The war over Tesla (TSLA, Financial) has been waged in countless forums on the internet, television, and in traditional print media. In recent research notes, we have addressed the major issues with Tesla as a company, as well as its stratospheric (and unjustifiable) valuation. It should be clear from our research notes that we are very much of the opinion that Tesla, and its besieged CEO Elon Musk, are in deep trouble.
With no economic moat, unsustainable cash burn, and ever increasing competitive threats, it is increasingly difficult to see a path to profitability of any kind, let alone the huge future cash flows already implied by the company’s approximately $50 billion valuation.
In this research note, we will seek to elucidate a perhaps somewhat obscure aspect of human reasoning that seems to be leading Tesla bulls astray – and could well end up costing them dearly. Specifically, we will be addressing the concept of the map-territory distinction as it pertains to Tesla. Ultimately, we seek to demonstrate that, by mistaking the ideas and promises of Tesla for the underlying realities on the ground, Tesla bulls are setting themselves up for painful reversals as reality inevitably dispels fantasty.
The map is not the territory
Alfred Korzybski, a 20th century philosopher and social scientist, was focused on the ways language and other symbolic representations of ideas and things can be warped. Specifically, words, ideas, numbers, etc. are all symbols we use to signify things in the real world. But if our symbols are wrong, so is our understanding of the underlying reality. That led Korzybski to make his most famous observation, that “the map is not the territory”. In other words, human beings may conflate the simplified symbols they use with the much more complex things that they signify.
We all build mental maps to help us understand the world. Financial models, whether of a single company or an economy, are maps designed to reflect reality and, hopefully, aid in projecting future events with accuracy. In the marketplace, mental maps are frequently being fed new data, but that does not stop them from being overloaded with irrational inputs:
We often hear about fear and greed as forces driving behavior in the stock market, and they are undoubtedly perpetually at play. But those emotional responses are, at least in part, a product of a mental map that has fallen out of alignment with reality.
When something happens that we did not expect, we may panic and rush for the exit when a second look might keep us sitting still and waiting out the storm. When we see a stock rising and read report after report about its golden future, we may neglect to read the actual financials too closely or to entertain the alternative thesis. When our outlooks become rigid and inured to the changes in the underlying reality on the ground, we render ourselves vulnerable to nasty surprises.
In the case of Tesla, we can readily observe a classic case of irrational exuberance. The market is already imputing in the current share price a huge amount of growth. Any faltering from that course will mean the whole future-looking map will be thrown off kilter.
Compromised information sources distort perceptions
Another interesting aspect of the map-territory distinction as it applies to Tesla comes from the fact that most of the information consumers possess is filtered through suspect sources. Specifically, most individual consumers get their information about Tesla from the general media, which has been a fawning admirer of Elon Musk for many years. That has served to warp the perceptions of countless would-be Tesla owners. In numerous conversations with individuals completed unconnected to, and disinterested in, the investing world, we have found little to no awareness of Tesla’s financial difficulties. Indeed, the problems are largely understood only by a small subset of the population.
This makes for an interesting aspect of the Musk-admirer psychology. Most of the people who consume media lauding Tesla and celebrating Musk have essentially zero meaningful interaction with anything he does. They see Teslas, and may have driven in one or test-driven one at some point, but not many people have actually gone through the process of buying a Tesla and then experiencing the misleading and broken promises, ridiculous service station wait- times, etc.
Verdict
As more people actually experience Teslas in the flesh (so to speak) they will realize that the depiction of reality as portrayed by Musk and his media boosters does not comport with actual reality. When they see Teslas in greater numbers, or even own their first ones, they may well start to suspect they have been sold a bill of goods.
Given Tesla’s story is so inextricably bound up with its brand and Musk’s reputation, any dent in it could mean dire consequences for its premium share price.
Disclosure: I/We are short TSLA via long-dated PUT OPTIONS.
