Rethinking Tesla and Apple

0:06Pushkin. We've been talking for the better part of a year about the Magnificent seven tech stocks, but two of them recently have not looked so magnificent. That would be Apple and Tesla, both of which have lagged both the broader market, which is up, and the Magnificent Seven in general. Today on the show, what's up, guys? What's going on? This is Unhedge, the markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in New York, joined by my boss, Robert Armstrong, who has just pulled up to the office in his brand shiny new Tesla Cybertruck. The great thing about parking the Cybertruck is You don't need a parking space.

0:44I just drive it over whatever car is in the parking space I want, and it works perfectly. Yeah, it's like the world is your bathroom equivalent to parking spots. I have no idea what you're talking about. That's probably for the best. Yeah. Speaking of other things that are pooping the bed, Tesla. So the S &P is up about 10 % this year. Some of the Mag 7 are up even more. NVIDIA up almost 100%. Microsoft chugging along Alphabet. that. But Tesla has lost about a third of its market value this year, and Apple about 10 % of its value this year. And those together are 100 % of my 401k. So I am in big trouble.

1:25Well, Rob, see, I diversified with some Bitcoin, so I'm actually doing quite well offsetting those two holdings. Be that as it may, we thought we'd talk about some of the fundamentals going on. There are some interesting stock-specific fundamental stories at play here, which can help explain some of the price movement. So Rob, let's start with Tesla, everyone's favorite EV stock. Yes. Well, part of the problem here is the simplest reason of all. Tesla is making less cars and thus fewer money. We just got these first quarter delivery numbers, right? So every quarter before earnings, Tesla tells us how many cars we produced, how many cars we delivered.

2:04And the delivery numbers for the first time in several years, I think it's four years, declined and quite precipitously, 9 % year over year, a pretty chunky decline, way below analyst expectations, pretty disappointing news. I think people were feeling rather alarmed about what's going on in Tesla. And it fits into a broader picture of you have all this new Chinese electric vehicle competition from the likes of BYD. You have global automakers piling into the EV industry. And with all that supply coming online, you don't have the kind of commensurate demands on the other side, right? Yeah. It's interesting.

2:40The people I know who drive Teslas fit into two camps. People I talk to, one camp is New York City Uber drivers who love their Teslas. It's very easy to charge around here. It's very efficient, obviously, from a cost point of view versus gas cars. Then on the other hand, there's like my friends who it's the family car. Maybe they live in the suburbs. And for them, it actually turns out to be a bit of a hassle. If they're taking a weekend trip going far, where are they going to charge along the way? Will there be a line at the charger? How long will it take, et cetera, et cetera? So I wonder if there is a real shift in the demand picture, at least in the United States, at a moment when Chinese manufacturers are just churning these things out at very attractive prices.

3:30And look, right, maybe we build more charging stations in the US and it ends up being fine in the long run. But at least in the short term, it's a serious concern for Tesla and Tesla investors. What the companies had to do is actually cut prices to stay competitive with this huge onslaught of EV supply coming online in the face of somewhat soft demand. And that's put really serious pressure on Tesla margins, which have just compressed quite dramatically. And so I think there's a decent fundamental story behind the 30 plus percent decline in Tesla stock this year. And the margin point, I think, is particularly important because when Tesla bulls like to point to Tesla and say, this is not just a car company.

4:15This is a technology company that is going to do all kinds of wonderful things for which these cars are just kind of the physical instantiation or just an example or something. They would always point to Tesla's margins and say, look, those are not car company margins. So I wonder if what's going on here is like, wait, could it be that Tesla is a car company? exactly like a lot of the hopes for tesla are pinned on like a mythical product years into the future that it's going to sell like hotcakes most importantly the self-driving car the self driving taxi there's not just that not just that i mean the cyber truck which launched not so long ago it was i think considered a bit of a flop i mean i saw i don't know if it was a flop but people sure aren't talking about it right now well here let me this is from the trade publication automotive news just last month, Tesla Cybertruck auction prices come crashing down to earth.

5:13So on the secondary market, these things have not been a store of value. They are so weird looking. Have you seen one of those things in person? Not in person. No, just videos. They're enormous and very strange and not really trucks. I don't know what they are. It's the opposite of a Veblen good. It's like very embarrassing. Yes. So that's the question. Is Tesla just a car company, at least for now? And the reason that's an important question is that if it is going to be declared a car company, the stock price is going to keep going down because it is not priced like a car company. And so I guess the question now is, is there more Elon Musk fairy dust still to be sprinkled on the world?

5:58Is there going to be another new product? Is it going to become a software company? Is the robo taxi going to be there? Is there going to be a flying car, et cetera, et cetera? I don't really have an answer to that question. I'm very wary of betting against Musk. I think he's a pretty creative person. No, absolutely. He's pulled rabbits out of a hat before. And they do have this product launch coming up next year for an entry-level car, $25 ,000. It's supposed to unlock kind of a new tranche of demand for a less wealthy consumer. Could that lead to a turnaround in vehicle sales? Absolutely. Completely plausible.

6:32Is the RoboTaxi possible? Listen, don't ask me. I don't know. I don't know. Should we turn to Apple? Let's turn to Apple. Okay. So because it's so unusual and surprising that Apple stock should actually fall relative to the market and other tech stocks, this has been like the most successful stock market story for 20 years or something. There's a lot of talk about what is going on here. Yeah, it's monopolist. Yeah. It's been sued. Yeah. China. No, no, no. And I think all of this kind of jibber-jabber is off base. The worries about China exposure, the worries about the Department of Justice monopoly investigation, the talk about the valuation.

