Robert Leonard (02:59):
When we had talked last year, I think it was, or earlier, when we had last talked, you had been quite bearish on Tesla. As we’ve seen the huge rise in Tesla stock last year in 2020, did your opinion change at all, and if not, can you remind the listeners of what your opinion was of Tesla?

John Engle (03:17):
Well, my opinion was then that Tesla was wildly overvalued. However, I would observe that I think I said during our conversation last time that I was unsure of where the stock would go due to the fact that its stock price was already wildly unmoored from economic fundamentals. That was a warning that I think I gave, one that I would repeat now, but my opinion then of Tesla was that the company is essentially an automaker that is radically overvalued, doesn’t have any particular strategic motes that will protect us and faces rising competition from a number of automakers providing electric vehicles that can compete with Tesla at every level, making its current valuation, which puts it now as … Values it at, essentially, more than all non-Chinese automakers combined like the market capitalizations of all other automakers, other than some of the other Chinese bubble auto makers like NIO, which we can talk about later if you’d like.

John Engle (04:18):
But my fundamental view of Tesla has not changed. The company hasn’t changed particularly. The only actual thing that has changed in terms of my bare thesis is that the price has risen to such an extent that should the company manage to pull off a really, really substantial capital raise, they could have enough cash to grow similarly to what they claim, but still probably not justify its current valuation, which assumes wild growth.

John Engle (04:49):
I mean, if you want to think about it in terms of market size and how market capitalization of companies usually behave in relation to them, you have to consider the fact that Tesla, at more than $800 billion market capitalization, represents like about a third of global auto sales annually, and yet Tesla’s actual market share is less than 1%. So, you’re talking about a really massive divergence.

Robert Leonard (05:17):
You talk about raising additional capital. Break down what you mean for us there.

John Engle (05:22):
Tesla, currently, has the capacity in its two existing factories, one in Fremont, California, and one in Shanghai, that collectively can probably, at full scale, produce close to a million units per year. They built and sold 500,000 in 2020, or just under. But they intend, according to Elon Musk, by 2030, be producing 20 million vehicles per year. They have to, in order to reach that scale, build the plant necessary to that. If you think about it in terms of what their previous automotive plants have cost, and assuming, let’s say 10% cheaper, over time as they get better at making them, you’re still talking about, in order to reach 20 million capacity, having to build roughly, basically close to 40 plants if you’re talking about 500,000 units per year and at about 4 billion per factory.

John Engle (06:21):
You’re talking close to $170 billion in CapEx over the next 10 years, which is a lot. Tesla has this $800 billion market cap. Could it engage in pretty substantially dilutive capital raise to raise something approximating that? It could probably do it? The reason it has to raise that capital is because currently it is essentially not profitable with its current operations. So, it couldn’t possibly fund even the tiniest fraction of that necessary CapEx through operated cashflow, or free cashflow rather. You’re talking about that’s basically the only way that Tesla could grow to the extent that it’s being priced in, although it’s actually really being priced as if they’re going to be producing substantially more than that number of cars, or be making a lot more money somehow in a relatively short span of time.

Robert Leonard (07:16):
It’s kind of a self fulfilling prophecy, isn’t it?

John Engle (07:19):
Well, up to a point. The problem is that it’s a bit … There’s a reason why Tesla has largely kept raising in the few billion dollar range. Even their last capital raise was about $5 billion. That’s because it is difficult to find the appetite in the institutional invest in market, which you would need to fill that sort of enormous capital raise even, even stretch out over … Even if you did it in equal parts over 10 years, you’re still talking about $15, $16, $17 billion in new equity sales per year. To do that, you need to have institutional buy-in, but institutional investors have ridden Tesla to a degree quite high, but institutional holdings are at the lowest.

