On Monday Hertz (HTZ) announced it would buy 100,000 Tesla (TSLA) vehicles at retail price. The $4.2 billion windfall that TSLA would get caused the stock to soar—in fact, it went up by over $100 billion in market cap as a result, meaning the market valued the one-off purchase at about a 22x P/S ratio—a pretty high number.
That has caused some outrage among fundamentalist value-driven investors, because, looking simply at valuation metrics, a 22x P/S ratio is inexcusable for a one-off purchase. Growth driven investors dismiss such an argument, saying that the knock-off effects of HTZ’s purchase are where the real value is. More people will drive Teslas, and enjoying the experience will inspire them to buy a Tesla in the future. The multi-billion dollar windfall will help Tesla improve production capacity. HTZ will buy more Teslas in the future. Other car rental companies will follow suit, buying more Teslas as they see the efficiency in maintenance and durability of electric vehicles.
There are counterarguments to all of these points—some (or all!) could be wrong. A good point is that pretty much every car producer is ramping up its EV production, so Tesla is no longer the only big producer of reliable EVs (and some would argue Teslas aren’t reliable). As BMW, Toyota, Ford, etc. etc. build more EVs, greater market competition will crimp TSLA’s growth and its stock will no longer deserve its trillion dollar market cap. Or so the counterargument goes.
Who is right? We won’t know for years, but you can definitely handicap both arguments by analyzing the facts on the ground and trying to model the growth not only of EV production and consumption at TSLA, but also among its competitors. A big winning argument for TSLA maintaining its marketshare is the superior quality of the product—TSLA fans point to how the car starts automatically without having to insert a key when you sit in the driver’s seat, they point to the large touchscreen, and they note that TSLAs are beautiful cars.
Again, all debatable points—but they must be debated with data and analysis. Can those features be replicated? Are other car producers replicating them, or even trying to produce even better features? What of TSLA’s other investments—its solar power, batteries, cloud computing, and other bets? These, many argue, make TSLA more a tech than a car company, thus deserving a higher multiple and expectations of much greater growth than what we’ve already seen. Are these arguments sensible, and can data back them up?
Note how when we try to get to the heart of the TSLA debate, fundamental analysis of balance sheets is less and less important. What’s much more important is market research—understanding Tesla’s activities, the activities of their competitors, and the nature of the markets in which Tesla operates. In other words, we need to learn about the world around Tesla to make a confident argument of the company’s future. That, by the way, applies to every company on Earth—but the particularly vocal and cantankerous debate about this very hyped company demonstrates just how essential market research is when calling a stock.