7:15I think something much more fundamental has gone on here, that what Apple is in itself, its key characteristic is that it is the most solid business in the world. It has incredibly high barriers to entry in the form of once you're in the Apple world, you never leave it. It is incredibly profitable. It generates loads of cash. It reinvests and distributes that cash very wisely. There is a reason this stock is so much of the Berkshire Hathaway portfolio. It is the safest, highly profitable business there has ever been. And I just think stock markets aren't that into safety right now. Yeah. They're looking for the cutting edge instead.

8:02They're looking for NVIDIA. And there's like related jibber jabber, you know, about Apple losing a bit of a chain. And I'm curious what you make of that, Rob. The idea that, well, Apple sort of is, you know, behind the curve on AI. Nobody wants those glasses or whatever they are, the goggles. Yeah, no one wants like the Vision Pro. It can't launch like a splashy new product the way it used to be. It's services business, which was supposed to be the salvation for Apple sales. Growth has started to slow in that division. How do you think these play in? Obviously, it would be a more valuable stock if people could see a technology upgrade cycle in this thing that would kind of redouble revenues.

8:40And I agree. It is not obvious what that thing is. There was going to be a car. There's not a car. The goggles are not that exciting. iPhones are plenty good already. if we all got stuck with the iPhone from five years ago, that would be totally fine. The fact remains that we keep drinking Coca-Cola, even though Coca-Cola doesn't change. Yeah. And we're going to keep using Apple products. And the key difference between Coca-Cola and Apple being that Apple's an even better business than Coca-Cola, which is an incredible business. The barriers to entry are even higher. the profitability is even greater.

9:23It's Coca-Cola times 10 in some sense. So there's a way in which Apple will remain a multi-trillion dollar company, even if it never makes another major technological shift ever again. Yeah. Look, Coca-Cola doesn't have a gigantic chrome loop as its headquarters. We can put it that way. So I want to zoom out though, Rob. So So if Tesla is just a car company and Apple's just technology's Coca-Cola, I mean, should these have been in the Mag 7 to begin with, right? They're called magnificent for a reason because they're supposed to be technologically sophisticated, nimble, high margin businesses that have growth potential on and on and on into the future.

10:08I think you nailed it about Tesla in your column the other day, which is like, the fact is Tesla is in a tougher competitive situation than the other six are. That is the salient point about Tesla. And that has been proven in the last quarter or two as the competition encroaches and these questions about what is it going to do next in large. It's in a bleeding edge market. The other six, including Apple, by the way, are in settled markets where they have almost unimpeachable competitive positions. So I would make the case it always should have been the salubrious six and not the magnificent seven.

10:44Tesla is just a different kind of company. Yeah, I think that's definitely the case. With Apple, it may just be that it has different challenges in front of it than Microsoft Meta, Alphabet, whatever. That explains why it's diverged from the rest of the Mag 7. But Apple's pretty magnificent, like we've been talking about. Agree. Will Apple return to some kind of growth that will impress investors? I think the answer has to be in the medium to long run, yes. This is a company with decades and decades of multiple cycles of reinvention. It's very hard to bet against this stock in the long run. Correct.

11:18But the reason why it makes sense to talk about the Salubria 6 as a separate almost segment of the market or an asset class is these are the very, very large companies that have captured increasing returns to scale in a way that no other companies have. And that is their unifying characteristic. And And that gives them different characteristics from the point of view of investment than other stocks. Absolutely true. As they get bigger, they just get better at what they do. More profitable, more dominant. Tesla? We'll see. We'll see. Maybe the robo-taxi business is increasing returns to scale. Correct.

11:59I don't know. Could be. All right, Rob. I think let's leave it there. We'll be back in just a moment with Longshore.

12:10this is long short that part of the show where we go long a thing we love short a thing we hate rob i am long sato japanese people named sato who apparently are taking over the world this is from the guardian everyone in japan will be called sato by 2531 unless marriage law is changed says professor and basically this guy has written a paper saying that this name sado is already very popular and like over time unless the law has changed that lets couples pick which surname you know they want to have it's going to crowd out all the other names exactly you know this i think is a very pressing problem that that needs potentially humanitarian intervention immediately we need to think over the long term here you know the year 2500 is sooner than you think it's true It really could creep up on you.

12:59This Guardian article talks about, you know, when the paper was actually published, or rather it was publicized on April Fool's Day and people thought it was a joke. Not a joke, guys. Sato. It's happening. Okay, I got a tricky one for you, Ethan. I'm going to put this to you as a question. As you remember, the last time I was on the show, I think, we were talking about Truth Social. Yes. Donald Trump's social media company. Where I post all my life updates. Yes. Follow us on Truth Social. Anyway, the stock was going bananas. You just argued that it makes no sense whatsoever, even close on a valuation basis.

13:34And on the basis of the fact that it made no sense, I said, I'm long this thing. Once something makes no sense, it can do anything. This thing can keep going up. I think it was the next day they released some financial information and Truth Social's shares fell 25%. So now I'm wondering, do I believe in fundamentals again? Does the stock market make sense? So I'm going to very hesitantly go long reason and logic in the American stock market. I mean, it's still at like$46, which is also a preposterous valuation. But okay, on the margin. On the margin, I am long rationality, Ethan. I love being long rationality on the margin, but not in general.

14:25Short rationality in general, long on the margin. All right, Rob. I think that concludes another show. Thanks for being here. We'll have you back soon. And listeners, we're back in your feed next week with another episode of Unhedged. We'll catch you then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free.

14:59A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Ethan Wu. Thanks for listening.

15:23We'll see you next time.