John Engle (08:09):
There was a lot of efforts to sell to retail buyers in the last few capital raises, which all indicate that it’s going to be hard to soak up that level of investment. When I say that, that’s the only path, it’s basically that Tesla has to find a way to convince a lot of buyers who aren’t willing to stump up the capital to put a lot of money into it. Also, depends on the market cap not being diminished over that period of time as the reality of its performance fails to meet the modeled expectations built into this outrageous market capitalization, which is, in itself, also probably derived, to a degree, from just, similar to Bitcoin’s parabolic rise, a frantic FOMO that results in driving the stock up, especially with just a tremendous amount of retail options traded that has had an impact on that as well.

Robert Leonard (09:02):
It was pretty hard for anyone interested in financial markets to not have heard how well Tesla stock did last year. They’re up, I think, over 700% just in the last year, which means that they went from being about a hundred billion dollar company or so to nearly $700 billion, which I think is absolutely crazy because it wasn’t that long ago that we were talking about the first US trillion dollar company, and now Tesla is right there knocking on the door of becoming a trillion dollar company as well. What do you think has really been the main driving factor of Tesla’s stock over the last year, and how did the underlying business perform in comparison to Tesla’s stock?

John Engle (09:40):
Fundamentally, it’s all about narrative. So, you have the emergence of this belief that Tesla will dominate the auto market, no sign of that so far, but there’s a multitude of sort of expectations that have been built into this. You have an ecosystem that’s evolved around Tesla, unlike almost any other company. There’s pretty much nothing like it, where you have loads of dedicated fan websites that are also focused on sort of pumping the stock and supporting it, as well as a number of market analysts and fund managers, who I consider to be shysters for the most part, selling an insane narrative.

John Engle (10:19):
You ave the Cathie Wood of ARK Invest, who’s ETF has taken on incredible growth in terms of assets under management, which is scary in itself. The model on which they base their Tesla valuation has hard coded results. They don’t care about the actual performance. I think that’s the point, that no one cares about the performance, the people driving the stock and talking about the stock are not people who have experience or meaningful understanding of the automotive sector. So, it’s just become a story that this company is doing all these things that will make it basically become Amazon or Apple, just dominate a sector that is essentially impossible to dominate. It boils down ultimately to misunderstanding and relentless narrative reinforcement.

Robert Leonard (11:15):
How long do you think a disconnect like this between the stock and the business can really maintain itself?

John Engle (11:22):
When I first started following Tesla a few years ago, I didn’t think it would take nearly as long. I mean, in fairness, it did lose a lot of its value for a while, but then that was reversed, but I did not believe that it could possibly keep going the way it did. Turns out, in this particular sort of unprecedented market environment, where extremely low interest rates, very little consideration of actual sort of DCF considerations, like valuations of companies thinking about cashflows, but instead, the product has sort of become the stock in many ways. That’s a problem that I believe is not reserved to Tesla.

John Engle (11:59):
It’s a issue that has affected lots of companies. Even in its own sector, companies like Nico.lab as well as companies in various like technologies, where you see companies like Lemonade with a market cap that was almost the total addressable market at one point. When the product becomes the stock, all that matters is the direction of the stock, not the fundamentals of the company. As long as the company manages to deliver performance that is in line with near-term expectations, which are always extremely conservative, then people can continue to believe that next year will be the year where we see this, not double digit economic growth, but triple digit.

John Engle (12:37):
Because I mean, you fundamentally have to think about it. Tesla’s weird in that it isn’t even growing the way a company valued the way it is usually would be, and that’s because they’re very good at basically selecting markets. They’ve continuously been able to hide the weakness of initial markets where vehicles are brought to market in order to … By essentially going to like new markets in the case of 2020, it was mostly China, to continue to keep the top line growing in that way.

John Engle (13:07):
If you actually look at it, US sales of Tesla rose about 6% in 2020, which would be good for a normal company in a recessionary environment. It speaks to the real limits of growth for a company like Tesla. That’s an automaker with only four models, two of which are aging and rapidly falling in sales.

Robert Leonard (13:33):
A big news story for Tesla stock in 2020 was whether it would be included in the S&P 500 or not. Tell us what it means to be included in the S& P 500, why it was important for Tesla, and what the actual outcome was.

