Should You Sell Tesla Stock & The High Cost of “Anchoring”

  • Anchoring, or the act of placing too much emphasis on an arbitrary number is a well understood human error in the field of behavioral finance[1]
  • Headlines today are full of stories about Tesla’s sharp sell-off yesterday and Kailash believes this is classic anchoring
  • The chart below has Tesla’s share price over the last two years and we have annotated at what price per share it is worth Toyota, Volkswagen and Honda respectively
  • Kailash believes it worth noting that HONDA is ~400% larger and over 500% more profitable than Tesla
  • Said differently: if Tesla was 4x bigger and 5x more profitable than it is today it could be valued at $53 per share.

Kailash hopes speculators in Tesla’s stock understand that even after yesterday’s “decline” Tesla is worth 15x as much as Honda – might be time to pull up your “anchors”

Tesla Stock Price & How Far it Has to Fall to be Worth: Toyota, Volkswagen or Honda

Buy Honda Stock or Buy Toyota Shares?

One of the things we would like to remind readers of is the possible conflicts between Wall Street and many electric vehicle manufacturers. Ultimately, no matter if a car has an electric or internal combustion engine, original equipment manufacturers (OEMs) like Toyota Motor Corp, Honda Motors, Tesla, Nio, Lucid, and many others are in the business of the manufacture and sale of cars. In the short term, the Battery Electric Vehicle (BEV) makers have seen their market capitalizations decouple from this unfortunate reality.

Over the long term, all of these stocks’ valuations will be determined by these firms’ ability to generate cash flows in excess of their cost of capital. Some readers might be groaning. Aaaagggghhh. Here comes the KCR research team talking about stock prices being tethered to accounting metrics and fundamentals. Yet that is the unforgiving and long-run truth of investing: eventually fundamentals matter.

To borrow from Benjamin Graham, the stock market is currently valuing auto stocks like a “voting machine.” But eventually, it will become a “weighing machine.” Eventually, the market will switch from “voting” on the popularity of car makers’ shares to “weighing” them based on their actual ability to earn sustainable profits. We believe this transition poses much higher risks for Tesla than for those who choose to invest in Toyota or Honda.

History indicates that car manufacturing is ultimately a business of operational excellence. Toyota and Honda have seen their brand values soar on the back of an uncanny ability to build highly reliable vehicles. That reliability enhances their residual values in the used auto market and helps them sell their vehicles with less marketing spend at higher prices due to consumer loyalty.

We would note that Tesla has had stumble after stumble after stumble on the quality front. While this does not mean you cannot make money on Tesla stock, it speaks to a massive competitive headwind the firm faces. We encourage people to think a bit about the complexity of manufacturing a hybrid, which has an internal combustion engine and a battery-electric powertrain compressed together compared to just a battery electric vehicle.

Reducing it to a simple comparison like that helps see the lack of differentiation between BEVs and legacy OEMs. Statista publishes a useful breakout of the Toyota Motor Corporation’s hybrid, plug-in hybrid, fuel cell, and all-electric vehicle business segments. Despite the lack of fanfare, you can see that Toyota’s sales of fuel-efficient vehicles hit 2 million units in 2020.

Even more remarkable, Toyota has sold over 15 million hybrid electric vehicles globally. That is a staggering sum of cars that are effectively a battery electric vehicle that happens to have a powertrain that perfectly interacts with a traditional internal combustion engine. It is our house view that Toyota could very easily churn out BEVs by increasing the size of their battery packs and electric motors but Tesla, in contrast, would find it impossible to tackle the complexity of integrating their BEV technology with an ICE motor.

We are not climate change deniers here at KCR. We are also not out to say that reducing our dependence on fossil fuels is an admirable aim. Instead, we are just highlighting that Tesla, Honda, and other car companies are ultimately just makers of power products. What precisely powers their various vehicles is something we believe has fairly low barriers to entry.

Lacking the shocking scale of Volkswagen, Toyota, or even Honda, we believe Tesla is in a difficult position. As these companies and their competitors pivot to selling more BEVs we believe the pressure on Tesla’s prices and manufacturing defects will begin to rise. As the novelty of Tesla’s vehicles wears off, we fear those who own the stock may be left with large losses.

In our experience, auto manufacturing is a tough business determined by the operational acumen of the operators. We believe that the hype around BEVs has been “compressed” into Tesla’s stock price despite the firm lacking a sustainable competitive advantage in our view. Over the long haul, investing in car companies is almost as tough as building great cars and we believe betting that Tesla will be 4x the size and/or profitability of a firm like Toyota may prove to be a mistake.

Our work explaining the mounting retail frenzy What Does Volume Mean in Stocks? shows how precarious the situation has become. If you are someone who puts an emphasis on buying companies that earn money, please see our GARP stock screener to find a group of stocks that are profitable, growing, and almost entirely ignored by a market infatuated with sales growth.

Want more content? Subscribe now!

[1] For an example read our White Paper that leans on the work of KCR’s in-house academic and expert in Behavioral Finance as well as the work of many others

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.