Recently, Tesla, the electric car company, set another record. However, instead of a speed record it was a financial one as investors bid Tesla’s stock above $310 per share. In the process, this valued the entire company at $51 billion—more than either GM or Ford. At a minimum, the growth of its stock price has been impressive—especially for a company that did not exist 15 years ago.
With all the Tesla excitement, you may be asking yourself: “Should I jump on board and invest?” Before taking the plunge, let me offer you some food for thought:
Tesla, with its iconic founder Elon Musk, has been revolutionary to the car business. The technology implemented by Tesla is high on “wow factor” - delivering performance straight out of a sci fi movie. According to a recent test by Motor Trend, the Tesla Model S - with new software updates - accelerated from 0 to 60 in 2.28 seconds. That makes it faster than a 949 horsepower Ferrari LaFerrari. This is even more impressive when one considers that the Model S is a 5,000 pound sedan!
However, as I counsel my students in the investment program at Texas Lutheran University, liking a product does not make it a good investment.
Last year, GM sold about 10 million vehicles while Ford delivered more than 6.6 million. For their efforts, they both produced revenue of more than $150 billion. Tesla sold 76,000 cars, only producing $7 billion in revenue.
More importantly, GM and Ford realized net income of $9.4 billion and $4.6 billion while Tesla lost $800 million. Yet despite high debt loads and losses, investors keep driving the stock higher.
I have not seen people fall in love with an “idea stock” like Tesla since the 2000 Tech Bubble.
Tesla obviously has its following. In fact, there is more demand than they can currently supply. However, meeting that demand requires raising large amounts of money. Over the past three years they have raised $3 billion to build factories. This year it looks like they will need to raise another $2 billion.
Tesla supporters, however, argue that this is okay because it is really a technology company. This is an important distinction because, over time, technology prices come down with innovation and scale. Whether it is broadband, servers or software, the more people you can sell to, the cheaper the cost per unit becomes. The question is : Is this sentiment true for Tesla?
Certainly, there are many technological components that Tesla makes. However, at the end of the day, they are still a manufacturing company. This requires a massive investment into plant, property and equipment. Unlike technology, plants, property and equipment wear out over time and are more expensive to replace due to inflation.
If you can set aside the capital requirements of Tesla, there is another flaw that must be addressed. Investors currently look at Tesla as if they will be the only auto maker delivering technologically advanced vehicles and will always maintain “first mover advantages.”
However, every other auto maker in the world is bearing down on them - and therein lies the real fear for investors. The competition is coming from traditional incumbents like Ford, GM, Volkswagen, Jaguar, Mercedes and BMW. However, start-ups like Lucid Motors are already producing an all-electric car capable of 217 mph!
Additionally, traditional automakers like Toyota are already pairing gas engines with electric motors - resulting in a highly hybrid vehicles. Porsche’s 918 hybrid delivers nearly 900 horsepower and an incredible 70 mpg!
The gas electric hybrids offer one other benefit—an extended driving range. The current Tesla models have a range of about 250 miles before needing a charge. That doesn’t even get me to Austin and back without a lengthy pit stop. The drive to Dallas with a Tesla? Out of the question.
My conclusion is that Tesla belongs in the “too hard” pile. Maybe they can maintain their lead over established car makers. Maybe they can raise enough money and grow into their extended valuation. But the company is far from a sure bet.
There are a lot of “maybe’s” with Tesla. As such, it is much easier for the intelligent investor to enjoy owning the car - just not the stock.