In today’s Exponential Investor

  • The world goes mad
  • Picks and shovels, or new platforms?
  • Elon’s big giveaway

Tesla is now a one-trillion-dollar company.

This maker of electric vehicles (EVs) has a market value is larger than Facebook’s, and it joins a list of four companies over that threshold – Microsoft, Apple, Amazon, and Saudi Aramco.

While Apple had sales of $274 billion in 2020, Tesla’s were only $12 billion.

It’s larger, by that measure, than the next nine car companies put together.

What were they thinking?

It reminds me of Cisco back in 2000.

Cisco made computer hardware. Everyone thought during the computer age that the way to make money was to take the oft-cited “picks and shovels” approach.

In other words, buy the tools and the hardware, and not the output.

In 2000, the excitement was focused not on mining but on the internet.

The tools and the hardware included computers, routers and infrastructure.

Cisco supplied all these things and was rewarded by the market, briefly becoming the largest company on earth, and trading (as Tesla does now) on a crazy valuation relative to its sales and profits.  

As I mentioned on Tuesday, Scott McNealy has the most famous quote on such valuations. He was head of Sun Microsystems at the time, which traded on a price-to-sales ratio of ten.

He said, in short, “What were you thinking?”

Cisco actually traded as high as 46x price to sales.

And it suffered for 20 long years after doing so. Investors lost 80% or more of their money, and didn’t start to regain their fortunes until the last few years.

Amazingly, Cisco did actually recently just tickle the belly of an all-time high – as the following chart shows.

Source: Koyfin 

It topped out at $60.06 back then. On 25 August of this year, it reached $59.87, before pulling back.

Is this is a sign? It will be a big moment if it can recapture its highs (at much more reasonable valuations, now that the company has grown a fair bit).

I don’t know what that does signify though… although you may have to wait a long time to make money if you buy a stock that is at the centre of a speculative bubble.

The real winners

To me the interesting thing is that the 2000 bubble was in internet stocks, and Cisco was the biggest. People rightly saw that the internet represented a paradigm shift. They did their best to invest in the companies which would benefit from its growth.

However, they picked the wrong ones for the most part.

Cisco provided things to help build the internet age.

But the real winners would be the companies which were built on the internet. These were companies whose existence was only conceivable in the internet age. Amazon, with its ridiculously seamless online shopping experience, and its cloud capabilities, was a classic example. Others included Facebook, Netflix, Spotify… the list goes on.

Could the same be true with Tesla?

At the end of the day it is a car manufacturer, and a pretty good one at that. And it’s capturing large parts of the rapidly growing EV market. But car-making, as its competitors have shown, is a highly competitive and low-margin business. It’s difficult to dominate, and a difficult place in which to generate huge growth or profits.

This will be especially true once autonomous cars arrive, as they will make taxis and ride-sharing platforms cheaper, reducing the economic case for owning a car outright.

Tesla might seem the most obvious pick for the energy transition. But like Cisco, I can see it being left behind as the sustainable energy system of the future rolls out, creating opportunities and business models was can hardly envisage right now.

Elon’s crystal ball?

Anyway, if you were looking for a signal, how about when Elon Musk tried to take the company private at $420 per share?

It’s unclear to what extent he actually tried to do this and to what extent it was just a 4/20 joke on Twitter.

But he was willing to buy his own company for $420 per share when the market price was around 25% lower than that, at the time.

Today? It’s around $1,000 per share, and that’s after a 5 for 1 stock split. So it would’ve been $5,000 unadjusted, or a 1,100% return.

They say that there are plenty of reasons a director of a company can sell their shares. But only one reason why they buy: they think that the price will go up.

Elon Musk wasn’t able to buy back his company from the public markets and was, in fact, reprimanded by the authorities for claiming he might do so.

So it’s hard to know how much to read into his brief suggestion to take Tesla private. But could investors have taken note, and realised that maybe Tesla had even further to go?

But Elon isn’t your typical company director. He certainly goes against the advice given by Scott McNealy, two decades ago.

In hindsight though, this was another example of insiders signalling that the future for their company is bright.

Every day, it’s possible to track which directors and executives are buying shares in bulk in their own companies. They tend to have a much better idea of how the next few years look in their industry and for their company specifically.

It’s a complex web of data though, and it needs careful analysis to properly understand it.

If you want to know when insider buying is giving a signal…

Then click here now.

All the best,

Kit Winder
Editor, Exponential Investor