Know What You're Buying

Jeff’s Random Words

On Friday, we had our October First Friday (held occasionally on the second Friday) livestream on YouTube. We do these once a month and they’re pretty fun. They’re also a bit of a different vibe than our weekly show due to the live questions we receive. If you haven’t checked one out, I hope you’ll join us in November (tentatively scheduled for the actual First Friday). 

The first topic of conversation was the Tesla (TSLA) Cybercab announcement. I won’t re-hash the whole conversation here, but it got me thinking about how Tesla functions as a stock. In the spirit of full disclosure, the genesis of this post is somewhat borrowed from the writing of Matt Levine at Bloomberg, who has written on several occasions about how some stocks (GameStop (GMS), AMC Entertainment Holdings (AMC), Tesla, Trump Media & Technology Group (DJT)) don’t always trade according to the fundamentals of the business.

In one category are the “meme stocks” like GameStop and AMC. Price movement with these companies is often driven by many individual investors acting together to move the stock. While I wouldn’t put Tesla and Trump Media in the same category, they certainly have some of the same characteristics. 

Let’s start with, and only briefly discuss, Trump Media stock. Take a moment to do an internet search for “DJT stock correlation with polls” and you’ll see many articles about how large movements in DJT seem to correlate with the political fortunes of Donald Trump. This is where I specifically borrow from Matt Levine. 

Now let’s turn to Tesla. Yes, they have other business divisions, but at present time, Tesla is a car company. In Q2 of 2024 (the most recently reported quarter), automotive sales constituted 78% of revenue. Now consider Tesla’s price-to-earnings (P/E) multiple compared to some other automakers:

Thanks to Finchat.io for the chart. You can get 15% off any paid plan by using http://finchat.io/unscripted

“But Jeff, the market is forward looking and Tesla has so many ways it’s going to change the future” you might be thinking. Yes, absolutely possible. But also possible it won’t happen. And what I can’t figure out is how much of Tesla’s premium is due to optimism about the future and how much is due to the exuberant fan base Tesla has. 

Let’s remember that Tesla shareholders voted more than once to pay Elon Musk $45 billion, even though one could argue that’s not in the best interest of the company or its shareholders. It’s hard to imagine another publicly traded company where that would happen. 

My point is that forgetting my personal feelings about Elon Musk, Tesla goes into the too-hard pile for me. I have no way of knowing how much of the share price is optimism or fandom. 

When considering an investment in one of these kinds of companies, it’s important to understand how much of the share price is based on the business and how much is based on something else. I don’t give investment advice so I won’t weigh in on whether or not any of the companies mentioned above are worth your hard-earned money. But I will caution you, dear reader, to be sure to know what you’re buying.

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