[in-depth] no one can see a bubble. that’s what makes it a bubble

“No one can see a bubble. That’s what makes it a bubble.” – The Big Short 

GENERAL PROGRESS REPORT  

The last two weeks began with a text from my mentor. He sent David and me three movies to watch: The Big Short, Too Big to Fail, and Wall Street. Each of the movies listed above takes the complex finance scene and portrays it in a hilarious and terrifying way. The first movie listed, The Big Short, explains the 2007 housing market crash and simplifies the topic without diluting it. Too Big to Fail follows the catastrophic 2008 financial crisis and, through the dramatization of real-life characters, reveals some of the basic elements of the crisis and how it came to be. Wall Street depicts the corrupt yet alluring reality of Wall Street, New York, and the finance industry. With these movies, I definitely gained a more lively understanding of the rises and falls of the industry and its power over the rest of the world. 

Moving onto our project, though David and I originally planned to research mobile payment and blockchain technology, we found that our analysis project on Tesla went more in-depth and thus, more time-consuming than we predicted. Instead of separating our attention between the two projects, we communicated with our mentor and decided to focus on the Tesla project. For this project, we scavenged the web for data and information that can help us predict Tesla’s future developments and compare Tesla to its competitors. We gathered pure-numbers financial data (revenue, shares outstanding, etc.) and more flexible, strategic information (the state of their product market, customer demographic, etc.) and inputted these data into a chart: 

Tesla Notes
Age 17 (2003) Relatively young, especially compared to traditional competitors like Toyota or General motors.
Brand Net Worth 700 billion Most valued auto manufacturer
Revenue  31.5 billion (annual) Very low, compared to Toyota’s 278 billion or GM’s 137 Billion
Profit margin 24.1% Most efficient auto manufacturer 
Stock Value  798.15 Unsustainable (?), rapid growth. Speculation
Shares Outstanding 1,083M Low number of shares outstanding, especially compared to Apple’s 16.8 billion shares, general motors’ 1.4 billion shares, and Toyota’s 1.5 billion shares. However, this number has been growing year over year, increasing by a gap of 15% between the years of 2019 and 2020, while other companies’ shares outstanding have been steadily decreasing. (ex. Toyota’s shares outstanding has been steadily decreasing by between 2.2 and 2.5% a year)
Market Capital 766.108B
Debt  13,279,000  Last years: 14,469,000 (decrease by 8.3%)
Strength  High expectations

Very strong growth

Highly innovative technology and products, which drives up expectations 

Favoured by policies

Large consumer base with in the US (79% of the electric car market in the US) 

Weakness Unrealistic market share

Possibly overly high expectations

Only sustainable with current monopoly over market

Experiencing difficulties with large-scale productions 

Tesla is scheduled to release a new model in the first quarter of 2021, and if the new model fails to meet the customer expectations the Tesla stock may crash.

It has never had to fairly compete with a competitor, as it has always been favoured by government policies and Elon Musk’s fame and the debt he was able to raise powered the company to what it is today. With the new potential competitor of apple, Tesla may struggle, and if the faith people have in Tesla breaks, then the company may completely crumble.

Opportunities Eco friendly, and thus favoured by policies

Monopoly in growing electric vehicles market

Faithful supporters

Innovations

Expand into other clean power markets

As Tesla often creates new markets, it doesn’t have to worry about existing competitors, and the creativity of its CEO, Elon Musk may create unforeseen opportunities
Threats  Bubble bursting

Customers losing faith

Competitors like Volkswagen and potential competitor Apple car. More niche competitors include NIO, BYD Company 

The current insanely huge market cap is sustained by a faithful customer base, so any event causing the supporters to lose faith in the company can cause a bubble burst followed by significant weakening or even a potential collapse of the company.
Expansion Unstable expansion

  • Similar to its products, it has expanded to a variety of markets, but none are significant and most go silent after a progress report.
  • Mostly expanding with the electric vehicles market and stepping into the clean energy market.
Any successful expansions or potential signs of successful expansions will probably raise its stock price even higher, and failed expansion attempts will only be brushed away as a minor inconvenience.
Debt growth Tesla’s total debt is more than 40% of the company’s total liability according to the 4Q 2020 annual filings. A rising debt level has led to a rising interest expense for Tesla. Tesla’s Debt vs Assets shows that the company’s debt is used to expand the its asset base 
Operation cost 4,636,000 – current year   Last year’s: 3,989,000
Product Clean/electric vehicles (4 models)

Clean energy (Solar energy generator, power well, batteries)

Innovation

Very innovative and hyped, but not quite deserving of its fame.
Demographic Age: 35-65

Class: middle to high income 

Education: college and up

Location: mostly in the US, China, and Europe

Lifestyle: people who are interested in green-energy or people who are progressive 

(those consumers aren’t necessarily loyal) 

With the chart above and additional news articles, we concluded that Tesla’s stock is fueled by speculation (literal hype) and thus, it’s a bit overvalued and in a bubble. Tesla is very dependent on its CEO, Elon Musk, and the company’s reputation, especially as a large part of its stock fluctuation is due to Musk’s actions and speech online. This means that Tesla, though will probably rise in the near future as the electric vehicle market is trending, is extremely risky and vulnerable.  

