Tesla is heading down the same path as WeWorks

I have written quite a bit, and posted multiple articles about WeWorks and about Tesla over the past year or so. 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 WeWorks, 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 Soft Bank and other high-profile investors and investment funds, was able to drive a sizable valuation in the multiple billions of dollars. The way the company was able to accomplish this was 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, which 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 WeWorks 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, but instead that 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 IPO was subsequently scrapped, the CEO was fired, and the company is teetering on bankruptcy. Obviously the valuation has adjusted down dramatically as a result, and it is unlikely that WeWorks will ever become a public entity.

Like WeWorks, Tesla is one type of company masquerading as another – it is a car company that “investors” (they are really speculators) are valuing as a technology company. Like WeWorks, the problem for Tesla, and for its shareholders, is that Tesla is not a tech company, it is, in fact, a car company. This is significant because, like all car companies, Tesla has the same financial requirements and restraints as does every other car company. Car companies, unlike technology companies, have considerable capex (capital expenditures) expenses, including equipment, machinery, tooling, manufacturing facilities, and manpower, which is required to build cars. These capex expenses are in the billions o dollars, and every time the company designs a new model of car or open a new manufacturing plant, they incur 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 these expenses. If you follow this through the financial statements, the typical tech company, with a much lower cost structure, and thus has much higher net margins, profits, profit growth, etc, 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 that Tesla is somehow different from other car companies because they write software for their cars, they make batteries for sale to the public separate from their cars, they sell solar panels, blah blah blah. The problem with this argument is that Tesla, again like every other car company, generates the vast majority of their revenues and cash flow from cars. In their most recent quarter, they generated 85% of revenues from cars. It is a car company, plain and simple.

Just like WeWorks, Tesla is being valued as a tech company, but it is not a tech company. And just like WeWorks, sooner or later the reality of this fact will be realized and the stock price will adjust accordingly. Any “investors” that 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 their cars, just like WeWorks offered cool technology in their office space. This is how they justified their valuation, and it worked, for a while. But just as with WeWorks, ultimately Tesla will have to be valued based on their actual financial performance, just like every other car company, and the result will be a drastic adjustment to their valuation, and that adjustment will not be an increase in the valuation.


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