Coyote Blog

I have been recuperating from some health issues and have not been writing much, but I really don't want to miss out on putting my oar in the water prior to the SpaceX IPO.  As background, I love to watch what SpaceX is doing in launch and believe they have made a huge contribution to the world in doing so.  As a former operator of hundreds of wilderness campgrounds, Starlink was the greatest single new technology for our business in 20 years.  But you don't automatically get your way with stock valuations just because what you do is cool and useful -- there has to be some prospect of making back the investment.

Anyone who has been following Tesla for years has to know what is coming at SpaceX.  In the movie Gettysburg, the great Sam Elliot speaks these lines as General Buford, the union Cavalry commander who was able to slow the southerners just enough on day 1 to let the Union grab the high ground.  But ahead of this success, he fears that he and the union will fail and the South would slaughter Union troops trying to take the hills too late, as at Fredericksburg (and as happened to Pickett a couple days later).

Devin, I've led a soldier's life, and I've never seen anything as brutally clear as this. It's as if I can actually see the blue troops in one long, bloody moment, goin' up the long slope to the stony top. As if it were already done... already a memory. An odd... set... stony quality to it. As if tomorrow has already happened and there's nothin' you can do about it. The way you sometimes feel before an ill-considered attack, knowin' it'll fail, but you cannot stop it. You must even take part, and help it fail.

Having been a (peripheral) part of the online community skeptical of Tesla stock valuation,  I feel I can see the future of SpaceX stock over time as if it has already happened.

There are at least two distinct patterns one sees over time in the stock of Musk-led Tesla that I fully expect to see duplicated at SpaceX.  So it is worth reviewing those.

1. Absurd Valuation Based on Musk Shouting "Squirrel"

Tesla has a Trailing 12 Month PE ratio of 387(!) and a forward PE of 216.  These ratios are almost unprecedented for a company not in the middle of a restructuring, and indicate simply enormous growth expectations.  This is not some weird temporary data spike... Tesla has maintained a PE over 150 for years and years.  Just to give it context, let's compare it to Nvidia which is perhaps the world's most famous growth company right now.  Nvidia's revenues have really gone vertical over the last quarters:

For that it has been rewarded with a PE of 34 / 25 (Trailing / Forward).  So Tesla must REALLY be growing to justify a PE of nearly 400, right?  Well, not really.  In fact, Tesla's revenue has been essentially flat for 14 quarters:

So how does Tesla maintain such a crazy-high valuation?  Honestly, I don't know.  But from watching it and Musk for years I would argue that the most important factor has been Musk's ability to keep shifting the endgame.  The response to valuation concerns is always "yeah, but you are only looking at the current business, [fill in the blank] which is coming soon[-ish] will be worth a trillion dollars."  The fill-in-the-blank over the years has included solar roofs, full self-driving, semi-trailers, battery swap, robo-taxis, neural implants, humanoid robots, and AI.

Tesla Translated to SpaceX:  The proposed SpaceX valuation of $1.75 trillion is, if anything, even crazier than Tesla's.  It is impossible to apply a PE, since SpaceX loses money and can be expected to do so for years, even decades.  But with about $18.7 billion in revenue last year, the SpaceX valuation is nearly 100x revenue (Tesla trades at a lofty 15x revenue).  Nobody, ever, has made money investing in a 20-year-old company with low margins at 100x revenue (barring the occasional sucker who will later pay 120x).

The tell for me is the emphasis and investment in AI at SpaceX.  Strategically, this is a terrible idea as their core business is already very capital intensive and they really don't need a diversion into something else.  They are competing in AI with a number of companies that are far ahead of them and I don't see an obvious way to catch up (very similar to Tesla and self-driving).  Musk says they are ahead but Musk said Tesla was ahead on self-driving and robotaxis until it has become obvious that they are not even close.   There is a potential AI-related launch and hardware opportunity, maybe, someday, to put AI processing in space, but there is no reason that should be dependent on SpaceX's independent investments in AI.  The one thing AI gives SpaceX, of course, is a squirrel to help fill in the value hole between "losing money on $18 billion of revenue" and $1.75 trillion.  Investors in SpaceX can expect a constant stream of squirrels over the coming years.

