next. Yes, it’s been great for Cathie Wood and everyone else to have bought this thing and have it rip and build a business out of it but philosophically, I couldn’t do that.

Tobias: To what extent is this driven by the option speculation, which seems to be the tail that wags the dog a little bit where there’s some delta hedging going on by the folks on the other side of that trade?

Drew: Yeah. There is a lot of talk about the gamma squeeze and you get this– whenever someone’s out, buying a call option, the hedgers are going to have to go out and buy stock, the guys that sold them this stuff. Now, they’ve sold it at a very nice bid-offer spread. These guys aren’t going to be losing money when they do this. They go out and they build a hedge and stock goes higher, and if they got to buy a bit more the delta, it works back the other way. I think that might have driven some of the craziness. I think what drove it more crazy than it might have been warranted, is that everyone started talking about it. It wasn’t just the technicalities of a gamma squeeze. It was that everyone learned what a gamma squeeze was, and everyone’s like– people never heard the term, and they’re like, “That was a gamma squeeze.” Geez, what?”

[laughter]

Drew: It just became this wonderful, self-fulfilling feedback loop. I think the retail guys thought they were fighting the hedge funds when, in fact, it was probably hedge funds fighting hedge funds, and just playing the narratives. A lot of misdirection and talking about front running and coordination. It was just a speculative mania, which we’ve seen time and time again, and this time, it’s everyone’s talking to each other in real-time, and so you come up with these notions of politics or of screwing the man, and let’s get these hedge funds back for their bailout-ing their way, I’m thinking to myself, “Mate, hedge funds were bailed out in a way it was the banks and the hedge funds found out a lot of this stuff, and a lot of these egregious situations.”

You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”

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