(Article Originally Appeared on Forbes.com, April 9, 2017. Author: Bryce Hoffman)
Last week, Tesla Inc. blew past Ford Motor Co. to become the second largest automaker in the United States in terms of market capitalization. Now, the Silicon Valley auto upstart is threatening to topple General Motors Co. and become number one.
But if investors really think Tesla is worth more than Ford, they should think again. Because the valuation they are putting on the company is based on a dream, not on reality.
It is a very compelling dream — one Tesla founder Elon Musk has woven carefully around his company. It is a dream about a future where everyone drives elegant, non-polluting electric vehicles made by a company that out-thought the old, established automobile companies and beat them at their own game.
Getting in on the ground floor of that future is certainly alluring, and I understand why so many investors are eager to do so.
However, I believe in red teaming investment choices, just as I believe in red teaming any important decision. And red teaming — a system developed by the military and intelligence agencies to help individuals and organizations make better decisions — demands a skeptical analysis, even of the loftiest dreams.
So, let me to tell you a story.
Back in 1999, Yahoo paid more than $3.5 billion to acquire the web-hosting company GeoCities. GeoCities had IPO’ed six months earlier at $17 a share, but its stock quickly soared to more than $100 a share as investors convinced themselves that it was the dot-com industry’s Next Big Thing. Yahoo was also convinced.
At the time, I was a financial journalist covering Silicon Valley for the Oakland Tribune, and I decided to write a story comparing the Yahoo-GeoCities deal to Ford’s recent acquisition of Swedish carmaker Volvo.
Ford paid $6.45 billion for Volvo — almost double what Yahoo paid for GeoCities — but I argued that it got a much better deal. Why? Because Ford actually got stuff, as in factories, robots, distribution networks and most importantly, technology. What Yahoo got was an office in Los Angeles, some computers and a dream — a dream of how web users would organize themselves into an online simulacrum of the real world using GeoCities’ platform.
Unfortunately for Yahoo, GeoCities’s dream turned out to be just that. Yahoo closed GeoCities ten years later (though its Japanese subsidiary remains). Not only did the acquisition fail to achieve the desired synergies, but it also turned out to be one more in a series of bad decisions that led to Yahoo’s long decline.
Ford Vs. Tesla: Another Comparison
Don’t get me wrong: I am not suggesting Tesla is an ephemeral Internet flash-in-the-pan like GeoCities proved to be. I think Tesla is a tremendously innovative company that is doing a great job disrupting the traditional automobile industry.
But I also think its stock is tremendously overvalued.
As of the end of 2016, Tesla had sold more than 186,000 electric vehicles since rolling out its first Roadster in 2008. But by that point Ford had sold more than 560,000 electrified vehicles since its first hybrid went on sale in 2005. And in January, Ford announced plans to introduce 13 new hybrid or electric vehicle models over the next three years — including electrified versions of its popular F-150 pickup and Mustang muscle car.
I don’t doubt Tesla will continue to grow, and grow rapidly.
But so will Ford.
Call In The Red Team
Red teaming, as an investment tool, is all about overcoming the sort of irrational exuberance that lead to the 1990s tech bubble and the poster-child that was the Yahoo-GeoCities. I fear the same sort of irrational exuberance is behind Tesla’s recent surge in share price.
While red teaming offers many sophisticated tools to do that, one of the most powerful is also one of the most simple: Devil’s Advocacy.
Playing the devil’s advocate means asking, “How can I lose money off this investment?” rather than just, “How can I make money?”
And I can see a lot of ways in which people buying Tesla at today’s inflated price could lose money.
(Disclosure: I own stock in Ford)
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