However, our mentor disagreed with our opinion, saying that “their market share can still advance and as long as the EV market is in trend, Tesla will grow.” Despite his disagreement, he also respected our hypothesis on the high risk of Tesla stocks and recommended we continue observing the automobile company and Tesla-related news. Low and behold, a few days ago, David noticed a finance expert made a comment on how the electric vehicles market is not thriving and that “Tesla is the least stable company […] in the field” and will experience “the most pain from the market instability.” The internet picked up on this claim and it gained attraction from stockholders. People began to sell their Tesla stocks and thus, the price dropped. This situation demonstrates that the growth of Tesla’s stocks heavily relies on the public’s opinion, which can be turned at any moment, and supports our conclusion.  

In our Wall Street Survivors’ account, things are not doing so well. Our Nike stocks are actually at a loss while the Adidas stocks are making a profit. As it’s only been two weeks, I’m not too worried about our progress, especially as we bought Nike pretty high and shorted Adidas when it was on the rise. Hopefully, in the next two weeks, we will be able to make a profit! 

NEXT STEPS

Since we didn’t have the opportunity to research the financial industry the past two weeks, we are going to complete the research project in the next two weeks. We might start a new comparison project or another research project; we are still undecided. Since time is flying pass, we are also going to prepare for our final project in the next two weeks plus Spring Break! 

HOW TO HAVE A BEAUTIFUL MIND: HOW TO LISTEN AND QUESTIONS
Over the last two weeks, I, with the guidance of Have a Beautiful Mind and Edward de Bono,  developed both myself and my relationship with my mentor and David by putting emphasis on active listening and asking valuable questions. Bono closely relates the concept of listening and questioning, stating that “a listener should seek to ask questions” and that “questions are very much part of listening.” The two chapters discuss two of the most important abilities in the communication process. 

According to Bono’s book, a good listener “shows that he or she is paying attention[ and interested,…] respects the speaker[, and…] gets value from what is heard and shows that he or she is getting value.” As my meeting with my mentor is always online and usually voice-only, it is crucial yet difficult to demonstrate my interest and respect. I can’t smile and nod to show my mentor that I’m listening as he can’t see me, but I can make sounds of agreement at the right moments without disrupting the meeting’s flow. However, this timing was and is very hard to predict. Sometimes, I might think that my mentor is gonna end the sentence only to find that he continues on and other times, I would miss the opportunity to show that I’m listening. Therefore, though I still practice showing verbal agreement, I also focused on other ways of showing my attention. For example, when my mentor explained how our analysis is limiting and how stocks are affected by other influences, in addition to money, I engaged with the topic discussed by summarising, condensing, and recapitulating everything and reiterating it to my mentor, saying “So, basically, our analysis may be false because the positive growth in the EV market and the unpredictable market, and we can also look at Ark [Fund’s] bull and bear case for another input. Right?” This not only reveals efforts; it also demonstrates my understanding and invites corrections in case I misconstrue certain information. By listening well and engaging to confirm that I’m listening well, I gain value and substance from the conservation and, looking at the bigger picture, mentorship. 

I also listened by asking questions that “show attention and interest[,…] allow for the further exploration of certain points[,…] permit the clarification of any misunderstanding[, and] direct attention.” Bono outlines the difference between shooting questions, which are designed to be answered with a ‘yes’ or ‘no’, and fishing questions, which are open-ended and asked because you don’t know the answer. 

A shooting question I asked my mentor is “Do you recommend that we also read opinion pieces while researching?” To this, he responded with “Yes, of course” and elaborated that, as we aren’t very experienced in this field and we don’t have certain exclusive information, we should always look at other people’s opinions before drawing our own conclusions. This simple shooting question not only demands a direct and simple answer but also invites a deeper explanation. I constantly use shooting questions to direct attention and seek clarifications in my conversations. 

I also ask my mentor fishing questions when I want to gain more details and explore alternatives and possibilities. For instance, I followed up with my shooting question and asked my mentor, “Can you provide me with some trustworthy and reliable sources?” He answered me with a list of resources, including Bloomberg, Wall Street Journal, and Economist, and suggested we also look at interviews with ‘big-shot names’ in finance and Reddit (with care and consideration). Moreover, I generated alternatives and possibilities to enrich the discussion with fishing questions. As David and I have only been introduced to the most basic financial evaluation methods, I wanted to get a sense of the mathematical mechanisms behind stock value predictions. So, I asked “What are some other evaluation means and methods? Would you mind introducing some to us?” Though my mentor expressed that these methods are usually very complicated, he still explained three relatively simple ideas: the dividend discount model, discounted cash flow model, the comparables model. To be honest, my notes and I still don’t have a great understanding of these models. After the meeting, I texted my concerns to my mentor and he expressed that he believes it’s perfectly normal to be confused. I then took initiative and suggested we continue to explore these models next meeting. With a simple shooting or fishing question, I opened up the discussion and actively learned about possibilities and specific details. 

In the past two weeks, I practiced listening and how to listen by asking questions. I extended my conversations to become more valuable and listened in a way that shows interest and continues the conversation. The Tesla project also gave me some insights that I’m going to apply in the future. The past weeks have been very enriching and entertaining with a little bit of frustration! A big thank you to David and my mentor!

hope everyone’s doing well,

joanna

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