Only part of the plunge in Tesla’s stock market value can be pinned on Elon Musk’s misadventure with Twitter. Yes, selling a few tens of billions of dollars-worth of Tesla stock – far more than he signalled at the outset – to fund the purchase was bound to dampen the mood among investors in the back seat. And, yes, the distraction factor is serious; Tesla’s non-executive directors should be screaming at the boss to get back to the day job.
But the main cause of Tesla’s decline from a $1.2tn valuation to today’s £350bn is surely very simple: the stock was ludicrously overpriced in the first place. Investors were required to believe that revenues could keep rocketing for years and competitors’ attempts to catch up with electric vehicles would barely affect Tesla’s profit margins.
If such a plotline seemed unlikely, Jeremy Grantham, British co-founder of Boston-based fund manager GMO and a student of stock market bubbles, offered a recent historical perspective a year ago to explain exactly how far-fetched it was.
Tesla was being valued at “many multiples” of the price-to-sales ratios that had been achieved by members of the big-tech Faang club at the same stage of their corporate development, he pointed out. The market was assuming Musk’s creation would not only be as brilliantly successful as the likes of Facebook, Apple, Amazon, Netflix and Google – “some of the greatest companies in the history of capitalism” – its success would put theirs in the shade. “This is a big ask,” Grantham said drily. You bet.
Thus the stock market’s savage reaction this week to a miss by Tesla to its revenue targets makes perfect sense. The shortfall in sales wasn’t enormous and a growth rate of 40% for 2022 is still slick but, if 50% until eternity had been previously been assumed, the difference matters. It is evidence that competitors are already more than a minor irritant.
The day was bound to arrive. It was always absurd to ignore the well-funded efforts of Ford, Honda, BMW, Toyota, Volkswagen et al. One should now assume the competitive field has changed permanently. As it is, Tesla seems to have had to work hard with discounts to keep sales roughly in step with its production schedule in the final quarter of 2022.
None of which deflects from Tesla’s status as a great 21st-century company that has redefined its industry; it deserves its place in the tech pantheon. But, now the valuation bubble has burst and investors have learned that the price isn’t going to the moon, one can start to talk about a fair valuation.
At the new level, Tesla is still valued at about 29 times projected earnings this year – earnings that some analysts, note, think will go sideways in 2023. In an automotive sector where the post-pandemic boom is fading, that is still a premium rating – just not an insane one. Musk still has a job to do to maintain it.
Centrica is right to talk about credit balances
Annoyed by how your energy supplier is sitting on hundreds of pounds of your cash as a credit balance? So you should be. As the outside world discovered a year ago when some of the smaller suppliers (plus Bulb, a bigger one) started going bust, the practice of using customers’ money as working capital is widespread, and widely abused.
Ofgem, awakening from its regulatory slumbers last summer, seemed minded to do something about it. Companies had been using credit balances “like an interest-free company credit card”, declared chief executive Jonathan Brearley, threatening to insist that the cash should be ringfenced.
In the autumn, however, he performed a U-turn. Ringfencing would only be insisted upon if a company is deemed over-reliant on deposits or doesn’t get its act together to meet tougher – we hope – financial resilience rules, Ofgem decided.
That is the context of the appeal by Centrica, owner of British Gas, to Citizens Advice to join its campaign for suppliers to be obliged to disclose prominently to customers whether their credit balances would be fully protected in the event of corporate failure.
Since Centrica adopted ringfencing voluntarily, one could say it has a vested interest here. But it is also right to keep banging the drum about credit balances. Energy suppliers should not be sitting on the equivalent of months-worth of bill payments in some cases. Let them find their own working capital, which is how life works in virtually every other industry. Ofgem’s lenience on this issue remains baffling.