
Anatomy of a Bubble – Tesla and Bitcoin - makaimc
https://endlessmetrics.substack.com/p/anatomy-of-a-bubble-tesla-and-bitcoin
======
kjksf
It's a lengthy article but I didn't learn anything other than the author likes
the word "bubble".

The article claims that Tesla valuation is not based on fundamentals but it
fails to present any fundamental model.

Here's one model that justifies price target of $600 (i.e. much higher than
current $480 price):
[https://twitter.com/garyblack00/status/1300540006864486404](https://twitter.com/garyblack00/status/1300540006864486404)

Now, you might disagree with Gary Black's numbers and think that they are too
optimistic but at least there are numbers to disagree with.

This article, sadly, lacks any quantitative or qualitative analysis to
disagree with. You should probably disregard people who's only argument is
shouting "bubble" and comparing anything to bitcoin.

For the past 10 years Tesla has been growing revenue at 50% Compounded Annual
Growth Rate.

If they keep growing at 30-50% for the next 5 to 10 years, they'll grow into a
valuation that might seem excessive today. That's a very simple and yet more
often than not unappreciated math behind compounded growth. Einstein
understood it. Warren Buffet understands it. The author of this article
doesn't.

~~~
sassypotato
> If they keep growing at And that's where the falacy is. Nothing keeps
> growing forever. Past performance is no guarantee of future results.

You don't need great analysis to see that something that has appreciated 131
times in less than a year is a bubble, unless they cured cancer or seriously
undersold at their IPO. And no one undersells by that much.

~~~
SpicyLemonZest
I'm not sure what it means to count up the number of times a stock has
appreciated in a year. A stock with steady, reasonable 2% annual growth could
in principle appreciate on every trading day.

~~~
0xffff2
I think GP means that the stock is worth 113x what it was a year ago, although
that seems to be off by a factor of ~10 for Tesla.

------
MrPowers
Tesla may be in a bubble, but this article doesn't provide a compelling
argument. See Rob Arnott's analysis on Tesla for a more robust bubble argument
that's based on the financials.

Comparing Tesla to Bitcoin is flawed. Tesla is a publicly traded stock that
produces products and is subject to financial audits. Bitcoin is completely
different and can't be valued like a traditional financial asset. See Robert
Shiller's discussion.

Tesla will need to make a lot of profit in the future to justify a $442
billion dollar market cap. They'll need to go from breakeven to making around
$66 billion a year (for a P/E ratio of 15).

Jeremy Siegel wrote a great article in 2000 about how tech companies would
need to make massive profits to justify their bubble valuations. It's still a
great read.

~~~
jkhdigital
The article is not comparing the fundamental valuation of the two assets, it
is talking about bubble behavior. Investors caught in a bubble behave the same
way, regardless of the asset class. That's why it's a bubble--the fundamentals
are ignored and the "greater fool" theory dominates market decisions.

Also, I think it may be a very long time before 15 is considered a "normal"
P/E ratio again, if ever. It seems like low interest rates are here to stay.

~~~
MrPowers
I agree with your viewpoints on bubble behavior. Robert Shiller used "bubble
behavior" analyses to predict the 1999 tech bubble and the housing bubble in
Irrational Exuberance. His book talks extensively about fundamentals and human
psychology. Jeremy Siegel also has performed robust bubble arguments. I'm
arguing that the blogs bubble behavior argument is low quality because it
doesn't discuss the fundamentals and performs an apple/oranges comparison.

The bubble conclusion might be right. A good bubble argument should
demonstrate how the market price has completely detached from fundamentals.

------
aazaa
Too much attitude, not enough substance in this piece. It does little to
actually fulfill the promise of the title in a way that hasn't been done
hundreds of times already.

Number go up, so people buy. Number will go down. Don't enter a burning
building. Don't try to catch a falling knife.

Yes, we all know that.

Assets go through periods of being overvalued all the time. There's a big
difference between that and a bubble.

Nor does the author even mention the main difference between Tesla and
Bitcoin. Tesla is a company and there are tested traditions of valuation that
generally hold over time such as price to earnings ratio.

Bitcoin has no earnings. It's more like a currency or gold. Therefore,
valuation is more challenging, but still possible given some work. Had that
work been done, some actionable conclusions might be drawn.