John Engle (13:48):
S&P 500 index includes 500 large mega cap stocks that are supposed to represent like a core basket of America’s most valuable and profitable companies. They have to be companies that, in order to be included in the index, a company must first demonstrate consistent profitability, which is defined by the S&P as four consecutive quarters of profitability. Tesla managed to do that once then the S&P committee passed, then the next quarter Tesla reported another profit, and then the S&P committee admitted them. So, now Tesla is a member of the index, and that matters because for a number of reasons.

John Engle (14:31):
It was a natural tailwind, because any funds that are linked to the S&P 500, like any index tracking funds, the underlying assets have to reflect the composition of the S&P 500. There was a significant buying pressure, especially amongst the large pools of ETF related or fund, private index fund related, investment vehicles having to buy Tesla, so that was a major impact. Inclusion in the S&P 500 is usually considered the stamp that a company is sustainably profitable and ready for the big leagues.

John Engle (15:06):
It’s not just growing the top line, it’s actually delivering … It’s able to keep operating and growing without recourse to capital markets constantly, basically. The problem with Tesla’s inclusion, if I can sort of move into the next question, is that the profitability, or the quality of the earnings, you could say, that they reported to get included was not great in the sense that, in order to deliver a profit, Tesla company first had to radically re we use CapEx expenditures and R&D.

John Engle (15:42):
In 2019, for example, they have had a effectively negative CapEx, which is weird for a supposedly growth company, given … Basically they spent less on CapEx than they did on depreciation. They basically borrowed from the future in order to do that. They also relied heavily on the sale of regulatory credits, so any automaker that makes an electric car gets a tax credit, and it depends on the country and jurisdiction like what the composition of that sort of regime is. In the US, there are credit for each vehicle and California, where Tesla is based and where its largest market is, it has an additional tax credit that Tesla has made great use of.

John Engle (16:24):
Other than the company is trying to sell in California have to buy those … Trying to sell an internal combustion engine vehicle, have to buy a credit to offset it. This credit market, while Tesla was the dominant, or only electric vehicle maker around, meant that there has been a scarcity in those credits, and in order to get, so Tesla’s been able to make hundreds of millions of dollars per quarter by selling those credits. In almost all the quarters where Tesla has recorded a profit, if you exclude those credits, they didn’t. That means that, from their actual operations, from the actual cost of their operations of the business, and then selling products, they can’t make money.

John Engle (17:04):
One might say, well, they can keep selling credits, but they can’t, or at least won’t be able to much longer because of how many more electric vehicle makers are coming into the market. The more credits there are, the more flooded that market is, the lower the value of an individual credits. There’s also a reduced demand for them, because as automakers make more of their own EVs, they don’t need to buy tax credits to offset them anymore. You’re looking at a juicing of their earnings that is totally unsustainable and is going to gradually disappear over the course of the next year or two and will leave them, like the quarter business that is essentially unprofitable with some work could barely profitable, but is much less impressive than literally any other automaker on the planet.

Robert Leonard (17:57):
According to a CNBC article from December 20th, 2020, Tesla shares actually fell 6% after it entered the S&P 500, and it entered the S&P at a 1.69% weighting, which would make it the fifth largest weighting. Did it fall after its inclusion because of the different types of accounting policies that you were just talking about, or is there something else at play?

John Engle (18:19):
No, the fundamentals don’t matter to anyone right now. The brief downward pressure was largely the result of punters betting … Basically misunderstanding that the index funds that need to include Tesla will have already bought all that they need ahead of the inclusion. Basically there was just principally a imbalance between buying and selling for a little while that pushed it down, found a new level, and then began climbing again.

Robert Leonard (18:52):
Given what you mentioned about the credits and how they’ve arguably artificially inflated Tesla’s profitability, if that doesn’t continue into the future and they struggled to get back to profitability, is it possible for them to be removed from the S&P 500 just due to profitability?

