If you’re looking for a ride, you’ll do no better than Tesla. Its stock price, that is. Last week, the company announced buoyant quarterly results: a record number of vehicle deliveries, $105 million in net income, and $7.4 billion in quarterly revenue, up 17 percent from the previous one. In the next four trading days, through Tuesday, Tesla’s stock price skyrocketed 52 percent. On Monday alone, shares rose almost 20 percent. Then came Wednesday, and news that coronavirus would delay the carmaker’s delivery of the Model 3. Shares fell by 17 percent. It wasn’t Tesla’s worst day ever, but it was its second worst.
Tesla has had a rocky decade on the public market. CEO Elon Musk has been praised, vilified, and penalized by the SEC for his irreverent and seemingly off-the-cuff approach to running an automaker, epitomized by his tweets that have moved markets. This past week, though, it’s not Musk moving the market, but Tesla itself.
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Tesla has always seemed to think of itself as a tech startup. It is based in Silicon Valley, not Detroit, and Musk and Co. have created much hay about the company’s now-3 billion miles’ worth of driving data from its assisted driving feature, Autopilot. But professional investors are more interested in production capacity, new factories, and battery tech than the company’s latest features or over-the-air updates. It's hard to pin any sort of market move on any one data point, but Tesla appears to be riding a wave of enthusiasm for electric vehicles.
“From the perspective of the outside world, Tesla has for sure been considered more like a tech company than an auto company over time,” says Michael Ramsey, a senior automotive analyst at Gartner. “The reality is, the bigger they become and the more factories they build, the closer they are to Volkswagen than Amazon and Facebook.”
By Volkswagen metrics, Wall Street approves. In fact, the electric- car maker’s market capitalization is now $132 billion last week, vaulting past the 83-year-old German giant’s, at around $85 billion. (For comparison, VW churned out 11 million vehicles last year, while Tesla plans to produce 500,000 in 2020.) The market is valuing Tesla roughly equal to IBM or Costco (which today pull in three and six times the automakers’ revenue, respectively), and more than BP.
In notes to investors released in the past week, analysts gushed over the carmaker’s most car-y metrics. The company’s new mass-market mini SUV, the Model Y, has started rolling off production lines in its Fremont factory some six months ahead of schedule. The company's cost-cutting measures—at one point last year, Musk and his CFO, Zach Kirkhorn, were personally signing off on all expenses—seem to be panning out. Operating expenses actually fell last year, compared with 2018, even though the company delivered 50 percent more cars. A new factory in Shanghai might produce some 150,000 Model 3’s in the next year, in a country where government regulations have propped up the expanding electric vehicle industry and funded the charging infrastructure to keep their electrified engines humming. Oh, and Tesla put that factory up in 10 months—a promising figure as it starts work on another factory in Berlin. The whole enterprise is starting to look positively functional.
Still, analysts have plenty of questions. Non-Tesla carmakers seem to be marketing the newer breed of vehicles more seriously, with GM, Porsche, and Audi all running glitzy (and expensive) ads for electrics during the Super Bowl. Tesla may have started the electric revolution, but some question whether the company has the manufacturing might to follow it through. Ryan Brinkman, an analyst for J.P. Morgan, noted to investors that Tesla’s stock value is “increasingly disjointed from the fundamentals.” Moreover, a coronavirus-related pause in production in China has prompted questions about a strategy that relies too heavily on the country’s sometimes unpredictable government. Tesla remains the most shorted stock in the US, measured by dollar value. The company did not respond to a request for comment.
Overall, though, auto industry prognosticators have upped their expectations for EVs. The Boston Consulting Group predicted in 2017 that electrified vehicles (a category that includes battery-powered vehicles and plug-in hybrids) would take a quarter of the global market in 2025, and start approaching 50 percent by 2050. Last month, the company’s analysts revised their figures: Now electrics will grab a third of the market by 2025 and account for more than half of all cars sold by 2030. Eight percent of vehicles sold worldwide last year were electrified.
If Tesla can continue to be the king of electric vehicles, the cars have tons of business upsides. The cost of batteries are going down, as chemistry tweaks continue to boost vehicle range and (hopefully) quell skeptical buyers’ range anxiety. Because electric vehicles have fewer parts, they should take less time and fewer hands to put together—which means they should have higher profit margins. Ramsey, the analyst, points out that EV-makers also have to spend less time and money adhering to regulations, because their vehicles don’t have exhaust pipes.
Is that enough to justify some investors’ suddenly sky-high expectations for the company? Sit back and enjoy the ride.