Is Tesla Overvalued?

Tesla Motors (NASDAQ:TSLA) is a favourite to watch for lithium investors and motor enthusiasts alike. But is the stock overvalued?
Matt Stack of XLP Capital thinks so. He’s the founding manager of XLP, as well as the Chief Investment Officer of the firm’s technology activist fund, Devonshire Capital.
The company has published two reports under the name Devonshire Research Group, outlining why the company chooses to hold a short position in Tesla. Both reports can be found here.
No doubt, plenty of investors might also be wondering whether Elon Musk’s electric vehicle (and soon to be battery) company is truly undervalued. The Investing News Network spoke with Stack to get a bit more insight into his views on the subject.
Here’s some of what he had to say:

First is not always best

Devonshire sees Tesla as an early mover in the electric vehicle space, but argued that disruptive industries need to reach a tipping point before companies can capture benefits at scale.
“The first out in tipping point industries is rarely the sustainable leader,” he said.

GAAP vs non-GAAP

Stack took issue with the difference between Tesla’s self-reported non-GAAP financials versus its GAAP audited financials:

“On an earnings-per-share basis, that gap is growing hyperbolically. In the long run, that either signifies completely novel types of business model innovation, of which modern accounting standards simply cannot capture or reflect, or it signifies that the non-GAAP earnings will snap back to the GAAP based earnings, in which case the truth about the business possibility will be made publicly available. Tesla reports a significant net loss quarterly anyway … What would those numbers look like if they were GAAP reported?  It would be an astronomical loss.”

Tesla provided a contrasting statement to Value Walk earlier this year, including a point that non-GAAP revenue is “useful in understanding the underlying cash flow activity and timing of vehicle deliveries.”
But Stack added, “Even though they continue to miss operating targets, they continue to lose money, they are still attracting capital.  And that’s commonly a feature of questionable of financial business models.”

Losses

Stack suggested that Tesla operates like a technology startup, but that as a vehicle producer, this model doesn’t make sense:

“We tolerate social security. Social security as a system continues to be a loss. In a social media environment, for a venture-backed startup, we tolerate loss.
For a 10-year-old publicly traded company manufacturing cars, it’s not clear to me that the markets continue to tolerate that loss.  The question on the equity side is when will anybody get a deal out of that? When will that ever turn around?  When do people start to get their money back?”

Not so disruptive after all?

Stack argued that Tesla’s approach to the electric vehicle sector is the “typical business model for a web startup company in San Francisco … a storyline of disruption,” but that this doesn’t work so well when it comes to the auto industry, where there is more intense competition. He explained:

“That kind of logic we tolerate on software side, because there is such rapid disruptive potential. In the auto world, you have competitors. And you have competitors that are geared to fight back. So, what we believe, and we see this even today, is that the established auto industry in Germany, China, Japan, and North America has a competitive response and it’s pricing aggressively.”

Devonshire has only written one other report for public release in which it recommended shorting GoPro (NASDAQ:GPRO). By December 2015, after shares of GoPro had fallen roughly 60 percent, Devonshire was recommending that short positions be covered, with no further recommendation on the company.
Of course, since Devonshire holds a short position in Tesla, its views are not exactly unbiased. Still, it is interesting to see an alternate point of view on the electric vehicle maker.

Tesla and lithium

As a final note, Stack shared some of his thoughts regarding Tesla’s impact on the lithium industry. He agreed that it isn’t all about Tesla when it comes to lithium, and that the company only accounts for a fraction of demand for the mineral.
Because of that, he admitted that Tesla won’t have much leverage when it comes to pushing for lower lithium prices. As lithium prices continue to rise, he predicted that lithium suppliers would take their product elsewhere.
“Why would you go under contract with Tesla today if you saw the world exploding around you and Tesla was asking to fix the price lower and lower?”
In terms of lithium stocks, Stack sees plenty of potential for opportunity. He stated:

“Some of the greatest fortunes in North American history have taken place from the smart, clever commodity suppliers—the equipment suppliers to oil and gas, and the transportation and equipment suppliers for the gold rush.
We are in the EV rush. Lithium mining stands to create some of the greatest fortunes, certainly in this modern era, not necessarily the branded company that  is providing those cars.”

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