Transcript: Rethinking Tesla and Apple

This is an audio transcript of the Unhedged podcast episode: ‘Rethinking Tesla and Apple’

Ethan Wu
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.

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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 Unhedged, 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.

Robert Armstrong
The great thing about parking the Cybertruck is you don’t need a parking space. I just drive it over whatever car is in the parking space I want, and it works perfectly.

Ethan Wu
Yeah, it’s like the world is your bathroom equivalent to parking spots.

Robert Armstrong
I have no idea what you’re talking about.

Ethan Wu
That’s probably for the best. Speaking of other things that are pooping the bed, Tesla. (Robert laughs) So the S&P is up about 10 per cent this year. Some of the Mag Seven are up even more. Nvidia up almost 100 per cent, Microsoft chugging along, Alphabet. But Tesla has lost about a third of its market value this year, and Apple about 10 per cent of its value this year.

Robert Armstrong
And those together are 100 per cent of my 401(k) so I am in big trouble.

Ethan Wu
Well, Rob, see, I diversified with some bitcoin (Robert laughs) 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 favourite EV stock.

Robert Armstrong
Yes. Well, part of the problem here is the simplest reason of all: Tesla is making less cars and thus, fewer money.

Ethan Wu
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. And the delivery numbers for the first time in several years, I think it’s four years, declined and quite precipitously: 9 per cent year over year. Pretty chunky decline, way below analyst expectations. Pretty disappointing news. I think people were feeling rather alarmed about what’s going on at 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?

Robert Armstrong
Yeah. It’s interesting, the people I know who drive Teslas fit into two camps, people I talked to. One camp is New York City Uber drivers who love their Teslas. They, you know, 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 gonna charge along the way? Will there be a line at the charger, how long will it take, etc etc. 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.

Ethan Wu
And 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 company’s 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, you know, I think there’s a decent fundamentals story behind the, you know, 30-plus per cent decline in Tesla stock this year.

Robert Armstrong
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. This is a technology company that is gonna 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?

Ethan Wu
(Laughter) Exactly. Like a lot of the hopes for Tesla are pinned on like a mythical product years into the future that is going to sell like hot cakes.

Robert Armstrong
Most importantly, the self-driving car, the self-driving taxi. So not just that.

Ethan Wu
Yeah. Not just that. I mean, the Cybertruck, which launched not so long ago. It was, I think, considered a bit of a flop. I mean, I saw . . . 

Robert Armstrong
I don’t know if it was a flop, but people sure aren’t talking about it right now.

Ethan Wu
Well, here. This is from the trade publication Automotive News just last month. Tesla Cybertruck auction prices come crashing down to Earth. So on the secondary market, these things have not been a store of value.

Robert Armstrong
They are so weird-looking. Have you seen one of those things in person?

Ethan Wu
Not in person, no. Just videos.

Robert Armstrong
They’re enormous and very strange and not really trucks. I don’t know what they are.

Ethan Wu
It’s like the opposite of a Veblen good. It’s like, (both laugh) very embarrassing.

Robert Armstrong
Yes.

Ethan Wu
So that’s the question. Is Tesla just a car company? At least for now.

Robert Armstrong
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? Is there gonna be another new product? Is it gonna become a software company? Is the robotaxi gonna be there? Is there gonna be a flying car, etc, etc? 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.

Ethan Wu
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, you know, a less wealthy consumer. Could that lead to a turnaround in vehicle sales? Absolutely. Completely plausible. Is the robotaxi possible? Listen, don’t ask me, I don’t know. I don’t know.

Robert Armstrong
Yeah. Should we turn to Apple?

Ethan Wu
Let’s turn to Apple.

Robert Armstrong
OK. 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.

Ethan Wu
Yeah, it’s monopolist. Yeah. It’s been sued.

Robert Armstrong
(Laughter) 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. I think something much more fundamental is going 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. They’re looking for the cutting edge instead. They’re looking for Nvidia.

Ethan Wu
And there’s like related jibber-jabber, you know about Apple losing a bit of its sheen. 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. It’s services . . . .

Robert Armstrong
Nobody wants those glasses or whatever they are, the goggles.

Ethan Wu
Yeah. No one wants like the Vision Pro. It can’t launch like a splashy new product the way it used to be. Its 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?

Robert Armstrong
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. And I agree, it is not obvious what that thing is. There was gonna 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. And we’re gonna keep using Apple products. 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. It’s Coca-Cola times 10 in some sense. So there is a way in which Apple will remain a multitrillion dollar company even if it never makes another major technological shift ever again.

Ethan Wu
Yeah. Look, Coca-Cola doesn’t have a gigantic chrome loop as its headquarters. (Robert laughs) We can put it that way. But I wanna zoom out though, Rob. So if Tesla’s just a car company and Apple’s, you know, just technology’s Coca-Cola, I mean, should these have been in the Mag Seven to begin with, right? They’re called magnificent for a reason because they’re supposed to be technologically sophisticated, nimble, you know, high-margin businesses that have like growth potential on and on and on into the future.

Robert Armstrong
I 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 gonna do next enlarge. 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. Tesla is just a different kind of company.

Ethan Wu
Yeah, I know, I think that’s definitely the case. With Apple. I mean, it may just be that it has different challenges in front of it than Microsoft, Meta, Alphabet, whatever. And that explains why it’s diverged from the rest of the Mag Seven. But Apple’s pretty magnificent like we’ve been talking about.

Robert Armstrong
Agree.

Ethan Wu
And will Apple return to some kind of growth that will impress investors? I think the answer has to be like in the medium to long run, yes. I mean, this is like a company with like decades and decades of multiple cycles of reinvention. It’s very hard to bet against the stock in the long run but . . . 

Robert Armstrong
Correct. But the reason why it makes sense to talk about the Salubrious Six 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 that gives them different characteristics from the point of view of investment than other stocks.

Ethan Wu
Absolutely true. As they get bigger, they just get better at what they do. More profitable, more dominant. Tesla? We’ll see.

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Robert Armstrong
We’ll see.

Ethan Wu
Maybe the robotaxi business is increasing returns to scale. I don’t know. It could be. All right, Rob, I think let’s leave it there. We’ll be back in just a moment with Long/Short.

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This 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 Sato is already very popular. And like over time, unless the law is changed that lets couples pick which surname, you know, they wanna have . . . 

Robert Armstrong
It’s gonna crowd out all the other names.

Ethan Wu
(Laughter) Exactly. You know, this I think is a very pressing problem that needs potentially humanitarian intervention immediately.

Robert Armstrong
Yes. We need to think over the long term here, you know. The year 2500 is sooner than you think.

Ethan Wu
t’s true. It really could creep up on you. This Guardian article talks about, you know, when the paper was actually published, or rather, it was, publicised on April Fool’s Day and people thought it was a joke. Not a joke, guys. Sato, it’s happening.

Robert Armstrong
OK, I got a tricky one for you, Ethan. I’m gonna 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, Donald Trump’s social media company.

Ethan Wu
Where I post all my life updates.

Robert Armstrong
Yes. Follow us on Truth Social. Anyway, the stock was going bananas. You’d just argued that it makes no sense whatsoever, even close on a valuation basis. And 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 per cent. 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.

Ethan Wu
I mean, it’s still at like $46, which is also a preposterous valuation, but OK. On the margin . . . 

Robert Armstrong
Yeah, it’s true. On the margin, I am long rationality, Ethan.

Ethan Wu
Yes. You love being long rationality on the margin, but not in general.

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Short 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 Bryant Urstadt. Our executive producer is Jacob Goldstein. We need additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer. I’m Ethan Wu. Thanks for listening.

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