~~~
matz1
Ok how about instead of Bitcoin, we compare it with CSCO ? It was bubble back
then and the value never recover.

~~~
MrPowers
CSCO is a better comparison and Siegel analyzed its valuation back in March
2000:
[https://www.wsj.com/articles/SB952997047343478041](https://www.wsj.com/articles/SB952997047343478041)

Someone should use Siegel's thought framework with 2020 tech company numbers.

~~~
victor106
Can someone please post a non paywall link?

~~~
vageli
Here you go: [https://outline.com/UvsHMf](https://outline.com/UvsHMf)

------
paulpauper
People were calling a Tesla a bubble ever since it was trading at $8/share in
2013. "Who is gonna spend $50k onan electric car?" "Tesla is dependent on
subsidies and burning cash!" "GM, Ford, and Nissan have competitors such as
the Leaf" etc. These predictions are meaningless, according to exhaustive
empirical analysis. They said the same about Facebook in 2013 when it was
trading at $33/share. "Buying Instagram for $1 billion was so stupid" "Mobile
ads will never work!" "There will be a competitor!" "Just a fad!" etc. They
said same about Amazon when it was at $400/share in 2014. "Losing too much
money on Prime orders!" "Fake reviews" "Share price too high, not enough
profit!" "Stealing from the state (in regard to taxes)" etc. The list goes on
and on. For every correct prediction, they get many wrong. If if valuations
are high, what these people ignore is that earnings are surging, so that high
PE ratio will come falling really fast. For example, Facebook had a PE ratio
of 100 in 2012. If I were going to try to predict which companies are most
vulnerable to being bubbles, I would look for companies that are not a
dominant as Amazon or Tesla, but are small and whose products can be easily
substituted for cheaper alternatives. Retail is especially vulnerable to this.
But then again, Nike bucked this trend. Bitcoin , unlike Tesla, cannot
generate shareholder equity, so in the long-run Bitcoin will always lag
equities, as commodities have always done. Bitcoin's price is just a function
of supply and demand and has no intrinsic worth. Still long tesla and amazon.
Ppl need to stop trying to call the tops of these things. Ain't gonna happen.
Loser's game.

------
anthony_r
One thing to remember, Elon will not stop promising impossible things. Why
people still believe that [Mexico will pay for the wall] is beyond me.

[http://elonmusk.today/](http://elonmusk.today/)

~~~
vardump
Maybe because Elon has already delivered "impossible things", like economical
EVs and landing rocket boosters. That tends to increase one's credibility.

Not saying some things he has promised aren't somewhat a pie in the sky...

~~~
speedgoose
Tesla cars are far from being economical. A Mitsubishi i-Miev is economical.

~~~
toomuchtodo
$35k is the average price of a new car in the US. Bare bones Model 3 gets
close to this. The metric has been met even if the frugal and poor complain.
That economic cohort can buy a used Tesla in a few years if they can’t afford
one new, after someone else has paid the depreciation.

Not many are rushing to buy econobox EVs.

~~~
jcranmer
If you compare the Model 3--which is a sedan--to the median sedan sales,
you'll see that the price is about $35k for the cheapest Model 3 versus about
~$20k for most sedans. Of course, these prices also generally exclude trim
level upgrades, both on Tesla's side and on the more established carmakers'
side.

The more expensive cars being included in "average price of a new car" are
going to include pickup trucks, minivans, and SUVs. The equivalent model here
is (AIUI) Tesla Model X, whose base price would be about $80k, whose
competitors are ranging more around $30k-40k base.

~~~
toomuchtodo
You shouldn't be using the X for comparison, but the Y (which is closer to
$45k, $55k for the Performance version that puts you close to muscle car
territory).

EDIT: (HN Throttled, can't reply, replying here)

I agree there is a premium, but I do not agree it's considerable considering
a) people buy a payment and b) we're in a low interest rate environment where
people can stretch for a luxury car like a Tesla due to low carrying costs of
the auto debt.