John Engle (19:09):
Oh yeah. If you don’t meet the qualifications of inclusion, like I believe there are that there are … I don’t actually recall the exact rule for being removed. Basically, if you start being unprofitable for a certain number of quarters, you fall out of the index. It’s not permanent every year. There’s usually some rebalancing. Some companies are added and some are removed.

Robert Leonard (19:34):
Is that a major risk for Tesla, or do you think that Elon Musk and his accounting team could somehow drive one quarter of profitability in that range that they look at so they don’t get dropped?

John Engle (19:46):
I think longer term, especially if they have to grow the way they’re supposed to, and they have to spend a lot, and the additional impact, and the fact that you can see that there are sort of saturation effect in markets like California, you can see the competition effect in the EU that’s forcing down selling prices, which reduces margins, compressing their ability to make a profit. Eventually, at scale, one would hope that they would be able to turn a profit somehow from selling cars. Apparently, other companies are able to do it, so it wouldn’t surprise me if Tesla managed to do it somehow, but their current problems are pretty profound and it would take a lot to make it sustainably profitable.

John Engle (20:29):
The other challenge for S&P 500, it would be a race between whether they turn into the red again, that drives them out of the S&P, or as expectation, as the eternal future of Teslas and market domination, sort of diminishes into the ever further distance, that its valuation compresses, which will kick it out of the S&P 500 potentially as well. If it was valued like a normal automaker or even double … If it was given like 100% percent premium to how automakers are usually valued, which is usually less than 1X book of book value, Tesla would be well and truly out of the S&P.

Robert Leonard (21:02):
What role does the valuation play in the S&P? It’s not strictly … Is it due to size?

John Engle (21:07):
Yes, it’s basically supposed to be the 500 most like consistently profitable companies is what it’s trying to indicate. It’s supposed to be as a large cap index.

Robert Leonard (21:17):
My guess is that if there is, it would be, or likely has been quickly arbitraged away from super investors and supercomputers, but is there an opportunity or strategy to buy companies that are potentially going to join the S&P 500, or possibly even short companies that are expected to be removed from the S&P 500?

John Engle (21:37):
Yeah, that is a viable strategy, for sure. It’s not one that I engage in all that much, but there is a … If you have a high confidence in a company’s imminent index inclusion, or getting close to it, there’s a decent bet there. As can be seen in the case of Tesla, obviously everything with Tesla is sort of magnified up to a level. The share price spike ahead of inclusion was greater than with a lot of companies, but there is definitely a short-term trading opportunity there. That is sometimes harder than usual for the sort of algorithms to play, because the timing is itself kind of uncertain.

Robert Leonard (22:18):
When we think of shorting and we talk about Tesla, for the most part, shorts have been crushed. Since 2012, Tesla is up nearly a hundred times. If you look closely at the stock chart, there were some times where short sellers might’ve been able to make some money on short-term trades, but over the long-term, investors who have short Tesla have just absolutely been crushed. Talk to us a bit about shorting Tesla and other speculative companies.

John Engle (22:43):
Shorting the valuation of a company, even shorting companies that have significantly more profound problems in the valuation can be a painful exercise in futility sometimes, at least it can feel that way. That’s certainly been the case with Tesla. It’s, I think, more so the case in the current market environment where conventional short opportunities that include things like securities, law, or legal enforcement have diminished as sort of regulatory framework has been pulled back and a lighter touch has been taken with a lot of companies. Those one promising shorts are made worse. My Tesla short is quite small. It will be until there is a significant downward correction.

John Engle (23:27):
I’m not too worried about missing the first 20% or 30% drop. When the wheels come off of a company, they tend to come off spectacularly. With Tesla, a company that is just bizarre, that will almost certainly be spectacular. Barring what I said before that they somehow to finagle just enormous amounts of capital raises in a very short period of time. So, basically, raise a bunch of money at the current valuation before people realize that the valuation is nonsensical.

