(Bloomberg Opinion) -- There may be more riding on the future of Tesla Inc. than cars. The electric-vehicle maker has become a flashpoint in a heated debate about whether traditional methods of stock picking have outlived their usefulness.
Tesla didn’t ask to be at the center of the dispute, but two high-profile and opposing bets on the company’s stock made it inevitable. On one side, wielding the old playbook, is hedge fund manager David Einhorn. His fund, Greenlight Capital, has bet against Tesla’s stock for at least three years. Einhorn raised the stakes last April, rhetorically if not in actual dollars, writing to investors that Tesla is “on the brink” and that Chief Executive Elon Musk “never admits the crisis.”
On the other side is celebrated stock picker Catherine Wood, who told Bloomberg TV recently that Tesla is “incredibly undervalued.” Tesla’s stock is the largest holding in Wood’s ARK Innovation ETF, accounting for roughly 12% of the fund. She’s been unquestionably right so far. Tesla’s stock price is up more than 150% since Einhorn predicted the company’s imminent demise in April, including a gain of 76% this year through Wednesday, when the stock dropped 18% after a meteoric jump earlier in the week.
The old stock-picking playbook, first codified by Benjamin Graham and David Dodd in their 1934 classic “Security Analysis” and endlessly refined ever since, calls for buying companies with a strong record of earnings growth, modest debt levels and a stock that is reasonably priced or cheaper relative to assets, earnings or cash flow.
By those measures, Tesla is a disaster. Not only has the company never been profitable, but the losses have widened as the company has grown. Tesla’s annual net loss has averaged more than a $1 billion over the past five years. And while the company’s debt relative to its assets isn’t as high as some other carmakers, it’s well above that of the average company in the S&P 500 Index.
And that red ink isn’t cheap. Tesla’s price-to-sales ratio is 5.3, or twice that of the S&P 500. Its price-to-book ratio is 20, or five times the S&P. The price-to-cash flow ratio is 55, or four times the S&P. And the trendy enterprise value-to-Ebitda is a whopping 68, or five times the S&P. No wonder Einhorn is down on the stock.
But what if that’s the wrong way to think about Tesla? According to Wood, Tesla is an “exponential growth” company, part of a new generation of disruptors whose earnings will grow in a burst rather than the slow trickle typical of traditional companies. Wood tweeted in 2019 that, in Tesla’s case, electric vehicle sales “will increase nearly 20-fold during the next five years, from roughly 1.4 million last year to 26 million in 2023. $TSLA should capture a significant share of the market.” In other words, when that exponential growth is properly accounted for, Tesla’s stock is a bargain.
It’s tempting to dismiss the debate as just another spat in a long-running rivalry between growth and value investing, but that would miss the gravity of the argument. Tesla is in elite company, by Wood’s reckoning, and most stocks found in broad market gauges — growth and value alike — are “value traps” because they’ll be left behind or disrupted out of existence. Exponential growth companies are therefore not only the best opportunity to make money but also critical shelter from the coming disruption storm.
If you want a preview of what such a future might be like, look at the NYSE FANG+ Index, a murderer’s row of disruptors that have grown exponentially, or are expected to, including Tesla, Amazon, Netflix and Facebook. The index has blown by the rest of the market, outpacing the S&P 500 by 195 percentage points since inception in September 2014 through Wednesday, and it shows few signs of slowing. The thumping would be even worse if you excluded the companies in the index from the S&P 500.
Einhorn’s bearish Tesla bet has contributed to his fund’s disappointing recent performance, but he isn’t the only one paying a price for clutching the old playbook. Chances are, the more steeped you are in traditional methods of stock picking, the more your portfolio is lagging. Just ask some of the money managers who are considered among the most learned in the game, such as AQR Capital Management, Dimensional Fund Advisors, WisdomTree or Alpha Architect. Their sighs will tell you everything you need to know. (Full disclosure: My asset-management firm invests in some of their funds.)
So is exponential growth a fad or a tectonic shift? This moment offers a rare glimpse into how difficult it is to distinguish between the two in real time. Sure, with hindsight, it’s easy to deride investors who were swept up by the Roaring 20s or the Nifty Fifty or the dot-coms or countless fads that preceded them, but it’s never obvious in the moment because thoughtful people on both sides make compelling, or at least credible, arguments. My Bloomberg Opinion colleague Matt Winkler made a persuasive case for Tesla last week, and similar arguments could be made for other disruptors. Even Dartmouth professor Ken French, who is famous for his research on value investing, acknowledged recently that “there is no way to tell” if value investing is dead.
Still, it’s worth bearing in mind that the old playbook has survived every previous challenge. That doesn’t mean Tesla fans are necessarily wrong, but if history is any guide, many other disruptors are likely to disappoint or be disrupted themselves by resurgent incumbents, bringing the market back into balance and making the old playbook relevant again.
To contact the author of this story: Nir Kaissar at firstname.lastname@example.org
To contact the editor responsible for this story: Daniel Niemi at email@example.com
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.
For more articles like this, please visit us at bloomberg.com/opinion
Subscribe now to stay ahead with the most trusted business news source.
©2020 Bloomberg L.P.