Tesla shares are up an incredible 500 percent over the past year. Its current market value is $278 billion, surpassing Toyota to become the most valuable automaker in the world. This despite never having had a profitable year. Tesla sells fully electric vehicles and energy storage systems. All models of Tesla vehicles come with self-driving capability, although currently disabled. Impressively, the Model S can go from zero to 100 km/h in 2.3 seconds; faster than the Porsche Panamera.
The company name pays tribute to Nikola Tesla, the genius Serbian inventor. Although founded by engineers Martin Eberhard and Marc Tarpenning, Tesla is synonymous with and heavily reliant on its eccentric CEO Elon Musk. Musk has taken Tesla, PayPal, SpaceX and Solar City to valuations exceeding $1 billion. His audacious moves have created billions for shareholders. Musk’s visionary flair is indisputable, but impulsive tweets in 2018 about taking Tesla private and claiming that he had secured funding caused both Tesla and Musk to be fined $20 million.
While Tesla’s survival was questionable about one year ago, recent quarterly results imply profitability and continued growth in cars sold towards the middle of this decade. Since its inception in 2003, the company has come a long way to make its cars more affordable and accessible. It has created a strong brand without advertising and enjoys first-mover advantage.
Tesla is one of the only large and liquid investment options for investors who wish to benefit purely from the electric vehicle theme, which has been attracting a great amount of investor interest and goes a long way in explaining its recent exponential share price gains. Tesla, however, looks dangerously and unsustainably overpriced, with a valuation that is divorced from its fundamentals. Even though it is now the most valuable car company in the world by market value, Toyota generates more than ten times Tesla’s revenue and cash flow. Ford has pointed out that revenue attributable solely to their pickup trucks generated $17 billion more in revenue last year than all of Tesla’s products combined.
Tesla’s value is based on its potential to earn massive profits and sustain stellar growth in future. It currently sells about 400,000 cars per annum and will have to grow annual vehicle deliveries to at least 3 – 4 million over the next decade to justify its current valuation. For this to happen, electric vehicles will need to become more affordable and Tesla would have to maintain its electric vehicle market share of 20 percent globally and 80 percent in the United States. Even with its technological edge, it is unlikely in the longer term given the fierce competition that is emerging. There is very little margin of safety for investors who buy Tesla shares today. Failure to meet performance expectations and anything less than perfect execution may result in the share price tumbling back to earth.
Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria.