On Monday, news broke that rental car company Hertz Global (HTZZ) had ordered 100,000 new Model 3 Tesla sedans.
It’s the biggest electric vehicle (EV) order in history. And it represents about one-tenth of Tesla’s annual production.
Following the news, Tesla shares jumped 13%.
This pushed the company’s market value above $1 trillion for the first time.
And it could go higher still.
But unless you’re speculating, you don’t want to buy Tesla at this price.
As I (Chris Lowe) have been showing you, there’s an alternative way to play the EV revolution.
It doesn’t require you to pick winners among EV makers. It’s a better value than Tesla. And it’s still flying under most investors’ radars.
Before we get into that, it’s important you understand something up front…
Far from it… I’ll be first in line to rent a Model 3 from Hertz when they come to the U.S. and Europe starting next month.
For my money, Elon Musk did for car design and performance what Steve Jobs did for the design and performance of PCs, laptops, tablets, and smartphones.
And I’ve been steadfastly bullish on Tesla’s share price since I started writing to you about the company two years ago.
But as its stock has skyrocketed, its valuation has become unmoored from reality.
Tesla reported revenues of $13.8 billion for the most recent quarter. That’s tiny compared to other U.S. stocks trading at similar valuations.
Facebook (FB), for instance, has a market value of about $890 billion… so roughly $100 billion shy of Tesla. But it took in $29 billion in revenues in the recent quarter. That’s more than twice what Tesla took in.
No company in history has risen to be worth more than $1 trillion on such puny revenues. Investors are betting Tesla sales will grow so much, they’ll catch up to its soaring share price.
Tesla’s market valuation (the sum value of its outstanding shares) is now more than that of all other publicly traded carmakers combined.
If that’s not a bubble in Tesla shares… I’m not sure what is.
The only way it makes sense is if, 20 years from now, everyone is driving EVs… and all of them are Teslas.
And that doesn’t pass the sniff test…
It’s far likelier everyone will be driving EVs… but only a fraction of them will be Teslas.
People will also be driving electric Fords, Chevrolets, Buicks, Cadillacs, Mercedes, Volkswagens, BMWs, Audis, Alpha Romeos, Fiats, Renaults, Peugeots, Volvos, Toyotas, Mazdas, Hyundais, Kias, Nissans, and Subarus.
They’ll also be driving Rivians, Nios, Lucids, and cars from other companies like Tesla that started out making EVs.
They’ll even be driving EVs from carmakers that don’t yet exist.
Apple (AAPL) makes sleek PCs, laptops, tablets, and smartphones that are ahead of the competition in many ways. It, too, has a loyal following of die-hard fans.
But nobody thinks Apple is destined to make every PC, laptop, tablet, and smartphone in the world. That’s not how capitalism works. Wherever there’s a lot of money to be made, there’s also a lot of competition.
Super-investor Warren Buffett has a great insight about how the stock market works…
Over the short term, it’s a “voting machine.” Whatever is popular at the time tends to rise.
But over the long term, it’s a “weighing machine.” Eventually, investors consider fundamentals such as how much shares cost relative to what a company is bringing in through sales and earnings. This allows them to calculate what a stock is really worth.
They’re the money you bring in from your customers. So they’re harder to manipulate with creative accounting than earnings are.
Right now, Tesla trades at a price-to-sales (P/S) ratio of 21.
It means investors are willing to pay $21 for every dollar of Tesla’s sales revenue.
And it’s a whacky amount to pay for any company… even a great one.
We saw the P/S ratio for Microsoft (MSFT) top out at 18… and the P/S ratio for Google (GOOG) top out at 24.
These are two great companies that gush profits. But at high enough valuations, even great companies become bad investments.
Take it from our tech expert, Jeff Brown. He’s a longtime Tesla bull. But he says current valuations are crazy…
Tesla was one the most controversial recommendations I made in the last seven years. But though it’s an outstanding innovator… with outstanding prospects… I wouldn’t buy here.
Tesla’s valuation might make sense for a company making 80% or 90% gross margins. But Tesla’s are closer to 25%. The company continues to grow fast. But eventually, I expect its shares will trade closer to 10x sales – roughly half the valuation it trades at today.
It very well might…
One way to think of it is as the world’s biggest “meme stock.”
And as we saw earlier this year with struggling video game retailer GameStop (GME), anything goes with meme stocks.
In January, its shares shot up 1,630% (before plunging again) even though the company had lost money in four out of the five previous quarters.
But here’s what I know for sure…
Tesla won’t take over the entire EV market as investors are pricing in. So its shares are headed lower, not higher, over the long run as more companies’ EVs come to market.
As I showed you on Monday, the metal is a key ingredient in the rechargeable batteries that power every EV on the road.
Without lithium, there are no EVs. It’s that simple.
That’s why EV makers – including Tesla – are scrambling to corner as much production as possible.
There’s just one snag…
As soon as next year, demand for lithium will outstrip supply.
That’s great news for us as investors. Because the already roaring bull market in lithium will go into overdrive.
The Global X Lithium & Battery Tech ETF (LIT) is an exchange-traded fund that owns shares in companies involved in the entire lithium supply chain – from mining to battery production. It’s already up 172% since I first put it on your radar in October 2018 as an alternative way to play the EV megatrend.
But as I showed you in Monday’s dispatch, there’s still plenty of room for it to climb.
Right now, the top five lithium companies in LIT have an average P/S ratio of 4.6.
That’s not as cheap as you’d like it to be. But we can expect lithium companies to track the continuing growth of the EV industry. And they’re nowhere near the nosebleed valuation Tesla trades at today.
Regards,
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Chris Lowe
October 27, 2021
Barcelona, Spain