One MASSIVE thing about Tesla and Afterpay that people forget

Darling growth companies are often derided for bleeding cash. But is that actually true? A fundie offers his thoughts.
The post One MASSIVE thing about Tesla and Afterpay that people forget appeared first on The Motley Fool Australia. –

A businessman lights up the fifth star in a lineup, indicating positive share price for a top performer

Tesla Inc (NASDAQ: TSLA) is often cited as the poster child for the irrational exuberance of retail investors.

Notwithstanding the COVID-19 market crash, the stock for the electric car maker has increased 660% times since the start of 2020.

That dizzying ascent has made many people rich. This includes chief executive Elon Musk, who in January briefly overtook Inc (NASDAQ: AMZN) founder Jeff Bezos as the planet’s wealthiest person.

Tesla is now worth more than the 8 biggest traditional car makers combined, even though it produces a fraction of the vehicles they do.

Critics say this is the worst example of an overvalued growth stock. Foolhardy retail investors are pumping money into speculative businesses that are just bleeding cash, they say.

The local version of Tesla is Afterpay Ltd (ASX: APT), which jumped 5-fold in price from the start of 2020 to February this year.

So is the criticism of these businesses valid?

Tesla’s had positive earnings for 3 years

Frazis Capital portfolio manager Michael Frazis pointed out a tidbit that the Tesla critics seem to have missed.

“In the industry, it seems nobody really knows this or really wants to engage with the fact this company’s been profitable for a long time,” he told clients in a video briefing.

When Frazis says “profitable”, he refers to the EBITDA, which has been in the black for the last 3 financial years.

The 2020 financial year saw Tesla generate US$4.3 billion in EBITDA, up 93% on the year before. The car maker even made its first net profit of US$690 million.

Back in 2019, before the massive share price surge, Tesla was an absolute bargain.

“A couple of years ago, this was trading 15 times [enterprise value to] EBITDA. It was basically a value stock!”

The same situation applied to Afterpay when Frazis’ fund bought into it back in 2016.

“It was profitable then. A huge cash draw, but it was profitable.”

What should growth companies do with all that EBITDA

The growth stocks Frazis favours will put all that positive EBITDA back into the business.

“What we want to see is these companies investing all that profit.”

He cited the examples of fintechs Xero Limited (ASX: XRO) and Square Inc (NYSE: SQ) as other businesses where investment back into the business saw their revenues take off.

“In Q1 2015, [Square] spent US$32 million and got US$172 million back in gross profit,” said Frazis.

“This is the dynamic we look for. I wouldn’t get lost in ‘do we care about profitability’ – of course we do, but it’s beside the point.”

Hyperion Asset Management lead portfolio manager Jason Orthman said much the same last month in support of Tesla and Square.

They are actually his fund’s largest current holdings.

“Even though those share prices have re-rated upwards as we were buying them over the last 12 months or so, we still believe that they’re fundamentally misunderstood and there’s a large shift in consumer behaviour going on,” Orthman told The Motley Fool.

“So it’s still really day one for both Tesla and Square.”

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

See The 5 Stocks

*Returns as of February 15th 2021

More reading

Tony Yoo owns shares of AFTERPAY T FPO, Square, and Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Square and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post One MASSIVE thing about Tesla and Afterpay that people forget appeared first on The Motley Fool Australia.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android App - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US Trades. Click Here!