A number of analysts, including myself, consider the capitalization of Tesla Motors to be at stratospheric levels, and even the founder, Elon Musk, has expressed some skepticism while some investment banks see it going even higher. Right now, at about $220 per share, the company is valued at $31 billion, roughly half that of General Motors even though its revenue is about 3% of GM’s. Like other high-flying (mostly tech) stocks, the valuation is based on expectations of future, not current, revenue and profits. Sounds like the dot com bubble, no?
Actually, Tesla is offering real products, not services that are harder to price (and easier to compete against), as many companies in the dot com bubble found. Selling 500,000 cars a year by 2020, as Tesla plans, would be a significant increase in revenue and it is that against which many are making their valuations. The potential for the home energy storage system (and longer-term integration with solar power and the electric vehicle) also holds appeal for those who believe it revolutionary.
There have been stumbles along the way, primarily missed production targets, which are not critical but imply at least a mild tendency towards optimism. Stories like battery fires and a defective seat belt might seem like cause for concern, but par for the course for an automaker and should not detract from the attractive performance of the vehicles. More telling are the recent complaints about quality which led Consumer Reports to downgrade the Model S’s grade, albeit from a record-high level.
The dot com bubble, and its deflation, were caused by investors who were unsure how to value companies in a new business. Could advertising revenues rival those of traditional media? Would consumers turn to on-line retailing? What was the value of clicks and eyeballs? Investors’ attitude seemed to be “this is a revolutionary new technology which has great potential. We can’t predict success so we’ll throw money at anyone with an idea and hope to strike it rich.” Kind of like the early oil industry, or biotech in its infancy (and maybe still today). Tesla does not fall into this mode: the automobile industry is over a century old, the nature of consumer demand and product pricing is pretty well understood.
Which is not to say that there aren’t those who think that Tesla’s approach will prove to be revolutionary (I refuse to use the “d” word), especially the potential for its home energy storage system, solar panels and electric cars to be integrated with path-breaking software. Investors seem to be hoping that the Musk magic will translate into greater technological success than predecessors in that space (of whom there have been many), that consumer demand for electric vehicles will continue to grow robustly, and/or that massive federal subsidies will be extended. To me, this looks like “a bridge too far.”
Already, however, gas-electric hybrid sales have declined and battery electric vehicles are beginning to show signs of weakness. This implies that market saturation for advanced vehicles has been reached, and/or that low gasoline prices are causing consumers to rethink the vehicles’ relative economics. If the next Congress is dominated by Democrats, the chances for an extension of existing support for electric vehicles is likely, but a strong Democratic victory in 2016 is not.
Musk believes that his mega-factory for batteries will allow economies of scale that will lower the battery pack cost by one-third. This will probably be optimistic, since there are diminishing returns to economies of scale, but even so, it would leave the cost of the battery pack at well over $10,000 and probably closer to $15,000. Of greater concern: if the factory produces at a fraction of capacity, the capital cost will be amortized over a smaller number of units, raising the cost above those of competitors. By trying to vertically integrate, specifically by building a mega-factory to supply its batteries, the company is risking its future on making its very ambitious sales targets.
As a manufacturer of high-end electric vehicles (priced near or above $100k), the company seems successful already, but there’s not much evidence that it can appeal to others besides early adopters, at least not in time to pay off the debt incurred for its aggressive expansion plans.
