Monday, November 01, 2021

Thoughts #26: Tesla at USD 1 trillion

Tesla became a trillion dollar market cap company last week (end Oct 2021). This is a company that has not made positive cashflow since its inception. Yet, the market is saying this company should be in the exclusive club of trillion dollar companies, of which there are only six members today.

Trillion dollar club

In my view, Tesla meteoric rise is a testament of two factors:

1. QE Infinity

2. We are in the biggest bubble of all times

It is a true irony that I am half-way through reading Ben Graham's Security Analysis and yet living in this moment when fundamentals do not seemed to matter anymore. In Ben Graham's days, he did not even bother to look at earnings because it was not possible to project companies' earnings with confidence. So he only looked at the balance sheet and only with co.s that has more current assets vs its market cap (a.k.a. net-nets).

Value investing then evolved to look at earnings of stable companies. Then we look at good businesses with strong moats. These are companies that can generate stable, growing cashflows. Today, I am not sure what we are looking at. Tesla has very little equity, no earnings, no cashflow and no moat. Yet, the market is saying it is worth a trillion dollars.

Tesla's $1.1trn market cap

 However, stocks will always revert to their intrinsic values. That is the truth like how gravity pulls objects down or how the sun rises from the east. It could be the case that QE Infinity will cause intrinsic values to be recalculated off different risk-free rates and different risk premium (ie like 50x PE for good stocks can be the norm in the future because investors simply cannot get better returns anyways) but stocks will revert to their intrinsic values.

Let's see if Tesla's intrinsic value is truly 1,000,000,000,000 dollars.

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