Am I going crazy?

 

At the time of this writing, Tesla’s (TSLA) market capitalization is $749 billion and the company has a revenue of about $20 billion. Ford, which is one of the largest car manufacturers, has a revenue of $155 billion which is almost 8 TIMES larger than Tesla’s $22billion. Conversely, Ford has a market capitalization of $35 billion. Insane. General Motors brings in $137 million in revenue and has a meager $58 billion market cap. Chrysler’s $108 billion revenue with a market cap of $22.49 billion. That means that the combined valuation of all the car manufacturers in America, which produce 2.5 million cars, is $115.5 billion which is a total 5 TIMES less than just Tesla’s value. Keep in mind Tesla sells just 90,000 cars. $749 billion. This can be best visualized below:

This begs the question. What the heck is going on here? Let’s talk about what we know. The stock market is NOT just an accumulation of assets and taking away liabilities. It’s an evaluation by the markets PERCEPTION of a valuable asset. It’s what people think a company is worth. So the thing here is that if you want to make money on the market, you’re not predicting actual value you’re predicting PERCIEVED VALUE. As we’re seeing from the above example that’s not always correlated.

Since writing this paragraph, TSLA has already beat the cumulative Market Capitalization (company value) of all the big Automakers. What does a company do to generate this kind of hype? Not to mention the fact that these other automakers have the infrastructure to just start making electric cars at scale. Have there been other companies that have been as overhyped as this in the past?

Well, dear reader, you’ll be pleased to know that while TSLA is among the largest of these, it’s not the most overhyped company in the world. For that, we can just look at the companies with the highest P/E ratios. For the non economists among us, P/E is the ratio of price to earnings. The ratio of the market cap (how much the company is worth) to the Earnings or revenue (how much money comes into the company every year). The higher the number, the more valued or hyped the company is in comparison to it’s size. The P/E ratio at Tesla is 1,615.54. For comparison, Toyota’s P/E ratio has hovered around 10 for the past 8 years, before rising to 20 more recently.

There are a whole suite of hype companies. While there are quite a few random companies included, all the companies that are worth $50 billion and above are in the tech sector or tech-adjacent companies. Peloton – the tech bike company (P/E 2067), TAL Education – the tech education company (P/E 1746), Shopify – the tech shopping company (P/E 930) , Zoom Media – tech video conferencing (P/E 552), Daimler – the one exception and ironically the oldest (P/E 468), Square – the tech payments platform (P/E 419), ServiceNow – the tech feedback company( P/E 967). Victor Dergunov on Seeking Alpha wrote that the tech and clean energy and tech sectors are experiencing a huge bubble. But additionally three of the top 5 trending topics on the Seeking alpha page are about a market bubble, blaming the free flow of money in the US market resulting from the stimulus doled out by the US government during the COVID19 crisis.

From my E-Trade ETF tracker, this money bubble is most pronounced in the technology sector. Tech has built this future hype that’s propelled the NASDAQ above all other indices in the world. It increased over 100% in the past 3 years. There’s something interesting about being forward looking and the tech sector makes doing the mundane things we did before look futuristic. I titled this post “Am I Going Crazy?” because the tech hype seems completely irrational. From Victor’s post:

I understand that alternative energy is hot, and that Plug Power is one of the hottest stocks in this segment. However, this company is now worth a whopping $31 billion. Yet, it has no profits. Sure, roughly 40% YoY revenue growth is impressive, but should this company be trading at around 100 times sales right now?

I think that this is a result of sentiments similar to the dotcom bubble. We’re interested in tech companies in the same way we’re interested in sci-fi companies. We fill in the blanks for them. The hype that fuels these companies is the potential of what they MIGHT achieve in the future. Not based on their sales, balance sheets and sometimes not even their leadership. The book “The Smart Enough City” talks about how ‘tech goggles’ clouds our evaluation of technology. Our FOMO and excitement for futurism, leads us to poorly evaluate how useful a technology really is. Speculation that is linked to non-existent indicators is what led to the dot-com bubble and more generally even the recent sub-prime mortgage crisis. This market is due for a reckoning, because companies that are trading companies more than 100x or even close to a 1000x sales is a recipe for an unreachable runway. Now, I know better than to bet against it, since the market can remain unreasonable longer than I can remain solvent. That said, it can’t be unreasonable forever and this sector will eventually come back to earth.