Price is determined by how much a purchaser is prepared to pay. Value is what we receive after the price has been paid. Of course, depending on the price, it can either be great or poor value.
Tesla make terrific cars. It’s true that they started the inevitable shift to our electric car future. However, Tesla Inc. is not worth more than the entire auto industry combined. Yet ‘investors’ are currently paying more than the aggregate value of the next 12 biggest car companies to own a piece of Tesla. As I write this, Tesla has a market capitalisation of US$1.230 trillion. The second biggest car company in the world as defined by market value is Toyota. Toyota is currently valued at only $US254 billion, or 20% of the price of Tesla. For context, Toyota will make 11 million cars this year, while Tesla might manufacture 800,000, if they are lucky. Toyota is valued at $23,000 per car sold, while Tesla is currently valued at $1.5 million per car sold. All other car companies have a much lower market capitalisation per car sold (average is around US$10,000 per car). In order for Tesla to collect the same price per car sold as Toyota, Tesla would need to sell 55 million cars a year. While Tesla is positioned and priced as a technology firm, it will never get around the reality that they have to bend metal like other OEMs. Of course there are another dozen reasons the price of Tesla stock seems irrational, but you get the picture.
So the big question, is why is Tesla worth so much?
Is it because Tesla:
- Has uncovered a more efficient method of car production? Nope.
- Is the only firm that knows how to make electric cars? Nope.
- Is the only car company with autonomous driving technology? Nope.
- Has unique battery and solar capabilities? Nope.
- Is the only premium electric car brand? Nope.
- Has unique software powering the car? Nope.
- Has an unassailable lead in emerging car technology? Nope.
It is because stories are more profitable than reality.
Of course the products are real, and the company has real value – but the price reflects something different. Elon Musk has attained the status of ‘Nerd Jesus’, preaching his visions of the future to his growing flock of loyal acolytes.
In many ways, technology has become a new religion. It would appear that tech giants are the only ones who can lead us in these uncertain times. There is a such a sense of mystery to what they build and how they beguile so many of the world’s population. They hold the secrets to algorithms that steer our lives. They are the inventors of all the technology we use, yet don’t understand. It has been foretold that Elon Musk will lead us to a post-fossil fuel sustainable utopia. While Big Tech CEOs are not actually leaders of religious institutions, they certainly embrace Messianic tics. Their product launches are delivered to rapturous audiences, ready to sing the praises of the anointed one. Their mantras often set lofty goals for humanity, rather than brand propositions:
- Facebook – A more open and connected society (Zuckerberg)
- Twitter – Change the world 140 characters at a time (Dorsey)
- Google – Organise the world’s information (Brin and Page)
- Apple – Think Different (Jobs)
None are better than Musk, who proclaims on Twitter to his adoring 57 million followers that we need to become a multi-planetary species to survive. Investors are buying the story of Musk, our real life Iron Man. It’s my firm belief that much of the Tesla share price can be attributed to his persona and aura than economics. Likewise, a Hermes Birkin bag can sell for as much as US$500,000, because it is not just the leather and craftsmanship on offer.
So potent is the veneration surrounding Musk, any slightly negative posts about him or Tesla on social media will earn you the wrath of his congregation, descending upon you in outrage at an alternate view.
Will Tesla stock crash? It might. Or it could just as easily reach US$2 trillion dollars. Markets can stay irrational far longer than most investors can stay solvent.
To keep your head, here are two things to remember:
- Never forget that stories have real economic value. Don’t forget to tell yours.
- Keep your investments anchored in reality, because we never know when sentiment might just change.
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Keep Thinking,
Steve.