Robert Leonard (23:56):
One of my favorite quotes that relate to this whole concept of shorting companies based on valuation and other semi-speculative stocks are, is that markets can stay irrational far longer than you can stay solvent. I just feel like that is so important to remember when you’re considering shorting companies like Tesla and even other high-flying companies like Lemonade, Snowflake, all these other companies that are trading on crazy valuations.

John Engle (24:22):
It’s usually better to wait for the jaguar to come out of the tree before you start trying to fight it. That’s probably the best like advice on the short side.

Robert Leonard (24:32):
Where do you think Tesla’s going from here, both in terms of its stock and also the underlying business?

John Engle (24:38):
It’s interesting. There’s a few catalysts that are coming up that like with a normal company would almost certainly be considered negative, but with Tesla, it’s very hard to know what will actually punish the stock. But if you want to look for the things to watch, in terms of what could significantly move it, I don’t see anything significant on the positive side. I mean, they’ve got their factory they’re trying to build in Germany, but their German officials said today that they don’t expect it to be operational before July, or probably later the math, so it’s not going to be adding much earnings.

John Engle (25:14):
But you have other catalysts like, just this evening before, before our conversation started, the National Highway Transportation and Safety Administration announced a recall more than 150,000 Teslas based on it’s basically faulty screens, like their little display screen that kind of looks like an iPad in the center of it. Those are the sorts of things that shorts have been talking about for a long time. The design of those, one of the selling points that they’re bigger than those in any other auto makers, and that’s because other auto makers know that using the particular sort of consumer electronics design that Tesla used was not durable and would almost certainly end up failing, which is exactly what’s happened.

John Engle (25:51):
You see Tesla like heavily optimized for the short term. Basically, as time progresses, the gremlins in Tesla’s business will gradually spring to the surface. You have significant legal danger from that. You have enormous danger from the fact that they’ve been selling for years full self-driving capabilities for thousands of dollars to buyers who have not, and likely will never see the promised functionality. As time passes, as people sell their vehicles, or people who leased Teslas and bought the FSD capability when they did, will be returning their vehicles without ever having gotten those, and that’s the sort of time when you start seeing people asking for refunds, and a company that doesn’t have a lot of cash, doesn’t really make a lot of money except via selling its one profitable product, which is its stock, that’s not good.

John Engle (26:42):
That’s another that we’ve already seen one recall. We’ve seen the Chinese government crack down on Tesla already. There are other short-term optimized issues with its vehicles, including things like battery degradation that will increasingly become problematic. Eventually, those things will add up. Then you also have just the impact of, for the first time ever 2021 will be a year where you really see … The 2022 will be significantly bigger, but 2021 will be the year where you really start seeing competitors eat into Tesla significantly. So, Tesla lost EU market share in 2020.

John Engle (27:20):
Meanwhile, you have companies like VW, they now, like in 2020, they sold 240,000 battery electric vehicles, which is the half of what Tesla managed, and that’s 50% more than they had sold a year prior so they’re growing faster than Tesla in Tesla’s one niche. So, you’re looking at really significant competitive internal financial, internal operational, and legal risks, all piling up. As I said, a normal company that people will be talking about this, and that would be the only thing people wanted to talk about, that Tesla isn’t a normal company. Which of those things, if any, or which combination of them is what ends up waking people up, we’ll see.

John Engle (27:59):
So far, Wall Street analysts have simply copy pasted their next year’s expectation into the basically just move the Excel cells one cell over as each year it’s failed to do anything that it promises. If there’s one thing that’s going to like really bury the Tesla narrative in sort of one fell swoop is if they’re compelled or it becomes just abundantly clear that they’re not going to be achieving level five total full autonomous driving in the span that they set. Elon Musk keeps saying next year, or this year always. In December, he said it would be 2021 that full self-driving exists. He’s lying. It’s not true.

