When you look at Tesla Motors, what do you see?
Do you see a surfer precariously riding a 75-foot wave for as long as it will last?
Or do you see an almost heroic company dedicated purely to electric cars intended to drive a spear into petroleum-centric transportation’s heart?
Or, as has also been written, do you see a Silicon Valley hype machine led by Elon Musk who’s “a serial, almost kleptomaniacal, corporate welfare bum whose greatest talent seems to be sucking at the U.S. government’s teat for personal gain and glory.”
Perhaps you see something else? Whatever it is, Tesla more often than not provokes a deeper response than an ordinary widget maker.
This could start to explain why TSLA has traded for over 200-times 2014 earning estimates and nearly 75 times profits projected for 2015. It could help shed light on why its market cap eclipses medium-sized automakers despite having had its first profitable quarter in 2013, and with just one car for sale.
The EV Movement’s Biggest Hope
To contemplate why Tesla’s stock has skyrocketed, one needs to examine why Tesla is liked or disliked because this is as much about emotions, dreams, fears, and human psychology, and not just economic fundamentals.
As a startup for whom it’s sink or swim, Tesla is doggedly all about EVs. It says no to hybrid “amphibians,” no to internal combustion of any sort. No major automaker has this singular focus; not Nissan, not GM, not BMW, no one.
And, the public senses all this. It has inspired fans who’ve felt it. They see the vision to one degree of clarity or another, and want this company to succeed which stands as a goad or inspiration to many others who will in due time follow.
Others are just fascinated by the spectacle of it all. Others too don’t fully understand limitations and possibilities but sense change on the horizon and wonder if it could be true.
Why Has Tesla Stock Gone Up So Fast?
The short answer is more people than not have bought into the company’s story.
Tesla represents massive potential to those who’ve run its stock up from its $17 initial public offering in 2010 to the $240 range today. And it’s become a favored stock-market play regardless of whether speculators buy the full vision or not.
From the periphery, and sometimes overtly, it gets accused of bluster, and not without reason, but interlaced throughout the whole picture is enough substance backing it up.
For example, Tesla’s first sedan led Consumer Reports to gush that it was the best it’s ever tested. Tesla repaid a $465 million federal loan early, then turned around to build a $5 billion Gigafactory. It’s planting Superchargers all over the world map. Next on the agenda is Model X – late but on the horizon this year, and similarly late, next year we’ll get to see what the mass-market-intended Model 3 will look like.
Tesla is also leaping into energy storage with initially strong public receptiveness for “Powerwall” and the aura surrounding Tesla is this is one smart company. It keeps surprising people, is growing with next to no advertising budget, so who wants to really bet against it?
Not to focus on former Federal Reserve Chairman Alan Greenspan here but his memorable term “irrational exuberance” did strike a nerve of truth. It described the 1990s dot.com bubble trend of inflating a stock beyond fundamentals, and it appears that strain of insanity has run its course, evolved, but is still with us.
Have investors been numbed out by years of what would defy traditional economists’ viewpoints and is sentiment carrying the day? Or is there method to the new madness fattening an arguably thin-on-paper proposition with infusions of cash?
The truth may be a company will be called a hero if it pulls it off, but if it crashes and burns like Fisker, the pundits will pile it on in reverse. So far, Tesla is pulling it off.
A Company or a Cause?
The cliché is Tesla is the “disruptive” company, and it does represent a contrarian way – and this too can add to its appeal.
For one, the relatively small company does have a market edge with a unique product and head start, but instead of trying to widen it, last year it offered its patents for free and it says it welcomes competition.
There is an undeniable air of noble cause stoking Tesla fans to passion that this is more than business as usual, while others say they detect less-than-savory elements blurring the idealized picture.
Personal viewpoints have been taken justifying love for Tesla or hate; drinking the kool-aid or smelling a rat.
The most positive angle is Tesla is exactly as represented. It says it seeks to curb global emissions, reduce dependence on petroleum, and facilitate the electrification of the automobile.
Evidence exists for this view, and evidence exists against it.
The art of Tesla’s attraction also lies in playing to public and policy momentum and presenting a solution perceived viable, worth stretching for even, thus valuable.
For one, Tesla has fomented preexisting conspiracy theories against powers that be, if not also conspiracy fact. Supporters have suggested Tesla has of course incited enemies to attack it because it threatens the establishment.
To the chagrin of critics, Tesla and Elon Musk have also played masterfully to in-vogue government initiatives.
Every one of the endeavors Elon Musk controls – Solar City, SpaceX, Tesla – weaves itself into present taxpayer-funded government programs to subsidize its products on the consumer and manufacturing side. It even books profits its competitors must dutifully pay because they need California Zero Emission Vehicle credits, and Tesla has them.
