The markets open a little lower today as fears persist regarding the coronavirus outbreak. $OIL prices fell below $50/barrel and the two oil stocks in our portfolio, Concho Resources CXO and Parsley Energy PE are underperforming. Allergan $AGN , our largest holding, reported its last (most probably) earnings. It beat earnings. The acquisition by AbbVie $ABBV is expected very soon.
Should I Short Sell TESLA Stock
There are signs that Tesla stock is in a bubble. The stock gained over 200% in the last 7 months and people who would normally not invest in stocks are now interested in investing in this stock, Tesla $TSLA . Usually, when this happens, it it not good. This is the same thing that happened with Bitcoin $BTC in 2017. People were investing because of FOMO (Fear of missing out) and they were only investing because they were expecting the price to just go up as someone will be willing to buy at a higher price. And that person, in turns, is expecting someone else to buy at an even higher price.
YouTube has been recommending me some videos about Ark Invest CEO Catherine Wood (Cathie Wood), who is very bullish on Tesla. I've checked her portfolio, which is the active ETF ARKK, and she has only big tech companies. In case of a recession, this portfolio will greatly underperform the markets. Cathie Wood is saying that there's a 25% probability that Tesla stock price reaches $15000 by 2024. In order for this to happen, the stock will need to gain 80% per year. That's very very unlikely. And her bear case is Tesla reaching only $1500. When someone tells, you that you can never lose money on an investment, you should be scared. Tesla is not in a big bubble as Bitcoin but it is in a bubble and sooner or later it will burst.
Some people say that Tesla shouldn't be valued as a car company but as a tech company. Let's value Tesla as Microsoft. Microsoft has a profit margin of 33%. The average car company has a profit margin of 4%. Tesla is not profitable yet but how likely is it that they are going to be as profitable as Microsoft? I don't think Tesla can ever reach a profit margin of more than 15%. What is the PE ratio you would put on that company? Microsoft has a PE ratio of 32. Will you put the same PE ratio on a company half as profitable? If we do this then, on the $2 billion expected earnings of Tesla in 2021, the company will have a market cap of $64 billion, half its current valuations. Tesla is not being valued as a tech company or a car company. It is a bubble.
Should I short it? This is a bad idea. Shorting makes sense sometimes but not when a bubble is involved. There is no upper limit to how high the price can go. It can go to $15000 or even $50000, if you were shorting it, you would lose more money that you actually invested.
What should you do if you have Tesla in your portfolio? You need to understand that the stock and the business are two different things. If you believe in the business, you can invest but don't put more than 5% of your portfolio in it. Cathie Wood only invested 10% of her portfolio in Tesla even how bullish she is. Tesla is the future just like Microsoft was the future in 2000. But if you had invested in Microsoft in 2000, you would have waited 16 years to break even on the investment even if the business, itself was growing. Microsoft was in a bubble then. Right now, Tesla is in a bigger bubble.
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