John Engle (28:40):
There’s no chance that happens. Literally, every other developer of autonomous vehicles says that that’s fanciful. Tesla isn’t even in the top echelon of developers according … If you actually look at how industry researchers view that space, it’s like, that’s an example of the world … The public sees something radically different from what’s actually happening, and when the two meet, eventually you get to blow up.

Robert Leonard (29:06):
If you’re familiar with it, what do you make of Michael Barry pretty publicly shorting Tesla?

John Engle (29:12):
He’s late to the party, but probably smart to have been. Michael Barry is like a smart guy. He’s very good, completely comfortable with taking unpopular positions that can hurt for a while. I would see it as indicative of a guy who knows what he’s talking about in terms of radically overvalued, highly risky in the sense of systemic risk, not in the sense of economic systemic, but systemic to Tesla in the sense that it is internally riddled with problems. Glad that he’s on the side of the angels, shall we say.

Robert Leonard (29:49):
Where do you think that you could potentially be wrong? I mean, it sounds like you’re still quite bearish like you were last time we talked. What could happen for Tesla? What could Elon Musk do, what could the company do that might actually make them live up to their evaluation, or even grow?

John Engle (30:06):
If you had asked that question last time, there were a number of ways it could do. There were aspects to which it could grow into a hundred billion dollar valuation by actually committing to far better quality control, better manufacturing practices, taking the probably short-term, like the nearer term hit of recognizing they need to raise a lot more capital to invest, dampen people’s expectations probably and moderate them. But instead, they’ve sort of leaned into all their worst impulses. At this point, at its current valuation where it’s valued at more … The 5,000 vehicles it produces is valued at more than the 10 million produced by American and European automakers each year, there is no way to grow into that valuation other than to become that size.

John Engle (30:54):
That takes a lot of time and takes a lot of money. Even if it grows into that valuation, the dilutive effects would mean that, even if it has the same market cap with 20 million vehicles in production, which would still be overvalued, anyone who owns the stock now would still be down. It’s in a almost impossible bind. The one thing that could change it would be if Musk is right and literally, and Google, Ford, GM, Aurora, Amazon, and a dozen other developers of autonomy are wrong, and Musk is right, and that he’s actually going to be able to sell autonomy, not only in order of magnitude faster than anyone else thinks is possible, but also do it with a much more limited sensor suite, then it might be worth what it is eventually, maybe.

John Engle (31:40):
But that’s a big if, and if you’re going to be betting on people, betting on a guy who’s known to make outrageous and impossible promises, makes products that are sub-par, like you only need to look at the “third-row seat” of the Tesla seven model wise, supposedly seven seater, to know that what he says is going to materialize, often is not the case. The reality is that people often, it’s like, don’t bet against Elon Musk. He sometimes is over ambitious, but will deliver eventually. Just look at the model Y as a perfect example, of when he ends up delivering A product, but it’s not much like what he originally said it would be and it’s substantially worse.

John Engle (32:22):
I think that’s like the, do you want to bet on that guy or literally the entire constellation of tech and auto?

Robert Leonard (32:31):
Despite Barry being quite publicly short the stock, he did that if Musk one piece of advice, and that was to dilute the company by 10% right now. He said, dilute, raise 10% more money, issue 10% more stock and raise $80 billion at your $800 billion valuation. What do you make of that?

John Engle (32:52):
It’s interesting, and that’s what I was talking about before, is that like, if he can raise a phenomenal amount of capital very quickly, there’s a path to maintaining this valuation and keeping the story alive even if the actual fundamentals of the car company aren’t necessarily improved substantially, and also lay the groundwork for like actually growing plants efficiently to at least look like a real automaker, and Barry’s not wrong. It’s more a matter of how much Tesla stock can the market absorb, and is it willing to absorb? That’s what I said early on in our conversation about the appetite of institutional investors in that respect.