Why? [https://youtu.be/XCvwCcEP74Q?t=798](https://youtu.be/XCvwCcEP74Q?t=798)
(13:17-14:15 is the relevant time window)

~~~
jcranmer
Fair enough (I am by no means an expert on the Tesla models), but the general
point of Tesla cars having a considerable premium over their comparable market
segments does remain.

------
bottled_poe
While I agree with the bubble label, I think the reasoning described in the
article is wrong. Since the bond yield inverted earlier this year, investors
are looking at anywhere to put their cash for an ROI. And to further fuel the
situation, the QE policy of the US treasury (I.e. printing money) has resulted
in more cash sloshing around with nowhere to go other than the stock market.
These factors are fueling the rise seen in the share market much more than
simply “speculative investor sentiment”. Like all bubbles, this one will
inevitably deflate (hopefully not pop). I do think that these factors have
multiplied which in turn has attracted even more investment. I believe that
now is a very dangerous time to invest in the share market. A lot of this is
speculation. With any luck we can navigate this situation without a crash,
though I remain highly skeptical.

~~~
BenoitEssiambre
>this one will inevitably deflate (hopefully not pop)

If the Fed is unwavering enough to keep its new average inflation targeting
scheme credible, it should not pop (though things may still cool off at some
point).

------
seabj0rn
Another argument for justifying the run up in price is that investors see the
promise of TSLA being more than just a car company. The future of the Solar
City division means that part of the company can be viewed almost as a utility
co. There is a data play too. With an ever growing volume of Teslas on the
road, all stocked up with the very latest in sensor technology, the company
collects tons of valuable data not just for maps but also for Real time road
conditions and traffic. At some point, they may find lucrative ways of
monetizing that. Then we look at just the trends for their core product, the
cars. The crazy thing that Tesla is doing is turning all other luxury cars
into Cadillacs (ie products for old people). They are doing the same thing to
Mercedes and BMW that the Apple Watch did to Rolex. If you want to signal that
you are part of the new rich, you buy a car that shows off power +
environmental friendliness. With the flight out of major cities in the US,
Tesla is going to be a pretty popular choice for new car buyers that just
landed in the suburbs.

~~~
endori97
Tesla is similar to Netflix/Amazon when everyone knew the future --
TV/shopping would eventually go online and now everyone knows cars will
eventually be EVs

The legacy OEMs must allocate their capital to maintain current
products/dividends/pensions and have a seat at the EV table in the future. Not
as easy as it sounds, especially considering technology creates winner-takes-
all situations and cap-ex to participate in battery production at scale
appears to be in the 10s of billions.

------
gwbas1c
Remember, Tesla is more than a car company. They are an energy company and are
actively growing their battery manufacturing capability.

Why is that important to remember? With initiatives in the US like the Green
New Deal and other various green energy pushes; _there will be a huge demand
for grid-connected batteries._ Edit: They (Tesla) has a massively profitable
grid-connected battery in Australia that's paired with wind generation.

IMO, Tesla's high price is a _gamble_ that American politics will create a
large demand for batteries. But, I wouldn't call it a bubble.

------
lammalamma25
Not sure this article was more than a journal entry for the guy who wrote it,
but I will chime in.

Given any anecdote about the economy going down and stock market going up, it
is worth noting what is going on with the money supply. There is a huge amount
of liquidity being pushed into the USD supply by the fed and treasury. It
needs to go somewhere. The (government's) hope is that it will go into
hiring/spending and the real economy. Even if that is what happens to the
majority of the new money supply (debatable) a large amount will go into
financial assets for people who want to preserve their wealth. The expected
result (IMO) would be stocks to go up in USD purely because of demand for
them. This can alse been seen as inflation or maybe financial asset inflation.
The fundamentals of the economy are not good, but the new money has to go
somewhere. After paying for living expenses etc, there aren't many places to
put it besides the stock market.

A final thought is that if consumer price inflation remains low and financial
assets catch all the inflation, the "rich" or invested benefit the most.
However, its arguable that financial asset inflation without CPI is a better
result for most people vs high CPI and a stock market crash. I would be
interested to know if this a framework used by the Fed or just me as a random
guy on the internet.

------
ckastner
Quoting the recent [1] on Tesla's performance on Monday:

> _Today alone, Tesla’s market cap soared by $64 billion in eight hours,
> including after hours. That’s $8 billion in “value created” per hour._

> _In the second quarter, Tesla’s total revenues were $6 billion, down by 5.8%
> from Q2 last year. Today, its value rose by $8 billion per hour. Over the
> past four quarters, Tesla’s total revenues were $26 billion. Today, its
> value rose by $64 billion._

And the same source on the stock split:

> _The stock split did the job, based on the logic that a five-dollar bill
> broken into five ones makes each of those ones suddenly worth $1.16 — or
> $1.87 if you start counting since the announcement of the split on August
> 11._

And I think this really puts things into perspective:

> _Tesla’s shares are now valued at about 20 times annual revenues. [...] In
> terms of market cap, this makes Tesla the seventh most valuable US company –
> not counting Alibaba._

A car company that sold just 400K cars in its best year is the _seventh most
valuable US company_. Unbelievable.