2. Propping Up Older Musk Investments with Newer Ones

Over the years of following Musk, the one action of his that aggravated me more than anything else was the transparent bailout of his friends' and family's investment in SolarCity using Tesla stock.  Like most other rooftop solar businesses, in 2016 SolarCity was close to bankruptcy.  Rather than allowing that to happen, losing money and prestige for Musk, Musk used his extraordinary control of the Tesla board to have Tesla buy out SolarCity for far more than any sensible market value.  In doing so, Musk trumpeted another classic Tesla squirrel, presenting the Solar Roof, basically modular rooftop solar tiles that looked like wood or slate that would snap together into an attractive rooftop installation.  It was later found that most of the early demo was likely fake, as the tiles were not even close to release-ready and while Musk was predicting 12,000 installations per year and growing, perhaps only 3000 in total were ever completed over 10 years.  The Solar City results continued to fall at Tesla and were rapidly buried in the energy sector, making it almost impossible to figure out how much value Tesla got from SolarCity, given that the vast majority of energy sector revenues are unrelated to rooftop solar and are instead large battery storage projects.

Since that time Musk has used his AI lab xAI to buy Twitter/X.  And then just this year had SpaceX buy xAI for $250 billion.  Does it make sense that an orbital launch company own a social media platform?  Absolutely not, but it bailed Musk out of an investment in X that was going to be very hard to ever recover any other way.

Tesla Translated to SpaceX: 

Last year Tesla booked $890 million in revenue from SpaceX  (cars, battery storage, some AI).  This is less than 1% of Tesla's revenues though I expect it to be, since it was not arms length, more profitable than average.  But the real threat to SpaceX will be, as Tesla's stock valuation eventually starts to return to Earth, that Musk will use his unique control of both companies to have SpaceX buy Tesla.  People are already discussing it. These are two companies that absolutely have no reason to be under one roof EXCEPT that it would help maintain Musk's net worth.  Yes, I am sure he will generate a logic that the Musk fan-boys will love -- AI consolidation or some such.  And I guess it would be accretive, in an ugly way, with a 100x revenue company buying out a 15x.  Just remember that these two companies, which if the IPO price holds for SpaceX, have a combined market cap of $3 trillion and a combined 2025 net income of -$1 billion.  Even if your excel spreadsheet has enough columns to add years marching towards the heat death of the universe, I am not sure that investment ever pays off.

Parting Thoughts

None of this necessarily means that the SpaceX IPO will fail or that SpaceX stock won't rise post-IPO.  I spent too many years getting burned off and on shorting Tesla to ignore the fact that any Musk enterprise commands a premium among a subset of investors -- he is like Warren Buffet in that his name association with a deal has overwhelming value (the only difference from Buffet being that Buffet's investments actually produce profits).  Be aware if you invest that you are likely soon to own Tesla as well, because I do not think Musk can resist the temptation to use high-multiple SpaceX stock as wampum to buy out his other investments.

There is a sort of clock in Musk investments, going back to SolarCity.  There is a lot of arm-waving and squirrels to maintain a valuation, but as business performance inevitably does not live up to the valuation hype, its time to have the next investment that is at the peak of its hype with a huge multiple buy out the old one.  I really thought Tesla might finally hit that point when the valuation collapses to that of a low-growth car company once the robotaxi initiative proved a loser, but here comes SpaceX just in time.

I do not give out investment advice but if I were short Tesla right now I would run for my life.  The SpaceX IPO will essentially be a big Tesla bailout.

Several years ago I was pretty active in the online community that was deeply skeptical of Tesla.  When I backed away from blogging for several years, the Tesla fanboi community immediately decided that I was scared off by Tesla's success, as measured by a stock price that went through the roof for several years.  I still get DM's on X from time to time taunting me for all sorts of past heresies, when in fact I was just exhausted with blogging, and remained certain that Tesla stock had become a sort of Bitcoin-equivalent, without any underlying value except for a community belief that it had value.

In fact, I was so embarrassed about my past criticism of Tesla that one of my first posts back here was... a criticism of Tesla.

I was distracted a month or two ago when Tesla first quarter financials came out, but they are worth looking at because they were a disaster (of course, for anyone who knows the history of Tesla stock fandom, the stock price was up the next day after the release).  But I want to get into it now because it is pretty stunning.

Before I get to the earnings number, note that Tesla stock closed today with a trailing PE ratio of 174.  This sort of PE (except in turnaround situations) is only granted to astronomically-high-growth companies.  For comparison, AI darling and the superstar growth stock of the last year or so Nvidia, has a PE just under 53.  To justify a 53, Nvidia has demonstrated this sort of revenue and earnings growth the last several years:

So, one would expect Tesla to have demonstrated something even more spectacular to justify a PE of 174.  Drumroll please:

Tesla has 13 quarters, or over 3 years, of essentially zero revenue growth and an even longer period of zero net income growth.  Freaking General Motors has seen more revenue growth over the same period and they have a PE south of 8.  A PE of 8 seems about right for Tesla as a car company, meaning it is 20x overvalued.  This would lead to a value of $50 billion vs. its approximate $1 trillion market cap.