John Engle (33:28):
Because diluting 10% doesn’t mean the stock will just go down 10%. It can go down, as the case with any time you look at any company that does a dilutive offering frequently, it causes dissatisfaction and drives it down. But on the flip side, if they sell it as, we’re going to have this like absolutely ludicrous war chest now that we can do all of our growth plans, no problem, that might actually be buoy the stock a little bit eventually. It’s probably pulling off a 10% dilution at the current valuation is basically Tesla’s only path. I’m not confident it could do it. It would not be an obvious short and still be a highly suspect company with a deeply suspect CEO, but it would be difficult to say that it can’t at least grow along the lines that it wants to for a substantial period of time.

Robert Leonard (34:18):
We think about Tesla, a lot of people will argue that what people get wrong or the bears get wrong about Tesla is that it’s not an automaker, it’s a tech company or it’s some sort of different company. It’s not just an automaker. What do you make of that argument?

John Engle (34:34):
Fundamentally, those people are either idiots or liars. There’s no ifs, ands or buts. The people who go on CNBC and claim it’s a tech company or claim that it’s an energy company are liars. They should know better. Fundamentally, 99% of Tesla’s business, its costs, and its revenues are in the automotive sector. It is like which, by most definitions, would define a company, what it is. If you look at the other things that it’s supposed to do like the energy side, in terms of its solar deployments, like the solar roof was supposed to be revolutionary.

John Engle (35:09):
2018, I believe, was supposed to be the year of the solar roof. But if you actually look at Tesla’s megawatts deployed in terms of solar, it’s ticked up a little bit last quarter, but it’s still significantly less than half of what it was at its height before it acquired SolarCity in order to bail out Musk’s previous boondoggle. It’s not an energy company. It has no advantage in that space. Lithium ion batteries are not great as a scalable storage method in terms of the power wall. The energy loss is very high. It’s radically inefficient compared to things like to just simply using silica heat sink battery.

John Engle (35:49):
Throw aside the energy company side, then you can look at the autonomy side. That’s the other thing we talk about. As I already explained, Tesla and Tesla boosters who have no actual expertise or knowledge of, or really interest in the development of autonomous driving, think that Tesla is ahead. Google it’s Waymo, it’s subsidiary is widely considered the standout leader in the field. GM is ahead of Tesla bias as well. Go figure Amazon’s investing big in Aurora, which is doing some interesting stuff. Tesla has no monopoly on … There’s no leadership in, let alone a monopoly on like autonomous driving. Moreover, the challenge of that technology is such that it won’t matter for, at the very minimum, like five or six years, but much more likely in the 10 to 15 or even 20 year timeframe.

John Engle (36:41):
It’s basically saying like an automaker, it’s actually a an aerospace company, because in 20 years, I think they’re going to make a play. That’s basically what it is. Tesla basically engages in a highly morally dubious and dangerous practice of releasing beta test. But ultimately, even that is just, in the parlance of autonomous driving, it’s basically just a more advanced level two autonomous like a driver assist. It’s nowhere near the capability that it would be necessary to be truly autonomous. It’s nowhere near that. It probably can’t be because it’s being trained in a certain way and because it’s designed in a certain way to be a driver assist. Easily, Tesla is has been making bank on selling the fun stuff of autonomy and calling it full autonomy while doing almost none of the really, really hard, very boring work of doing what Musk call quarter cases or minor issues that are actually the big issues if you want to have cars that drive themselves without a driver.

John Engle (37:47):
And you have companies like Waymo doing that rigorously on a number of roads training their systems using a range of technologies and sensor suites, including things like laser, LIDAR specifically, that Musk claimed was not a good idea, but he did so only because Tesla couldn’t afford to put LIDAR on all of their cars, so he just pretended it didn’t matter, which another example of short-term optimization. So, we’re [inaudible 00:38:14] get down? Tesla is an automaker, it’s an electric vehicle maker, but that’s not special. There’s lots of them. There’s going to be tons.

