Opinion: Why Tesla shares are a wild ride
There are reasons to be sceptical about the world's most valuable car company, says FT Alphaville's Jamie Powell, as he answers readers' questions from behind the wheel of a Model X
Produced and edited by Joe Sinclair; filmed by Tom Hannen and Joe Sinclair
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When it comes to Tesla you're either a fanatic or a sceptic. So, before the world went into lockdown I took a Model X out for a spin to see what the hype was all about and to also answer some reader questions. I had no clue then that the shares were about to rise and rise from already pretty ridiculous levels.
It's turned out to be a bit of an egg in the face for myself and the company's long suffering short-sellers. By market value now Tesla is the most valuable car company in the world. It's so highly valued, in fact, if you combine the value of all the other US automakers together it still eclipses them by far.
So, why am I a sceptic? Well the reasons now are really the same they were in February. The share price may have changed, but really, the company or the story hasn't.
It's a sexy company. It's got a larger than life CEO. It's growing really fast. And of course, anything that grows really fast ends up having a lot of problems or a lot of growing pains, whether it be their ability to generate sustainable profits, to generate cash flow, to produce a mass market car which fulfils the needs of the mass market consumer or the claims of its chief executive Elon Musk, very promotional CEO, makes big promises that he often struggles to fulfil.
And when you come across these kind of characters, it's good to be slightly sceptical of all the promises they make, particularly when the company itself isn't very transparent.
Let's be honest here. Not only do they make, on the face it, a great product. This is an amazing car to drive. It's really smooth. It feels like the future. Elon Musk really kickstarted the electric car revolution. Before the Model S, which came out in the early 2010s, electric cars always felt like a sacrifice.
You were sacrificing performance. You were sacrificing style. But the Model S, in a way, really proved to consumers that, hey, we can have electric cars. They don't have to be a little bugs. We can drive them on the weekend. We can show them off to our friends. And they can get better performance than in a normal internal combustion engine car.
And the other thing I think Tesla should be really praised for is that the company has taken on a huge amount of risk. It's very refreshing to have a CEO who has kind of basically singlehandedly changed the face of his industry. Whoa. Whoops.
So one of the questions we got was: are Tesla cars the new iPhone, i.e, are they going to be so disruptive to the industry, they're so far advanced that they're going to put all of the competitors out of business and dominate the market? It's pretty hard to think of another product in the history of capitalism like the iPhone.
It has mass market volumes with luxury margins. And that's what's propelled Apple's valuation to the $1tn mark and above it sits at today. With the Tesla you've got to say the margins are similar to the auto manufacturers. Tesla are aiming for 25 per cent, but they're around 18 per cent, 19 per cent at the moment.
And in terms of volumes, Tesla is still a very, very small producer. It hasn't really gone mass market to any real degree. The early adopters, those who want to go electric, have taken them up. But whether they get into the $2m to $3m car sales, which they require to be in that mass market bracket, while still maintaining the margin profile that they have today is the big question.
It's also important to think like how important having a smartphone is to everyday life. I doubt many people watching this video can imagine not having one in their pocket. Can the same be said for a Tesla?
Sure, the car might feel like an iPhone, like it's super futuristic, it's very nicely designed, it's really enjoyable to drive. But whether that translates into a kind of Apple level stratospheric valuation, I think it really remains to be seen. And we should talk about the valuation.
When we recorded this video back in February, Tesla was the second most valuable car company in the world by market capitalisation, just behind Toyota. Now, it's the most valuable. So what's going on here?
Tesla has basically disconnected from being looked at as a car company. It's now really being valued as a kind of software proposition. And actually, this is what Elon Musk has been pitching to the market. In the capital raise they did last spring Elon Musk went on a conference call and said, we will have a million robo taxis on the road this year, pending regulation.
And that means your Tesla, when you're at work, when you leave it in your driveway, will go out, start driving itself around, pick people up, and you'll get a split of that fare. And Tesla will get the rest of it. Now, this is kind of, quite frankly, absurd. Tesla has good self-driving technology. It's on par with its competition, whether it be BMW, or Mercedes, or General Motors.
