Current thoughts on Tesla

Tesla has a market capitalization as of this writing of $780 billion. It made around $14 billion of profit in 2023 and $7 billion in 2024. A good chunk of profit comes not from selling cars but from regulatory credits. It sold fewer cars in 2024 than in 2023. Unless we see a significant shift change in battery capacity, speed of charging, and improved quality and availability of charging infrastructure, we have reached peak EV penetration (I wrote about this earlier).

However, today Tesla is not trading based on car sales but on future dreams of self-driving robo-taxis, robots, semis, and whatever else Elon dreams up. The car company may be worth $100–180 billion; the rest is what investors are willing to pay for Elon’s dreams.

Quick thoughts on each dream:

Self-driving: I would not trust my life or my kids’ lives to a car company that only uses cameras. They are passive sensors that have limited range and are easily impacted by bad weather. I’ve used Tesla self-driving software – it is great most of the time, except when it’s not – and then it might kill you or others.

Robo-taxis: They may work in geo-fenced areas, but they pose a huge reputational risk to Tesla. One death and this business is done. That’s what happened to Uber’s self-driving business, and why Google’s Waymo has taken a much more conservative route. It uses radar/lidar and launched the service in geo-fenced areas first.

Semis: They were announced in 2017 and were going to hit the road the next year. They are still not out there. I suspect Elon is waiting for a breakthrough in battery technology.

Robots: Exciting, huge market, but this will be a crowded field.

New competition: There are lots of Chinese EVs invading Europe and the rest of the world. BYD looks like a real competitor.

China looked like a great opportunity for Tesla, but may turn into a liability if the trade war intensifies.

Finally, though at times he seems superhuman, Musk is constrained by the number of hours in the day. As of today he is running Tesla, SpaceX, Twitter (x.com), xAI (the maker of Grok – a ChatGPT competitor), The Boring Company, Neuralink, and oh, yes, DOGE. The EV market is getting more, not less, competitive. Tesla needs an undistracted Musk.

One last thought: folks have been telling me that Tesla declined by 40% off its high. I want to offer this gentle reminder: it is the same price as in November 2024 when President Trump got elected. Trump was supposed to be a huge tailwind for Tesla, and may still be for the approval of robo-taxis, but so far he has ended up being a huge headwind for Musk’s brand.

We live in a very politically charged environment and a divided country. Half of America and the bulk of Europe hates Musk and thus Tesla (though I’m sure they love him in Russia). Anyway you look at it, this is not helping Tesla’s brand.

How can we protect the gains we have made, if the market enters a deep bear phase? How do we hedge the portfolio?

I have several answers to this question.

First, we don’t own the market. I keep repeating this, but it’s important to remember, especially in a recession. The market – the average stock listed in the US – is very expensive, but your portfolio looks nothing like “the market.” In fact a good chunk of your portfolio is outside of the US, in markets that are not nearly as expensive as the US.

Second, as our stocks approach fair value, we’ll be trimming or selling them. We have done some of that already.

Third, it is impossible to completely hedge out your market exposure economically. We can take large swaths of capital and buy put options, but to reduce short-term volatility we would have to give up a huge amount of return. We are not going to do that.

Fourth, we are going to be opportunistic about limited hedging. Our track record with hedging is mixed: our out-of-the-money puts on indices expired worthless, but our costless UBER collar twice was profitable.

Fifth – and this is the most important point – volatility is not risk. Risk to us is permanent loss of capital. As we analyze and value individual stocks, we look at them as businesses, and we require a margin of safety.

This is not what index fund investors are doing. Over the last fifteen years, index investing has turned into a religion that promises never-ending returns from stocks, no matter how expensive the stock market might be. “Buy the dip” and “never sell” have become this religion’s commandments. This faith has received endless reinforcement from stock market appreciation… so far.

Of course, as stock market growth outpaces earnings growth, these dollars invested in stocks buy less and less. But inflows never end. In their defense, investors typically keep doing what worked for them. Most are given a menu of index funds they can buy in their 401k. They check off the box, and then billions of dollars buy the index every month, with no research and no attention paid to how much these dollars buy per unit of earnings and cash flows. The longer this cycle lasts, the higher stocks will climb the cliff from which they will eventually fall.

This is where things get nuanced, and this is where risk becomes volatility, because in the case of downside volatility (nobody looks at price appreciation as risk) there may be a semi-permanent loss of capital – losses or near-zero returns for a decade or two.

“The market” is a somewhat nebulous entity to wrap your hands around. Instead, consider Microsoft, Qualcomm, or Wal-Mart. It took them a decade or longer to return to their 1999 levels. A decade is forever in the stock market, especially when you’re losing money.  Only a few investors who bought them in 1999 held on through 10–15 years of negative or no returns before things turned around.  This is why I am so glad we don’t own the market.

Key takeaways

• Tesla’s $780 billion market value is largely based on future dreams (robo-taxis, robots, semis) rather than current car sales, with the actual car business potentially worth only $100-180 billion.
• Each of Tesla’s future ventures faces significant challenges: self-driving technology relying solely on cameras poses safety concerns, robo-taxis carry massive reputational risk, promised semis remain unreleased, and the robot market will be fiercely competitive.
• Tesla market value may be undermined by Elon Musk’s divided attention across multiple companies (SpaceX, Twitter, xAI, etc.) and his politically polarizing personal brand, which has alienated potential customers.
• In contrast to index fund investing (which has become almost religious with mantras like “buy the dip” and “never sell”), our investment approach focuses on individual businesses with margins of safety.
• Rather than attempting complete portfolio hedging (which sacrifices returns), we’ll trim overvalued positions, seek opportunistic hedging, and remember that our diversified portfolio doesn’t mirror the expensive broader market.