Billionaire Elon Musk’s signature car company, Tesla, recently made headlines when an increase in their stock price gave them the title of most-valuable car company in the USA, ahead of giants GM and Ford. This news came as a surprise to many, and rightfully so. Tesla should be nowhere close to as valuable as GM, but optimism from investors has driven up the stock price.
John Maynard Keynes warned economists about the “animal spirits,” or emotionally-driven decisions, present in the market. His animal spirits explain why investors may keep investing in the stock market even when they know that they shouldn’t. The bull and bear markets of Wall Street were not named after these animal spirits, although the coincidence is perhaps too ironic to ignore.
Right now, Tesla is benefiting from a bullish attitude concerning their prospects. Many people are excited over the upcoming release of the Model E, a car which Tesla claims will sell for as low as $35,000. Optimistic investors view this as a potential Tesla for the masses.
Skeptical onlookers aren’t so sure that they can pull it off, however. Stanphyl Capital recently considered the build costs of the Model E, and were left scratching their heads as to how they could place the price so low. They estimate that if Tesla does sell the Model E at $35,000, they will lose $13,000 per car.
Tesla certainly can’t afford to create more losses for themselves. Although they have gained revenue over each of the past 5 years, they have also never posted a profit. It is completely possible that they will work their way out of the red, but to say that they are already as valuable as GM is certainly a stretch of the imagination.
Tesla’s stock value is inflated over the prospects of potential profits, while GM consistently performs well. They too have gained increasing revenue in 4 of the past 5 years, but they are also showing large increases in profits over that same period.
GM has a proven production method which allows them to produce cars efficiently and sell them at a profit. The future of Tesla requires the production of gigafactories, the construction of which will ensure that they continue to post net losses for the foreseeable future.
Tesla has chosen a model of car that will face substantial challenges in penetrating rural and business markets. One of the advantages of buying a gas-powered car is the ease with which one can drive it across the vast expanses of America. When one decides to go on a road trip in a gas-powered car, they generally don’t have to worry about taking long stops before arriving at their destination.
But Tesla’s cars present troubles when traveling cross-country. To fully charge a Tesla at one of their state-of-the-art supercharging stations can take up to 75 minutes. Filling up a gas tank takes a fraction of that time. This fact alone might cause someone with a significant commute or who has to travel for work to pass on a Tesla. Teslas are mainly feasible within a city driving situation. Although the majority of the population lives in cities now, there is still a large portion which would not realistically be able to use a Tesla due to work or family constraints.
There is plenty of hope for Tesla. In fact, there’s really nothing to be afraid of (outside of a potential overvaluation) for customers and investors. While Tesla is currently posting losses, they’re largely due to the amount of R&D going into Tesla’s overall business. If Tesla were to stop research and focus solely on producing cars, the company would most likely be profitable.
That being said, there are significant problems with their high valuation. Teslas are luxury cars produced for a niche market; GM produces cars for the masses. Tesla still has yet to turn an actual profit, whereas GM is a proven powerhouse that could still learn and grow.
I have full faith in Tesla and Elon Musk. Musk is a proven leader with a fantastic vision for the future of automobiles and electric energy. If they can manage to implement a full supercharger system across the nation, as well as complete enough gigafactories to keep production costs down, they will be on their way. But to say that they are already as valuable as giants like GM and Ford is putting the cart before the horse.