So what is driving the other $950 billion in market cap?  Whatever this $950 billion business is -- and we know it is not cars -- it constitutes the 10th largest company in America.  So here is the answer for you ... squirrel!

Tesla and Musk are very very very good at getting their fanbase to buy into the fact that they are more than whatever the company actually is at the moment (ie anything but a US automaker with an 8 PE).  We are a solar company... until Solar City crashed and burned.  We are a solar roof company ... until that business was shown to be all flim flam and no substance.  We are a battery change innovator  ... until that was shown to be a stunt.  We are an electric truck company ... until they never made more than the prototype.  We are a battery storage company .. until that growth stalled.  We are a leader in the huge Chinese market... until we weren't.  We are the leader in full self driving ... until, after selling the product for years, we still have never delivered to those who bought it.  One squirrel after another.

Today, it is the same game with only the exact future promise changing.  Every chance they get today, Tesla and its supporters will tell you that they are not a car company.  Go to Seeking Alpha and look at the Tesla buy recommendations, they say things like this:

• Tesla's current valuation isn't justified by traditional metrics, but its potential as an AI, robotics, and energy company is unmatched.
• The robotaxi and autonomous vehicle market could drive Tesla's valuation to $900B alone, thanks to its vertically integrated stack and cost advantages.
• Optimus robotics and other moonshot projects could add $300B+ in value, with further upside from energy, insurance, and software businesses.

And this:

• Tesla's valuation is now primarily driven by its robotaxi and humanoid robotics ambitions, not near-term automotive delivery growth/decline.
• Despite recent deliveries disappointment and renewed political fallout with Trump, investor sentiment has remained remarkably robust.
• The market is starting to price in significant operating income potential from robotaxi deployment, with a medium-term outlook in the next five years.
• Tesla investors are starting to take its AI ambitions (robotics and autonomy) very seriously, suggesting automotive hiccups could become less market-moving going ahead.

As I am writing this, enjoying the latest movie snark from the fabulous Critical Drinker on my iPad, I even got an ad for this crazy Tesla-pump video with the same basic message.

So apparently buyers and holders of this stock believe that Tesla's robotaxi business and AI/robotics business is worth at least $950 billion  (as a comparison Uber is worth less than $200 billion).  So let's think about that.

I am a frequent user of Waymo driverless taxis and have been in a number of friends' Teslas (totally white-knuckle nervous) in whatever passes for self-driving in Tesla models.  And they do not even compare.  Waymo is top to bottom a superior, better thought out product and way more reliable in its driving.  We have hundreds of these things on our streets around my house in Phoenix such that I cannot even drive to the grocery store without one driving through the same roads and intersections.  Yesterday I saw them stopped 3-wide at a nearby intersection.  And I have never seen a Waymo -- whether  I am inside it or driving next to it -- do anything that makes me nervous.  They are incredibly well-driven and safe vehicles (not to mention always clean and comfortable).  I have seen them navigate situations, like left-turns in complicated intersections, that might confuse me as a driver. Tesla continues to double down on Musk's early mistake of eschewing Lidar (Musk claiming good AI can work with cameras only) and I am convinced Tesla is thus in a technology dead end.  Part of the proof of this is that Tesla has actually been selling full-self driving for years and years and still have not delivered that product to the people who paid for it.

But forget all that for now, and assume I know nothing about self-driving (partially true) and nothing about AI (totally true).  Tesla made hay in its early growth phases by competing on technology and particularly electronics and automation with auto companies who are not really leaders in this stuff.  I had a Mercedes for a while and those Germans build a nice car but damn their electronics such as their entertainment system always suck.  I remember someone lauding the US military for being capable and the response to that was that the US military only appears capable and advanced because it competes with other militaries.  Same for Tesla cars -- they brought fresh technology into an industry that is basically the special needs kid of innovation and software.

Now, though, consider Robotaxis and AI.  With Robotaxis Tesla is competing with Google.  In AI it is competing with Microsoft, Google, and Meta.  Musk has made formidable investments in that space, but he is no longer running up the score against Appalachia State but has to take on the first teams of Alabama, Georgia, and Texas.  Not impossible, but $950 billion is a ridiculous valuation to put on what to date is simply arm-waying and talk, particularly given how much of past Tesla talk and arm-waving has turned out to be total bullsh*t.

