Tesla critics miss the point: I think the stock can go higher as battery day looms

Tesla critics line‐up and say the company is massively overvalued. They miss the point; I think Tesla shares are far from peaking; let's see what battery day brings.

Article updated: 4 September 2020 9:00am Author: Michael Baxter

Some call it nuts. Tesla is now worth twice the value of Toyota; it is not hard to find reasons to shout 'bubble stock' but I disagree. And I disagree because I don't see any evidence that Tesla cynics have grasped what Tesla is all about. Battery day will tell more, however.

September 22nd, as all Tolkien fans will surely know, is the date of Bilbo and Frodo Baggins' birthday. It also happens to be the day that Tesla calls battery day. It will perhaps be the only occasion in history that the world's financial press focus on batteries.

Let's not be too speculative here, if you want to know what battery day will reveal wait until September 22nd. Bilbo Baggins disappeared on his birthday; I don't expect excitement in Tesla to disappear.

The bear case

If you a regular reader, you know I am a Tesla and Muskfan. My belief in Musk did take a knock over his comments regarding Covid, and frankly, when the valuation passed $400 billion, for a while, I thought things had gone too far, that the share price was overvalued.

It is not hard to find people who agree. Fortune magazine says it has a businessmodel problem, "It would have to put an impossibly large number of customers behind the wheel," states Shawn Tully.

“Tesla's revenue would need to increase more than 40 times to justify its valuation,”states an article on Seeking Alpha.

“Tesla is nuts,” proclaims a headline on the FT.

"The only worrisome thing for Tesla is that growing its physical capacity and making more cars — by building factories and service centers and so on — requires 2020 money. A company like Ford is using factories that were built and paid for decades ago," states Matthew Debord, for Business Insider

I do have a genuine concern, which is that last year, Tesla's former CTO, a man known as a genius on battery technology, JB Straubel, changed his role within the company, becoming an advisor. At the same time, he focused on his startup, Redwood Materials. This is an interesting company in its own right, and the rumour mill has churned out talk that Tesla may buy the company. If it does, and this has been a cunning plan hatched with Musk, then good. But if it isn't, the loss of Straubel worries me a tad.

Money raise

Tesla is also raising $5 billion by selling some stock. The company's valuation has increased by around $300 billion since March, so the money it has raised is less than two per cent of the increase in valuation. Shareholders don't seem to care a jolt. No wonder some are calling it free money for Tesla. What it has done has improved its balance sheet enormously.

Missing the point

I have changed my mind on Tesla. I no longer think it is overvalued. I am once again a Tesla bull, as I was last October, when I raved about the company here. Its share price has increased eight‐fold since then.

There are lots of reasons why critics miss the point. I'll save the biggest of these reasons to last.

  • Tesla is not just a car company — around 14 per cent if revenue comes from solar and energy storage.
  • Tesla's expertise is in battery technology and AI. In those two respects, it is streets ahead of the opposition. Battery Day will reveal more.
  • In reference to the point above, "a company like Ford is using factories that were built and paid for decades ago;" this misses the point that legacy at a time of rapidly changing tech can be a handicap. Tesla is creating state of the art.
  • Tesla is on the front row of the grid in the development of autonomous cars, with Alphabet subsidiary Waymo, its main competitor.
  • Tesla's long‐term business models relates to car sharing. Tesla motor cars are more like Trojan horses for opening what will be a massive market later this decade.

But my main reason takes me back to Tolkien. I often think that Lord of the Rings was one of the first‐ever books on climate change — deforestation was certainly an important part of the narrative.

I believe in climate change — I think it poses an existential threat to humanity. Arguments against are idiotic. Some say that the 'planet will recover, it always does,' and they are right, of course. But such recoveries take millions of years and are preceded by mass extinction. To make 'the Earth will recover' argument would be akin to a dinosaur intellectual dismissing the threat of a meteorite because it will spark off an acceleration in evolution. This did indeed happen, but it didn't do the dinosaurs much good.

But while I believe in climate change, I also happen to think we can fix this problem without negatively impacting GDP — medium term. But we need to invest a lot. We probably need to invest trillions of dollars in sustainable and clean energy and food production. The effect of this investment will be cheaper energy and food.

This is a simply massive opportunity. I believe the biggest company in the world in 2030 will either be engaged in the fight against climate change, or in neurological science.

Right now, in the war against climate change, Tesla is the market leader.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.