(The following is a Bloomberg opinion piece written by Chris Bryant)
When Tesla Inc. delivered 95,000 cars to customers during the spring quarter of 2019, the stock price was languishing at around $ 235 and Elon Musk’s electric car company was valued at “only” $ 40 billion. Fast forward one year and the shares are now priced at more than $ 1,200. With a market capitalization of $ 224 billion, Tesla has surpassed Toyota Motor Corp. as the world’s most valuable automaker.
However, in the second quarter of 2020, Tesla delivered 91,000 vehicles, approximately 5% less than in the same period last year. That’s pretty disappointing for a company whose fans see it as a fast-growing tech company in the mold of Amazon.com Inc., rather than a slow metal-hitting automaker. So how is the massive recent jump in its market value justified?
In fairness, he is reluctant to sell so many cars when the pandemic shut down the company’s California main plant for much of the spring period. Undoubtedly, the new Tesla plant in Shanghai regained production downtime, suggesting that it was worth the expense and effort to get that factory in China up and running. The launch of Tesla’s new Model Y crossover vehicle will have helped. Ford Motor Co. and General Motors Co. saw their deliveries in the United States decrease by a third in the same quarter.
However, Tesla’s stock market acolytes raised the shares another 8% on Thursday, adding $ 16.5 billion to the market value. Such exuberance is difficult to understand. Musk’s company sold 7,650 more vehicles than analysts had expected during the second quarter, and the jump in share price equates to around $ 2 million in value added for the shareholder for each of those additional sales. This seems a bit steep since a Tesla Model 3 sells for under $ 40,000, and the profit margin on those cars is pretty slim.
The shareholder reaction makes even less sense when you consider that Tesla investors are not really destined to buy the shares due to the company’s current sales, which are less than 4% of those of Volkswagen AG. Rather, the case for investment is long-term: it will come to occupy a dominant position in clean transport and energy in the coming years. That explains why the shares are trading at 320 times their analyst-estimated earnings this year. Seen through this lens, Tesla’s ability to trade a few thousand additional cars in the past few weeks shouldn’t matter much for valuation.
Investors’ tendency to overreact to Tesla news made more sense when their survival was open to doubt. A year ago, he was laying off workers, U.S. sales were slowing, and his retail strategy was confusing. Senior staff continued toward the exit. The company was spending a lot of cash and had very little financial fuel. He had just $ 2.2 billion in cash in March 2019, compared to more than $ 8 billion now.
But the subsequent evidence that Tesla can sell cars for more than it costs to produce them has transformed the mood, and with it the price of Tesla’s shares.
Instead of “killing” Tesla, lukewarm electrical offerings from established automakers like Audi and Mercedes have only underlined the quality of its rival’s battery and powertrain technology (the same cannot be said for the quality of Tesla construction). His upcoming ID.3 electric vehicle suggests that catching Tesla won’t be easy, even with the Germans’ vast resources.
Tesla’s stratospheric assessment seems to have been reinforced. If you require more money to finance your capital spending of roughly $ 9 billion in the next three years, you can collect it from shareholders without worrying about diluting it too much.
Similarly, holders of more than $ 4 billion of convertible bonds that Tesla issued to finance its expansion should be happy to convert them into shares, rather than demanding cash payment, taking some pressure off the company and its balance sheet. .
Still, Tesla’s valuation remains impossible to justify by any standard metric. Analysts’ average price target is more than 40% below current level. Even Musk has suggested that the share price, which has almost tripled since the start of 2020, is too high, though, as with his mockery of the US Securities and Exchange Commission and his comments on the blockades. “Fascists,” it’s generally best to tune in. Find out what Musk says and focus on his actions.
Skeptics may have more faith in Tesla’s new position as leader of the automaker group when Musk stops his provocations and his shareholders stop feeling dizzy from the modest good news.
This story has been published from a cable agency source without modification to the text.
.