~~~
vardump
> A car company that sold just 400K cars in its best year is the seventh most
> valuable US company. Unbelievable.

Similar statements are a staple of what people say about growth companies.
Investors seem to think the prospects are way better. Your mileage may vary.

~~~
ckastner
And what exactly would those prospects be to justify this valuation?

VW, the third-largest car manufacturer in the world, sold 11 _million_ cars
last year (27x Tesla), for ~$280bn revenue (11x Tesla) and ~$19bn profit.

VW made 1 out of 8 of the ~77 million cars sold in 2019.

Tesla's valuation is currently 6x that of VW's. So how exactly are investors
picturing Tesla's growth here? To justify this insane evaluation, they'd need
to utterly dominate the market by sales, and with an incredible profit margin.

This isn't driven by investors. This is pure speculation.

~~~
vardump
Ask the people who bought the stock. In the end, this is still their bet and
many of them believe Tesla stock is _undervalued_ , and they put their money
where their mouth is.

They do have more than just the cars. Tesla says they expect their energy to
business to eventually surpass the EV one. They have also an insurance
company.

I don't have any Tesla stock.

------
sebringj
The last part made the most sense about "the ship has sailed" in terms of "buy
low sell high" but there's so many sectors to dominate that Tesla is still
going for and has a distinct approach/advantage for domination. Where's
"high"? idk

------
WhompingWindows
The fossil fuel economy has enjoyed a psychological bubble: we can trash the
atmosphere with whatever we want. Tesla was the ONLY automaker to look at the
SCIENCE DENYING bubble and say: maybe we actually need to emit less GHG or our
planet is doomed.

Everyone thought they were crazy, that it was a waste of money to emit less
garbage into the air, and NO ONE stepped in to compete on EVs. Meanwhile,
Tesla were simply following the science, which said we NEED EV's. As the
science has progressed, many governments in Europe and some US states have
massively pushed toward EV, and early adopters who are also looking at science
and the performance of EVs say: I'm rich, Tesla works for me now.

Does Tesla have too high of a valuation? Maybe, but their EV's are years ahead
of the competition, so maybe not. Maybe the fault here is with other
automakers for completely ignoring EV's for the first decade of Tesla's
domination.

------
ppod
Interesting choice on one of those charts to truncate the "post-crash Bitcoin"
price at end 2018. The price recovered to $10k by mid-2019 and has been
relatively stable there since.

------
orblivion
I saw him mention how the stock market "fully recovered" but I didn't see the
word "trillion" "inflation" or "stimulus" anywhere in the article.

------
talove
_For $7,625 invested at the opening offer price, you’d have a million dollars
today._

This statement from the article is incorrect and doesn't account for the stock
split. Had you invested that much at the opening price you'd actually have
closer to $5mil today.

~~~
NiekvdMaas
[https://youshouldhaveboughtstocks.com/](https://youshouldhaveboughtstocks.com/)

Actually the amount in the article is correct

------
thrownaway954
What the author and most people fails to realize is that you can make alot of
money in the market with bubbles.

