Why is Tesla’s stock zooming – and can Musk’s vision sustain his business?

How much has its valuation increased?

On January 9, for the first time, Tesla’s stock market value eclipsed the combined market values of General Motors and Ford Motor Company. The surge has continued since, albeit with a small dip when the markets tanked in March-April. Tesla sold about 3,70,000 cars in 2019 — an insignificant number in the global vehicle market, where more than 90 million cars are sold annually, with Toyota, GM, Ford, Honda and Volkswagen each selling around 10 million vehicles.

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So what explains the stock surge?

One explanation is that Tesla’s investors are looking beyond just the next couple of years. Musk, his eccentricities notwithstanding, has been able to hardsell his vision for the company, pointing to beyond 2025 and 2030, and investors seem to have bought his story. So it does not matter to them if Tesla’s sales are just a fraction of Toyota’s or of the Detroit majors’ — it’s Musk’s larger vision of an electric future that does. Investors are looking at Tesla’s potential, and believe it can dominate the electric car market in the future.

Analysts at the stockbroker Jefferies said in a note in May that Tesla remained “significantly ahead of peers in product range, capacity and technology”.

There are specific, on-the-ground factors too, that buttress this long-term story.

Tesla vehicles at the Port of Southampton. (Bloomberg Photo: Luke MacGregor)

After years of losses, Tesla has managed to deliver three profitable quarters in a row, and has maintained that momentum in the first six months of 2020, despite the coronavirus outbreak and the shutting of its US plant. Within six months of going past GM and Ford, Tesla is now worth around three times the combined value of these carmakers. Plus, Musk has said Tesla will deliver at least 500,000 vehicles in 2020, a forecast that the company has not revised despite the pandemic. And Tesla is seeing a sharp revival in its China numbers.

Then, there are factors extrinsic to the company’s carmaking business.

The successes in Musk’s space venture have had a rub-off effect on Tesla’s car business. Days after SpaceX’s launch that sent two astronauts on board the Falcon 9 rocket into space, Tesla’s stock surged sharply. SpaceX’s success gave Musk a massive credibility boost, especially within the investing community.

But is the company overvalued?

Going by Tesla’s revenue and earnings for 2020, the short answer is yes. But then, that is if one were to value the carmaker in the same way that investors value other listed companies. Musk, on the other hand, has got investors to buy into the larger picture of a clear, electric future for mobility and Tesla’s pivotal role in this vision.

But there are positives even now. According to a Reuters report that quoted Wedbush Securities analyst Dan Ives, Tesla’s stock surge still has “room to run further”. There are predictions that Tesla’s Shanghai Gigafactory will reach 100,000 deliveries in its first year of operation. The fundamental catalyst, according to Ives, continues to be “the massive China market which is showing clear signs of a spike in demand for Musk & Co…”.

Elon Musk. Investors are looking at Tesla’s potential, and believe it can dominate the electric car market in the future.(Reuters Photo)

Are there any red flags?

Many analysts and investors remain unsure of the company’s ability to consistently deliver profit and cash flow, at least in the short term. The company has missed targets in recent years. Musk’s erratic behaviour has come in for scrutiny from financial regulators and shareholders. In May, he wiped $14 billion off Tesla’s valuation after tweeting that its share price was “too high”.

Also, most mainstream automakers are unveiling new electric vehicles that can compete with Tesla’s USP of style, technology, and performance. Volkswagen, Daimler and BMW have lined up launches of fully-electric premium models that compete with Tesla. Ford’s Mustang Mach-E electric SUV could compete with Tesla’s Model X or the proposed new Model Y utility vehicle when it hits the market, according to a Reuters report. GM and Ford have electric pickups lined up to take on Tesla’s futuristic Cybertruck.

Does Tesla have an India plan?

After reports last year that Tesla may enter the Indian market in 2020, Musk said in August that “extremely high” import duties in India would make the cars “unaffordable”. But he has been vacillating – a few months before this statement on Twitter, Musk, in an interaction with the students of IIT Madras, had said the car may run on Indian roads soon.

A bigger problem in India, though, is the lack of charging infrastructure, which is a must for an all-electric vehicle, Tesla’s famed driving range notwithstanding.