Investors who have been stunned by Tesla's stock-price surge need to keep a key vulnerability in mind
- Tesla's stock has enjoyed a stunning rise in the past three months.
- The company is now comically overvalued, with a market cap that's well over $100 billion.
- Investors have discounted Tesla's total exposure to the still-tiny electric vehicle market and have also argued that the carmaker deserves a tech-company valuation.
- Tesla has no plan B if the EV market fails to materialize as expected.
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What a ride! Tesla in the span of about three months went from about $250 per share to almost $1,000, minting a market capitalization that has made the still-small all-electric carmaker worth as much as a two General Motors and most of a Ford.
I know, I know - ridiculous. Even after a 50-day UAW strike in 2019, GM still made more than $8 billion in 2019, while Tesla lost more than $800 million.
But of course, Tesla is unfairly compared to other car companies. Tesla is a tech company and deserves a tech-company share price, because ... disruption, and innovation, and ... well, yeah.
An even more ridiculous allegation because all of Tesla's business - which isn't bad, by the way, with sales rapidly growing - involves taking metal, making it into automobiles, adding batteries and motors, then putting on four wheels and four doors and selling these contraptions to people who want to drive around in them in the same way that my father drove around in his Pontiac Bonneville.
So it makes perfect sense to compare Tesla to other automakers. And if you do that, a rather dramatic potential vulnerability appears.
Tesla's "first-mover" advantage is fraught with risk
It hasn't been discussed as a vulnerability, but rather as a first-mover advantage. Tesla has somehow built a lead in electric cars that traditional automakers can't overcome.
That's nonsense. The EV market globally is less than 2% of total sales. Being the leader in such a tiny market is no bargain because you're taking on all the risk and having to spend all of your money to fund the capture of that risk. That's acceptable, and in fact is the best way to think about Tesla's ludicrous-mode stock surge: if you're in the mood to own the riskiest stock in the market, Tesla is your baby.
As a business, however, Tesla has limited ways to manage its risk. In truth, its only current option is to get traditional automakers to pay it to "pool" their vehicles with Tesla's, to meet emissions regulations (Fiat Chrysler is doing this in Europe).
Otherwise, Tesla is all-in with electric propulsion. Yes, the solar business and battery storage could develop as other lines of business, but for now, it's cars. And they don't drive themselves, at last not yet, so Tesla's $7 billion in annual revenue comes almost entirely from selling the same thing that GM and Ford has been selling for a century, just powered by electrons instead of petrol.
Tesla enthusiasts can blab all they want about software and battery innovation, but I've driven literally hundreds of cars, including everything Tesla has ever made, and while Teslas are terrific, they're still basically cars. There are many legacy vehicles available that do stuff better than Teslas, and a few electric cars that offer their own competitive positives.
Teslas are also relatively expensive, even as the Model 3 has expanded sales in the mid-price tier (around $40-$60,000, versus $25-35,000 mass-market territory). A good thing for Tesla, for now, because it's unclear that the company can achieve an acceptable profit margin on high-volume vehicles.
There is no plan B
Here's the main issue: Tesla doesn't really have a plan B. It's see electric cars displace gas-powered ones - and displace them fast - or bust. And remember, although Tesla controls most of that 2% global sales number, it doesn't have 100% share. The market is also so tiny that even a flicker of competition could be a problem to Tesla. Word on the street is that two new EVs, the Porsche Taycan and the Ford Mustang Mach-E, are generating a lot of buzz and attracting customers.
That matters less for sales - the Taycan is going to price well above $100,000 at first - than for brand bandwidth. Tesla has inhaled all of it. But after 2020, that situation might change.
Ford, however, isn't anywhere near all-in on electrification. It sold nearly a million pickup trucks last year that run on gas. And if for some reason, electric vehicles don't achieve escape velocity or are supplanted by an innovation in, say, hydrogen fuel cells, then Ford is in better shape to quickly pivot.
Investors have been far too quick to dismiss old-school vehicles. Rumors of their imminent death are exaggerated. And in Tesla's case, those rumors have propelled stock prices to vertiginous levels that might have nowhere to go but down.