~~~
malydok
Quoting the author: "Riding a bubble is dangerous. It can also be lucrative."

------
4eleven7
One of these things is not like the other.

One is backed by multiple factories producing vehicles, with even more
factories coming online in the next year, an entire industry facing
"innovator's dilemma" with a petrol & diesels new sales ban coming into force
2030-2035 for most countries.

The other, a virtual commodity not backed by any physical items, issuers or a
real economy.

How are they comparable?

~~~
TheOtherHobbes
They're comparable because the value is based on faith/hope in the future, not
fundamentals.

The existence of factories is irrelevant if those factories are not
spectacularly profitable.

And right now they're barely - not spectacularly - profitable. And the
innovator's dilemma applies equally to the rest of the industry, which is
already making EVs of its own.

Like everyone else I have no idea if Tesla is a reasonable bet. But it's clear
the price today has become completely and irrationally detached from
fundamentals to the point where the value _might as well_ be from trading
virtual items.

~~~
est31
Yeah a tulip bulb has some basic real value. You put it into the ground and it
grows into a beautiful plant. But is it worth as much as a house in downtown
Amsterdam? Certainly not. Tesla is a valuable company, but the current price
is totally unjustified.

------
dalbasal
I think there's a crucial difference between TSLA, bitcoin and other "pure"
bubbles. I would include The Dotcom in the pure bubble category... definitions
are soft therefore debatable. This is IMO.

 _" Stocks _(in a bubble) _can become inflated through mania-fueled narratives
- not fundamentals. "_

I disagree on nuance. Narrative often drops off during a pure bubble. Rising
prices fuel mania and further rising stock prices. This is a key element of
bubbles: feedback. We have a debate about TSLA in 2019. You say it's
overpriced. I buy TSLA. I make money. We argue again. It's hard for you to win
the argument now.

Bubble narrative tends to get vague as time goes on. Bitcoin's narrative was
that it would be a real currency. People would get bitcoin salaries and buy
groceries with it. That isn't the narrative anymore.

The dotcom narrative, towards the end, became a vague " _this is just how the
economy works now_." The mania was there. The stock prices were there. The
narrative itself fell off. Uber is another good example. What's the narrative
now?

Tesla has some differences. A "narrative" _is_ actually driving stock prices.
Tesla investors are betting on certain things being achieved. They may or may
not be achieved, and that will determine whether or not it was a good
investment.

Narrative 1 is (at current prices), break-even or less for investors: Tesla
will keep its position in the EV market, but the EV market will grow
massively.

Narrative 2 is: Self driving is coming soon. Tesla is in position and others
are not.

The first half of the narrative is suspect. "Soon" can be a long time. The
second half is (IMO), pretty solid. It takes time to make new models of cars.
This is the other extreme to software. If all factories switched in one day,
it still takes a decade to replace the full fleet. Meanwhile, factories long
lead times. Etc.

If the software works and they get a regulatory green light, Tesla immediately
controls an existing fleet and all their new cars are immediately self
driving. It's a very big lead in a very, very saucy new market.

Now... You can think that's likely or unlikely. But, A Tesla share is really a
bet on this narrative/prediction becoming reality. A bitcoin is no longer a
bet on any prediction besides future prices.

 _" Sometimes, performance becomes completely untethered to any analyzable
fundamentals."_

This is true, but I think it mistakes what these "fundamentals" mean. It's
like using BMI to determine if someone is fat. True, on average. Average is
good enough for a stock analyst or an insurance actuary concerned with
portfolios and populations. For any individual though, the "mirror test" is
more accurate than BMI. The fundamentals of any day 1 startup always say
"don't buy."

A more fundamental fundamental is (value)=([p]narrative 1)X([$}narrative 1) +
([p]narrative2)X([$}narrative2)

Insert your own probabilities(p) and values and you have your guess at Tesla's
"real" value.

Whatever you think of current prices, you have to be extremely bearish to come
up with a value that reflect TSLA's current "fundamentals".

