Tesla’s Electrifying Stock Might be too High-Voltage:
Enough to Burn Some Investors
Since the company first started in 2003, Tesla Motors, Inc. (TSLA: Nasdaq) has been no stranger to news coverage. Lately, coverage has not been to the company’s liking. As Tesla struggles with turning a profit, investors continue to flock towards the company.
Elon Musk (CEO of Tesla) and the six other board members of the company (including his brother, Kimbal Musk) might have more to worry about than market indicators.
Silicon Valley’s auto manufacturer just reached a current market cap of $50.56 billion. Even though the company has failed to make recurring profits since its introduction, investors show no fear. Tesla’s multiple business ventures may be the reason for hopeful investors, because Tesla cars are surely not the only reason for the company’s success.
It turns out that Tesla is involved with quite a bit more than the consumer automotive market. Just last week Tesla announced plans to add freight trucks to its fleet of electric vehicles (EV). “The idea that Tesla is working on a big freight vehicle is flatly inexplicable,” wrote analyst Matthew DeBoard for Business Insider on April 15. “Tesla is currently struggling to go from about 100,000 vehicles in annual production to five times that in about 12 months.” DeBoard has a point, instead of trying to improve on production numbers Tesla has been focused on opening its new ‘Gigafactory’ in Nevada, absorbing Kimbal Musk’s company (SolarCity) into Tesla for roughly $3 billion, and recently, Tesla announced plans to double its charging network in 2017. In other words, it seems as if Tesla has bit off more than they can chew, for now.
Some analysts claim Tesla is doing great, as the company sits among the top four American automotive manufacturers including General Motors (GM), Ford, and the Fiat Chrysler Administration (FCA). It is important to remember that the analysts who rank Tesla in the top four U.S. manufacturers have not based their conclusions on the company’s profits, but have based their claims on the company’s remarkably high valuation. It was written in CNBC that, “Tesla’s market value has since slipped to just shy of GM’s.” As of Wednesday, the market cap of the Silicon Valley automaker was $50.3 billion, while GM’s was $50.8 billion on April 13, 2017.
Tesla may be consistently placed among the top automotive manufacturers in America, but they have not gained praise for sales numbers. In fact, Tesla has routinely been unable to meet its self-set production goals since the company started selling cars. “Last year Tesla sold 76,230 vehicles, missing its target of at least 80,000 cars sold,” wrote CNBC on April 13. “By comparison, GM sold 10 million cars and Ford sold 6.7 million.”
Despite falling short of production goals, there seems to be other problems with the company. “I have a hard time supporting Tesla’s monstrous valuation . . . the company still isn’t profitable on a recurring basis,” analyst Sean Williams wrote for The Motley Fool on April 15. Williams is not the only analyst who has a problem with the direction Tesla has been going in. On April 11, analyst Thomas Heath for Washington Post wrote, “The luxury electric-car company Tesla has yet to turn a profit, losing hundreds of millions of dollars last year alone.”
The company’s inability to meet production numbers (and produce a profit) could cause concern for customers. Low production numbers have left customers (some who have paid in full) without a vehicle for an extended amount of time. This may seem like a huge deal, but apparently, people who pay around $100,000 for the luxury EV are not concerned with production delays. As analyst Rich Smith wrote for The Motley Fool on April 10, “Tesla had no problem attracting preorders for 400,000 cars from buyers willing to wait a year (or longer) to see their new cars.”
The good news is that Tesla bumped up its total automotive revenue, going from $3,740,973,000 in 2015 up to $6,350,766,000 in 2016 (a 58.9% increase). Despite production and order delays, customers remain patient with the automotive manufacturer.
Tesla’s strong market cap is not necessarily a reflection of the company’s revenues, cars sold, or any other indicator. Rather this high valuation reflects the significant impact that investors have had on the company since it was founded in 2003.
Yes, Tesla has been continuously propped-up by the pockets of investors, the primary reason for its high market valuation. “Tesla’s stock has zoomed from $15 million in revenues in 2008, when it first introduced the roadster, to $7 billion last year,” analyst Rich Smith wrote for The Motley Fool on April 24. “That’s more than 47,000% growth in just eight years. And yet, during all this time, Tesla has failed to earn a full-year profit even once.” Just as Tesla owners have been patient for their cars, investors of the company will have to be patient to see any form of return. As analyst Rich Smith wrote for The Motley Fool on April 10, “According to most analysts cited on S&P Global Market Intelligence, Tesla is expected to report its first full-year profit in 2019.”
Despite a multitude of reports like this, there are analysts who argue. Lucinda Shen wrote for Fortune.com on February 27, 2017 how, “News in the past few months about Tesla’s potential benefits from tax cuts, ties to Trump, and signs that it was preparing for Model 3 production, have helped push its stock to an all-time high.” Investors do not seem to be flinching at the speculations analysts are throwing around, and as Damir Tokic wrote in SeekingAlpha.com on April 23, these investors might be displaying ‘irrational exuberance.’ Tokic further wrote, “Was it rational to buy Amazon in 1998, and pay extremely high premium for a company with no earnings? At the time, no, but it was a bet — just like a lottery ticket, and this specific bet paid off. Tesla could be an example of a ‘lottery ticket stock’ in today’s market.”
“Tesla’s rise in stocks tells more about the stock market than the auto industry & what is going on there,” wrote Thomas Heath for the Washington Post on April 11, 2017. Heath is explaining how Tesla’s rise as a company is mostly due to its success in the stock market. The company has yet to sell a comparable number of vehicles (annually) when compared to the production numbers of competitors. Tesla is also now involved in SolarCity, selling batteries/chargers, possibly entering the freightliner market, and then there’s SpaceX.
Because of the crucial role investors continue to play in making Tesla successful, these investors must realize that when they purchase into Tesla, they are not necessarily buying into an auto maker — they are buying into a technology company. If Tesla turns successful with these extra ventures, stockholders will be more than pleased. However, if Tesla fails on these advents alongside its deadline of the Model 3 release later this year, it is hard to see where the company’s stocks will go and it will be interesting to see if investors and customers will continue to remain loyal to a brand which, so far, has brought them so little.