John Engle (38:21):
Tesla might release the Tesla Semi, probably not, because the specs they claim are nonsense this year. They might release a new Roadster this year, but again, the specs seem to defy battery technology. They might be able to pull something off that looks passable for both of those. Those are two very niche vehicles in that product lineup. They’ve got no additional consumer product cars. They’ve talked about a $25,000 variant that could sell in smaller, more developing markets, and the economy vehicle in the developed world. When Musk says that something is three years away, it’s probably more than three years away.

John Engle (39:00):
How do they compete with the fact that, in 2021, they’re going to be 50 new EVs release that are not Teslas? Compete in every niche that Tesla competes in, and tons more in the year after that. The market’s going to be deluged in EVs, probably too many, to be honest. But that will make it very difficult for Tesla, firstly, to make the necessary gap-filling income from credits, but more importantly, it just won’t be as compelling an alternative value proposition when you can, instead of buying a Model 3, buy an Audi, or a VW, or a Toyota, or literally a Chevy that all fit those things.

John Engle (39:40):
I think the perfect example of Tesla’s, how its short-term thinking has completely kneecapped its sort of even perceptual long-term growth is that they unveiled that silly cyber truck that isn’t road legal. It’s too big and doesn’t even have a bad. Has angles that would make it impossible to use like for any of the actual uses of a pickup truck, but it won’t even make it to market if it ever did before several other EV pickups are available from GM, from Ford, from some of the new players that are getting into this space with backing from other … Like Lordstown Motors, they’re going to probably beat Tesla with their pickup.

John Engle (40:20):
That’s impressive in and of itself in the sense that Tesla won’t even be the first to market in like several segments.

Robert Leonard (40:27):
If you had to make a bet, let’s say five to 10 years from now, would you be more willing to bet that Tesla’s to zero or to a trillion dollar company?

John Engle (40:36):
Oh, like zero. At this point, I don’t think it will ever be a true zero, just because they’ve managed to paper over the problems enough that there’s probably someone who would buy them or merge with them. But no automaker is a trillion dollar company. No automaker is a $500 billion company. Tesla is no Toyota. Tesla is no GM. Tesla isn’t even a Ford. My bet would be significantly closer to zero than to a trillion.

Robert Leonard (41:06):
If we’ve missed out on Tesla, for whatever reason, what can we learn from this situation to allow us to become better investors and possibly participate in the next Tesla?

John Engle (41:19):
The best lesson is that the way the market now is structured and the way participants behave in it has changed with people in sort of leading edge technologies, or industries. People have demonstrated that it’s very difficult to value terminal value of an emerging technology, in this case, electric vehicles, or autonomy. That’s one lesson that people tend to radically overvalue those things in the early stages and less so as time passes. Some good last time is, if you see a situation where you’re seeing a similar leader emerge in a way that’s similar to Tesla, there is likely to be a tailwind even if its fundamentals don’t match up.

John Engle (41:58):
But also I think it’s important, just in general, how powerful narratives and stories around stocks and the performance of the stock, it’s the primacy of the performance of the stock over the performance of the business, I think it’s become an increasingly visible phenomenon in capital markets. If a recession couldn’t change that, it’s hard to see what else would in the relative near term. But those are, I think, the key, it’s a perfect exemplar of those profound, psychological changes in the way people behave in capital markets.

Robert Leonard (42:31):
John, thanks for joining me again on the podcast and doing a deep dive into Tesla. Depending on where the stock goes from here, we may need to have you back again to talk about that. Talk about new revelations, whether it’s gone down and you’ve been proven right, or if it’s gone up and we need to just talk about what is going on with Tesla still to this day. We’ll see how things progress, but I look forward to chatting again. Where can everyone listening today go to learn more about you and the different things you’re working on?

John Engle (43:00):
They can probably find me on LinkedIn or on Twitter @AlmingtonCap, or on Seeking Alpha. I also write there from time to time, as well as on GuruFocus and Yahoo Finance.

Robert Leonard (43:13):
I’ll put a link to all those different resources in the show notes below. As always, John, thanks so much.

John Engle (43:19):
My pleasure.

Robert Leonard (43:20):
All right guys, that’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro (43:27):
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