Posted: February 27, 2025 | by: Thomas F. McKeon, CFA
When Tiger was in his prime and always a threat to win any tournament, the sports media would often ask: "Who Ya Got? Tiger or the Field."
Most late afternoons I tune into ESPN’s “Pardon the Interruption”, a sports talk and banter program hosted by Tony Kornheiser and Mike Wilbon. For a long time through the 2000s and 2010s when the major golf tournaments would be coming up, one of them would ask the question: Tiger or the field? Do you want to bet on Tiger to win or the entire rest of the field.
For those who don’t know, Tiger Woods was the transcendent golf talent of his generation—a perpetual threat to win any tournament he entered. He was always on the leaderboard and won 15 majors in his career—roughly one out of four he entered.
The mathematically-probabilistic correct answer is of course: the field.
In late 1999 as the tech bubble was in full bloom Safeguard Scientific spun out one of its investments: the Internet Capital Group (ICGE). Safeguard Scientific was a publicly traded venture capital firm, buying and seeding private companies and spinning them off as public companies. The Internet Capital Group initial public offering (IPO) was priced at $12/share in August 1999 and by early December 1999 it was trading near $270/share with a market valuation of $34.7 billion. This for a company with $17 million in revenues and recent annual losses of $44 million. This struck us as an absurd and unsupportable valuation. So I wrote a valuation comment kind of like Tiger vs the field.
In December 1999, for a $34.7 billion investment one could own all of the Internet Capital Group or 100% of the following companies:
These companies had the added benefit of having collective actual revenues of $14.1 billion (vs $17 million for ICGE), and collective net income of $1.51 billion (vs a $44 million loss for ICGE).
There is another technology valuation extreme in the markets today (in my opinion) driven by Artificial Intelligence technology and its supporting companies. The technology sector is now the largest in the S&P 500 at 30.7% of the index. Next closest is Financials at 14.1%. With the extended valuations of the tech sector in general and a few individual companies in particular, it struck me as a good time to re-visit my comment of late 1999.
The stock I am going to pick on is Tesla. Its current valuation suggests either outrageous future growth or the delusions of the crowd.
Tesla is trading at an extreme valuation of roughly 148 times recent annual earnings. That is a price to earnings (P/E) multiple of 148x. That compares to a P/E multiple of 38x for Apple, 32x for Microsoft, 26.6x for the entire S&P 500, 16.2x for the FTSE Global All Cap ex US Index and 13.2x for Merck & Co. (Pharmaceutical). BY any objective measure Tesla is at an extreme valuation. Whether it is justified or not is the question.
So the question is: Tesla vs the field.
With no growth of net income it would take the owner of Tesla 148 years to earn back his initial investment of $948 bb. With no growth, owning the basket of stocks in the graphic above would earn back your initial investment in 18.6 years. Of course there are many variables that will affect the outcomes for all of the referenced stocks: growth, margins, leadership, the economy, innovation, interest rates, geo-politics, etc.
For me, the field (or basket of stocks) is always the way to go in comparison to an extremely valued stock. More certainty, more diversification, better valuation support, more margin of safety. For a stock priced at 148 times earnings, absolutely everything has to go in its favor to not only support its current price, but potential appreciation as well.
Tesla may run rings around the basket of stocks over time. Even if it does, the current extreme valuation could erode—perhaps catastrophically. If Tesla had the same current market price to earnings valuation of Microsoft, it would lose close to 80% of its current value. If it becomes evident that Tesla's growth will be constrained, the air will eventually come out of the valuation as well.
“The race is not always to the swift, nor the battle to the strong, but that's how the smart money bets.”
Damon Runyon
PS: In early 2000 the air came out of the absurd ICGE valuation and the company faltered, did not become the “next big thing” and the stock went to zero. In the basket of stocks in the comparison, some went up, some went down, some were acquired. Adobe by itself is now worth $191 billion up from just $7 billion in late 1999.
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