Vilas Capital is probably no stranger to Tesla Inc (NASDAQ:TSLA) investors, as the fund has been an outspoken critic of Tesla in the past, calling it “an over-hyped, lousy company” in an April 5 investment thesis on the stock, and one that is “destined to go bankrupt”.
It kept up the offensive on the company in its latest quarterly letter to investors, which was released on April 26, but this time expanded it to include the entirety of the green energy industry, which it believes is one of several industries that are currently experiencing a bubble (the others being cloud computing companies, social media companies, internet retailers, and video streaming providers). We’ll look at some of the fund’s latest comments in this article.
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In its quarterly letter, Vilas Capital CEO John Thompson relayed three recent encounters he had with random strangers, all of whom were forthright in their firm commitment in Tesla Inc (NASDAQ:TSLA)’s inevitable domination, despite none of them having a background in finance. One even expressed that Tesla “had” to be a great stock for the next decade.
Thompson described this phenomenon as a form of bubble where investors have lost any fear and are more afraid of missing out on the next big thing than on using a rational level of judgment to understand a company and stock’s true potential. Tesla is undoubtedly one of the most glamorous ‘story’ stocks out there, and all of these strangers had clearly bought into that story hook, line, and sinker.
Yet as Thompson explained, even if electric cars are indeed the future, as one of those strangers stated to justify their belief in the company, that in and of itself says nothing about whether Tesla’s stock is overvalued. Thompson expressed how that same kind of flawed thinking proved disastrous for investors of radio stocks, which reached extreme valuations back in their time that simply didn’t align with reality. Even though the radio did indeed become a commercial success and a ubiquitous item in American homes, those stocks still couldn’t match the extreme expectations that had been placed on them by investors.
While some of the individual companies in the aforementioned bubble sectors may indeed thrive, Thompson believes that collectively, they are grossly overvalued and have no chance of success collectively, as the companies that Vilas Capital is shorting (including Tesla) have a trailing P/E of nearly 300x on a weighted average basis.
Of course, it’s not only financial ignoramuses that believe Tesla Inc (NASDAQ:TSLA) will be successful, as there are many savvy financial minds who do believe in the company and its story (though hedge funds have been underweight Tesla for quite awhile). Vilas Capital though is not one of them, having predicted in its investment thesis that the company’s odds of bankruptcy if it remains a standalone company stand at over 90%; a bankruptcy that would be gloomily discussed over many a radio and in many a Tesla vehicle.