I have written quite a bit, and posted multiple articles, about WeWork and about Tesla. I thought I would discuss the two companies in comparison, because I see some parallels in the trajectory of the two.
First, if you are not familiar with WeWork, it is a real estate company that leases properties under long-term contracts and then rents office space on short-term agreements, typically with early stage companies and/or entrepreneurs who are trying to start businesses and who need temporary office space.
The company, mainly through investments by SoftBank and other high-profile investors and investment funds, was able to drive a sizable valuation in the multiple billions of dollars. WeWork was able to accomplish this not through effective and efficient operations, but rather by convincing the investing public that it was not really a real estate company, but rather that it was somehow a technology company.
This strategy seemed to work well, and it allowed the company to build that huge valuation and set the stage for a high-profile initial public offering (IPO) at this inflated valuation.
The problem was — and still is — that WeWork is not a tech company; it is a real estate leasing company. Further, it isn’t even a good real estate leasing company. In fact, it is a downright awful real estate leasing company that signed very expensive long-term obligations and was unable to lease the space at rates that generated profits. Instead, it generated substantial losses.
The situation was resolved to a large degree when analysts and investors, in reviewing the proposed IPO, realized how overpriced the company was and refused to buy the stock on the IPO. The offering was subsequently scrapped, the CEO was firedand the company is teetering on bankruptcy.
Obviously, the valuation has adjusted down dramatically as a result, and it is unlikely that WeWork will ever become a public entity.
Like WeWork, Tesla is one type of company masquerading as another. It is a car company that “investors” (who are really speculators) are valuing as a technology company.
This is significant because Tesla has the same financial requirements and restraints as does every other car company. Auto manufacturers, unlike technology companies, have considerable capital expenditures — including equipment, machinery, tooling, manufacturing facilities and manpower — that are required to build cars.
These capex expenses are in the billions of dollars, and every time the company designs a new model of car or opens a new manufacturing plant, it incurs sizable additional expenses, typically in the billions of dollars. Case in point: Tesla just opened a new factory in China.
Tech companies do not have such expenses. If you follow this through the financial statements, the typical tech company, with a much lower cost structure, has much higher net margins, profits, profit growth, etc. Car company margins and growth simply pale in comparison and, as a result, it is inappropriate to compare a car company to a tech company.
Investors in Tesla claim it is somehow different from other car companies because it writes software for its cars, it makes batteries for sale to the public separate from its automobiles, it sells solar panels, blah blah blah.
The problem with this argument is that Tesla — again, like every other car company — generates the vast majority of its revenues and cash flow from cars. In Tesla’s most recent quarter, it generated 85 percent of revenues from vehicles. It is a car company, plain and simple.
Just like WeWork, Tesla is being valued as a tech company, but it is not a tech company. And just like WeWork, sooner or later the reality of this fact will be realized and the stock price will adjust accordingly.
Any “investors” who don’t have the good sense to get out before this adjustment occurs (if they had any sense they would not own the stock in the first place) will suffer the consequences.
The misunderstanding is understandable. Tesla does offer some cool technology within its cars, just like WeWork offered cool technology in its office space. This is how they justified their valuation, and it worked, for a while.
But just as with WeWork, Tesla ultimately will have to be valued based on its actual financial performance, just like every other car company. The result will be a drastic adjustment to its valuation, and that adjustment will not be an increase in the valuation.
— Craig Allen, CFA, CFP, CIMA, is president of Allen Wealth Management, and has been managing assets for foundations, corporations and high-net worth individuals for more than 25 years. He can be contacted at craig@craigdallen.com or 805.898.1400. Click here to read previous columns or follow him on Twitter: @MPAMCraig. The opinions expressed are his own.