On October 18, 2021, Michael J. Burry declared that he was not short on Tesla stocks anymore. For those who don’t know him, Mr. Burry was the investor that made a fortune by betting on the collapse of the real estate lending market back in 2008 earning around 100 million USD – and being subsequently portrayed in “The Big Short”, a block-buster directed by Adam McKay.

Mr. Burry had declared that he was betting on a Tesla stock crash in December 2020 and at a certain point he was holding “puts” on some 800,000 stocks of the carmaker (a “put” is basically a bet that the value of a stock will be lower at a certain time in the future). His rationale was similar to that of the real estate mortgages analysis: if something is overvalued compared to its economic fundamentals, then it must come down. And by this line of thought Tesla appeared as an academic case. The first measure to detect if a stock is overvalued is the P/E ratio, intended as the relationship between the price of the stock and the profits that the company realizes. For example, if a P/E ratio is 15 (an average value in the stock market), it means that fifteen years’ worth of profits would be needed to make up for the stock price (i.e. the investment).

In the case of Tesla, in December 2020 such ratio broke the 1,000 ceiling and at the end of the year it was even above 1,100. This meant that 1,100 years of profits were needed to cover the stock price. Just as a measure of comparison, 1,000 years ago Lions were still roaming around Europe and the Mayas in the Americas had just entered the Postclassic Period.

In November 2021 the P/E ratio of Tesla had reduced to a more sustainable 530 (although five-hundred years ago Suleiman the Magnificent was leading the Ottoman Empire to its zenith). Under normal circumstances. A ratio of this kind wouldn’t be acceptable for a company that had been existing for almost twenty years – and Tesla has been founded in 2003. Still – Tesla is not a normal company.

Graph from: https://docs.google.com/spreadsheets/u/1/d/1HflVng6sYIb6Gs4pOKiDGtqU5YJ2-hgdM4pRNaT62gs/htmlview

As a matter of fact, Mr. Burry was not the first star-investor to crash against Tesla. His “Big Short” colleague Steve Eisman February 5, 2020 declared to have ended hist short bet against Tesla, because he came to the realization that Tesla is a “cult-like” stock. At the time of his declaration, short-sellers had already lost 11.5 billion USD since the beginning of the year. 

There is a lot of truth in the words of Eisman. Tesla’s stock doesn’t behave like a regular one, but rather like crypto. Let’s consider the elements:

1) The availability of Tesla stocks is limited. The fact that Tesla decides about how many stocks are made available to the marked is similar to the crypto algorithm setting mining difficulty

2) The holders of Tesla stocks don’t just hold a stock, but are rather part of a “Tesla club” that spans from the project of revolutionizing the EV sector, to establishing colonies on Mars

3) Tesla even made clear its similarity to crypto by purchasing humongous amounts of Bitcoins: at a certain point, it held some 1.5 billion USD worth of the cryptocurrency

Our next question would then be: how come Tesla is a crypto-stock and General Motors is not? It is somehow interesting to observe how Tesla’s revenue is tiny when compared to that of other automakers. In 2021 Tesla sold cars for around 42 billion USD, which is nothing compared to the 140 billion of GM, the 256 billion of Volkswagen and the 285 billion of Toyota. Still, the total sum of the value of Tesla stocks is more than four times larger than that of Toyota and around 6.5 times that of Volkswagen. Traditional car makers also have a P/E ratio between six and nine – we don’t need to go all the way back to the Maya to understand this order of magnitude.

The main difference is that of the “club” feeling. Tesla presents itself like a “future-club” headed by an eccentric visionary. Elon Musk didn’t just create a company, but a belief. Tesla didn’t issue stocks, but rather subscriptions to be part of a dream.

Yet, when I mention that Elon Musk created a “belief”, I don’t intend it exactly as a “cult”, but rather as a plain and simple belief: he gathered certain expectation around the stock of his company, so that people invest there. It is not different that the Bitcoin. Possibly, the evaluation of Tesla is scarcely impacted by bad news, and reaps disproportional benefits on good news: on October 26, 2021, car rental Hertz sent an order for 100,000 Teslas and the latter’s stock spiked by more than 13%. In strict business sense, it is too much: 100,000 cars is a fantastic batch order, but not enough to justify an increase on an already overvalued stock. But Tesla is no normal business, as Burry had to learn it the hard way.

The main issue is that Burry used old school economics for something completely different. If we used conventiional analysis to evaluate the price of Bitcoin, we might come to the comclusion that the currency will come down because there is no profit behind it.

Still, the point pure and simple is that the value is in the belief – and it is being priced as if it were profits.