Perfect or not, Tesla may be the best hero the environmentalist-oriented transportation world has and it wears the mantle of bright young star, the underdog threatening to be top dog led by a self-made billionaire presented as one who wants to give back.
Underlying the message is technology intended to make a better world. Tesla sets a new tone in the face of other corporations which themselves definitely have a checkered past – such as oil companies and old guard automakers.
Despite critical jabs, Elon Musk has not been personally accused of any more dastardly character flaws than alleged hypocrisy – a forgivable sin in this present climate, if not interpreted instead as evidence of playing the game well.
And, in his favor, the man has invested tens of millions of his own money into his businesses which all have the aim of benefitting society.
He’s gone nearly broke more than once when he has long had the means to be selfish, opt out, and live only for himself if he was so inclined.
So, the leader, just like the company, while not unimpeachable, has a deep stripe of plausibility to counter allegations that come – that themselves may be provoked by jealousy, or other motives less pure than the driven snow.
Better Than a Box Office Hit
The Tesla story is in many ways better than a well-written fiction because it’s a real life drama that threatens and promises much now and into the future.
Tesla plays Twitter, Facebook and other free media channels well, and leverages these as a virtual cottage industry of publicity for all major media to deliver free coverage as “Tesla” remains a search-engine-friendly keyword.
Positive stories often get shared, and stories viewed as too-negatively slanted may find a virtual mob with cyber pitchforks ready to skewer offending writers like the New York Times’ John Broder, or at least defend with tones bordering on religion.
“Elon Musk is facilitating the pace of innovation in a business sector that will absolutely dominate the next two centuries of global economic activity,” wrote one commenter recently against an anti-Tesla hit piece. “The fossil fuel industry would rather see the U.S. become a has-been power, rather than lose a penny of their profits. But change is coming – whether they like it or not. Our national concern is whether or not the U.S. leads the way. My money is on Mr. Musk – and our nation.”
The “next two centuries,” said this Tesla supporter. Those kinds of statements get flung around but imagine someone in 1815 making a comparably sweeping prediction for then-subsequent industrial history through to today.
Others, even while sympathetic, are put off by the zeal.
“I too am an admirer and supporter of Tesla and for the most part, Elon,” said another commenter on the pro-EV GM-Volt.com site. “Unfortunately, these feelings get tempered by the anti-anything-but-Tesla-especially-GM comments by Tesla/Elon worshipers who think Elon is Jesus resurrected and can do no wrong.”
Underlying the Tesla story also are questions of who is smarter, wiser, better – yes, bragging rights coupled with moral values are expressed and implied here for the Silicon Valley company defying established European, Japanese and Detroit-based titans.
All this is happening against great odds, adding to the tension. No new automaker has made it all the way in the U.S. since Chrysler without ultimately failing.
Not hurting Tesla’s credibility beyond its well-regarded products and self-sacrificial billionaire is it’s backed by other powerful people who’ve also added their names as supporters to this populist cause.
As far back as 2008 Tesla’s third round of fundraising was signed onto by Sergey Brin and Larry Page, co-founders of Google, Jeff Skoll, former president of eBay, Hyatt heir Nick Pritzker and more.
Not Home Safe Yet
Tesla needs the Model 3 and Gigafactory to make it profitable. Mainstream investment writers such as the Motley Fool – which nonetheless owns positions in TSLA – and Investopedia, among others, do urge caution.
Investment writers speak of potential landmines that could set the company back, if not sink it. The Roadster was only launched in 2008 and fewer than 2,500 were made, and the real test case, the Model S, has only been out since 2012.
Also, whether Tesla is an “automaker” or a “technology company” has been blurred, observes the Motley Fool. If it’s an automaker – and now energy storage company – its price-to-sales ratio could mean its bubble factor is really scary.
The automotive industry normally trades with a 0.9 PS ratio said the writer poring over future earnings potential based on Tesla’s projections.
“Meaning that if Tesla were to have about $31 billion in sales in 2020, a 0.9 PS ratio would indicate a market cap close to $27.8 billion,” he said.
“However, if Tesla is considered a technology company, that sector trades with an average PS ratio of 3, and its hypothetical $31 billion in sales for 2020 could justify a market cap of roughly $90 billion — over three times today’s valuation,” he said adding that the truth is probably somewhere in the middle.
Recently Musk hinted by 2025 Tesla’s market cap could be on par with presently over $700 billion Apple which a few found to be outrageous, but so goes the entire Tesla story – pushing the limit and so far proving every naysayer wrong.
For now. Or forever?
Is Tesla indeed pregnant with potential or only bloated beyond all sense of proportion from irrational exuberance run amok?
Just like the “future” Tesla itself promises to make better, many have their viewpoints, but no one can indisputably answer that yet. Until then, this phenomenon is still surfing a big wave with no end in sight.