Traditional car makers have been disrupted and Tesla is the disrupter. The trouble is that Tesla presents difficulties for those investors or analysts whose job it is to value companies.
They are naturally nervous when a company’s share price quadruples in nine months.
All understand the pivot from petrol to electric is coming but they don’t know when. So, how they value the incumbent petrol car manufacturers in the phase-down period is the first hurdle.
A recent Bloomberg article said there are plans to ban petrol cars in 12 major European capital cities, including Paris, Madrid and Copenhagen as well as London and Rome, starting as early as 2030.
Britain has taken it a step further, announcing this week it will ban the sale of new petrol and diesel cars from 2035, five years earlier than previously planned.
Investors and analysts also need to make an educated guess about Tesla’s future production numbers beyond next year. Tesla supporters are expecting production to ramp up to 1 million or even 2 million over the next couple of years.
Detractors will point to the fact that Tesla’s founder Elon Musk is a wild card who many don’t trust to deliver on his promises.
To be fair, history has demonstrated that Musk has come up short on some production and sales targets and encountered manufacturing problems in the past.
Thus short sellers (investors that take bets on a stock price falling) have previously triumphed.
But betting against the now relentless trend towards electric vehicles has become a way riskier proposition.
This is not to suggest that Tesla’s shares won’t be volatile. They almost certainly will And it would be rash for funds managers to wade into the stock after its share price doubled over a four-week period.
But what is becoming increasingly evident is that the risks associated with Tesla are reducing.
While it produced an overall loss in 2019, its earnings rose to $US105 million ($155 million) in the final quarter.
Add to that the successful ramp up of Tesla’s Chinese factory, the fact that it is poised to produce 500,000 cars this year, introduce a more affordable SUV and report its first full-year profit.
Tesla disparagers, who in the past have been part of the chorus that sings “the company makes no money”, have gone a little quiet.
They have also conveniently ignored the fact that since January 2018, the company has produced a combined $US4.5 billion in operating cash flow.
Tesla has been investing these funds in new manufacturing facilities – like many of the other disrupters whose valuations are based on revenue multiples rather than profit.
Those who point to the fact that other car makers are starting to make electric cars to compete with Tesla ignore the fact that Musk has the lead, has superior technology and has the brand that is associated with electric vehicles.
Ultimately, valuing Tesla is a bit of a crapshoot and the share price will be volatile, but the trend towards electric vehicles that will power Tesla’s ongoing performance is clear and established.
Elizabeth Knight comments on companies, markets and the economy.