It has got to be a bad idea to invest in a 22-year old company on the proposition that 95% of their value is in new things you haven't really seen yet.  This sort of shift almost never happens, and tends to be the equivalent of a company like Gamestop trying to keep investors excited in a no-growth low-margin business by announcing they are really a bitcoin company. A tiny tiny few companies have pulled this off -- I think of Amazon with cloud computing eclipsing their retail business.  But even in this case the shift was something that was only really recognized and drove valuations after Amazon made it real.

Postscript:  "But SpaceX" is not an adequate retort.  I love SpaceX, and give Musk a lot of credit for being the founder and visionary behind it.  But SpaceX just performs in its original business, without all the shifting promises and BS.  And for every SpaceX, I can say "But SolarCity" of another Musk business that ended up in the toilet after tons of hype.

Warning:  Please don't take this as a recommendation to go short Tesla.  I am sometimes short Tesla and I can assure you that Tesla fanbois can keep the stock overvalued much longer than you can endure the pain.  Always short with caution.  Remember, Tesla stock is up over 25% since the day in April that it announced the terrible results above.  If you had reasonably shorted the stock during the abysmal last earnings call you would be getting margin calls.

Update:  I forgot to link the source for the Tesla earnings charts.  It is here.

I lost a fair bit of money shorting Tesla ($TSLA) stock until I realized that its stock price was absolutely untethered to reality.  And we see this today as the stock is currently up 4% following yesterday's miserable earning report.  The "growth" stock with a P/E ratio of 111 reported its 9th straight quarter of flat revenues and 12th straight quarter of essentially flat to down profits (source CNBC).

There is a nice Cramer cameo in the movie Ironman where he screams "that's a weapons company that doesn't make weapons."  Tesla is the growth company that doesn't grow.  So of course, without growth, the Tesla stock fans are driving up that triple digit PE even higher

The only explanation seems to be statements from Elon at the earnings unboxing session yesterday:

Musk has been telling investors in recent quarters to focus less on the core business as it exists today and more on a future of autonomy and robotics.

In October, Tesla drummed up excitement among fans by showing off an early prototype version of a Cybercab at its “We, Robot” event. However, Tesla still does not produce robotaxis. Instead, the company sells a premium version of its partially automated driving system called FSD, short for Full Self-Driving (Supervised)....

While Tesla did not give specific guidance for this year, the company said, “we expect the vehicle business to return to growth in 2025.” It also reiterated plans to “unlock an unsupervised FSD option” eventually and said it expects to “begin launching” its driverless ride-hailing business “later this year in parts of the U.S.”

Wow, every CEO should try this after bad results.  "Focus less on the business as it is today and more on a vague, unspecified vision of how it might be better in the future."  This is the same sort of Musk handwaving we have seen for years.  The full-self-driving promise dates well back pre-COVID.   Honestly, having seen the state of FSD on Teslas, I fear for the residents of Austin where Musk claims there will be robotaxis in action later this year**.   I found this to be the most interesting piece of hopium:

The company’s stock price has rallied sharply since Trump’s victory in November as investors bet that Musk’s influence would lead to both favorable policies and less oversight of his companies.

Seriously?  In his first executive orders Trump has killed most of the mandates and subsidies on which the company has relied.

** Footnote:  You know where there are lots of robotaxis in action and have been for years?  Phoenix.  Waymo has become a fixture of the Phoenix and Scottsdale streets.   Everyone here loves them.  Yesterday I tried to get a picture but I was too late, but near my home there were three waymo's side by side going up the boulevard.  Go to any fancy club that attracts a lot of young people, like the bar on the roof of the new Global Ambassador Hotel, and you will see one Waymo after another dropping (mostly) young women off.   Women love these things because they feel safer without the driver.  I love them because they are about the only thing I see every day that looks like what I was promised about the future when I was a kid.   Musk has a long way to go to prove his camera-only sensing approach can match the LIDAR-rich Waymo strategy.

Postscript:  I know this will seem crazy, but it is possible to have mixed feelings about an individual:  people are not all Mother Theresa or all Hitler.  Musk's management of Tesla really irritates me and some things, like his fake Saudi tender offer or the SolarCity buyout, strike me as straight-up fraudulent (how many solar roofs were sold last quarter, Tesla?)  But I love everything that SpaceX is doing and I think Musk has done great work shining the light on certain issues from government waste to grooming gang coverup in the UK.