Is TSLA a tech stock or fashion product?

Tesla recently became the world's most valuable carmaker. That's pretty shocking since, as Morgan Stanley has pointed out, the company generates 0% of auto profits, 1% of auto OEM revenues and yet has 30% of sector market cap.

If Tesla wasn't an industrial company that had to manage a complex supply chain, labor costs and distribution, it might be easier to understand how it could be valued at an EBITDA multiple well in excess of pure tech companies like Google and Facebook. Amazon's significantly more capital intensive business might be the only comparable stock, but in that case, AWS is the primary profit engine and yet Amazon's multiple is about half of Tesla's.

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An amusing illustration of the difference in scale between Tesla and other carmakers: during the challenging Model 3 ramp up, when Elon Musk was celebrating reaching a milestone of 7,000 vehicles manufactured in a week, a senior Ford executive pointed out that Ford is manufacturing this number of vehicles every four hours.

https://twitter.com/StevenArmstrong/status/1013522801834254337?s=20

So if the 88,400 vehicles the Tesla delivered in Q1 of this year was less than 0.5% of vehicles globally, what explains this glaring incongruity? Here are two theories.

Theory 1: Tesla is a luxury handbag and Robinhood is a gaming company

Normally shares are commodities: units of ownership interest in a corporation that add up to the enterprise value. But in the case of Tesla, share ownership doesn't just give the value of owning a portion of the company, but also confers additional value on the owner through a kind of social status signaling. A designer handbag isn't just worth the sum of the materials it is made out of or the value it serves in carrying things around, but rather signals something about the owner which is the value we pay for in luxury. So too Tesla shares. They are luxury products.

Driving the growth of this "luxury quotient" added to stock value, the rise of retail investment through low cost trading platforms like Robinhood has also made Tesla investing into a game. There are now a lot more people who are in a position to want to own TSLA shares because it means something and along with them, people who want to predict how the value will change. There isn't that much of a gap between this theory and what is known as the greater fool theory - an investment in Tesla is a bet that its current price will generate a return simply because someone else will come along and be willing to pay a higher price - and there's probably a fair amount of these dynamics driving Tesla to new highs but with significant volatility. Given these dynamics, Robinhood should perhaps be thought of more as a gaming company than a fintech company. Like real sports teams, Tesla has a lot of adoring fans along with [bad guys to make fun of](https://www.forbes.com/sites/isabeltogoh/2020/07/06/elon-musk-sells-red-hotpants-on-tesla-website-in-jibe-aimed-at-short-sellers/#:~:text=Elon Musk has taken to,back at the firm's skeptics.). And given that much of sports betting is on hold due to the global pandemic, more and more seem to be people looking for a good game to bet on.

Theory 2: Tesla is a bet against the entire automotive industry

Beyond status symbols and games, are there any fundamental arguments for Tesla? What case might a thoughtful observer of the automotive industry make that could justify Tesla's sky high valuation?

The arguments used to support Tesla's high share price until now have mostly involved fleets of robots:

Both of these robo-futuristic ideas have been hyped for some time and have been beaten into a trough of disillusionment in the eyes of any serious observer, so it's hard to argue that they are the catalyst driving Tesla's stock price. So if not robots, then what explains how Tesla is positioned to eclipse the automotive industry and justify it's share price? This theory is a longer story and it starts with lego. And what it is that carmakers do.

What is a carmaker?

In Understanding business model disruption in the mobility industry, I noted that carmakers sit at the top of a complex supply chain, and essentially act as assemblers of various components - like blocks of lego - into a car.

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What makes Tesla different in terms of production is a significantly more vertically integrated manufacturing process, taking greater control of its components and supply chain. This not only applies to battery packs, but perhaps more significantly to electronics. Why does that matter?