But they are still a long way off coming up with the technology to really have a car literally drive itself around. And just for reference, in 2015, Waymo, which is Google's self-driving arm, they had a car go around Austin, Texas, with someone who is blind in the back with no one driving in the front seat to look after them. And that was in 2015.
So, I doubt there's any Tesla investor today who would put a blindfold on and be left to drive around a city alone. And I think that says a lot about where Tesla is competitively versus the other auto pilot companies. Another thing you hear about from fans and investors in Tesla, and they say, look, Amazon made losses for ages, because it had to to establish a big market share in online retailer. And Tesla is no different with the electric car market.
Amazon made losses. But because it was able to get money up front, get money from customers quickly upfront, and then pay suppliers much later, they generated a lot of excess cash they could use to reinvest back in the business. Tesla don't have the same dominance over their supply chain.
Is Tesla a battery company or a car company? If you just take a step back and just look at Tesla's financials, it's pretty impossible not to come to the conclusion it is a car company. It has the same margins. It has the same investment needs. The products follow the same cycle as a car company. They will need to start updating their old products, like the Model X, and like the Model S, very soon to keep up with their competitors.
Panasonic makes the batteries, and Tesla uses them. Now what Tesla has found is proven to be really good at is getting more range out of a battery than anyone else. And that at the moment is really their secret sauce. An advantage now, yes, an advantage now will be an advantage in the future, maybe. But...
Lucid Motors, an upstart competitor from the US, just debuted a car with a 500-mile range. And the Model X only has a range of 340 miles. Tesla's most expensive luxury car, the Model S, if you go for the best option, can only go to 400 miles. That's without mentioning that when Tesla's cars are really put out on the road and put to their paces, the real world range often comes in below 20 per cent to 30 per cent.
If it looks like a car company, if it walks like a car company, if it has the same financials, it's pretty hard not to come to the conclusion that this is a car company with a technology component to the side of it, and not the other way around.
So way back when, I had a question from an investor about the competition. If you follow Tesla closely you'll know Norway is a really important market for it, just because the country has had very nice electric vehicles subsidies for the past decades. And in 2019, it actually accounts for 5 per cent of Tesla's entire sales. But something's changed this year. And that change is competition.
So far through to August, the Model 3's market share has been just 4 per cent in the electrical vehicle space. And what's replaced it? A whole bunch of cars from the car companies you might not expect to make electric cars. At the top we've got a car from Audi, followed closely by the Volkswagon e-Golf, and below that offerings from Renault, Hyundai, and even Jaguar. Meanwhile, the high end Model S and X have been outsold by Porsche's new Taycan.
It's not just Norway either. Travel a few hundred miles south to Germany and you'll see the pattern repeat itself. In the first quarter of 2019 Tesla had a 21 per cent electric car market share. That's now dropped to 10 per cent. Now a counter argument here might be Europe's a small market. China and US is what really matters for Tesla, especially with this new factory in China. And to an extent, they'd be correct.
But if you look at the growth rates for electric vehicles globally you'll see Europe is currently the hottest market in the world. Depending on which country you look at the market's growing anywhere between 60 per cent and 90 per cent, mainly thanks to some very generous subsidies. And within this environment Tesla is losing market share.
I think this is the kind of first sign we're really seeing of this long threat of the auto manufacturers really coming to eat Tesla's lunch. Most people when they pick a car they're not going... they don't want something new, whizzy, and new and a flash. They want something reliable. And that is what the mass consumer market is about it's about. It's about a car which you can go get your groceries and pick up the kids from school.
And given the kind of terrible problems people have been having with Teslas in terms of service quality, and breakdowns, and very high insurance rates, I think we might see a real change in the competitive landscape in 2020.
If I was going to be a winner.
So really, what does this all mean for the share price? To be honest with you, I don't know. I thought it was wildly overvalued last year. And now it's worth 10 times as much.
In fact, there are trading days at the moment where its market value is swinging by more than its market capitalisation was when I thought it was overvalued. So it's got really out of hand. The only thing I am certain about is that Tesla's share price is going to continue to be a pretty wild ride, no matter what side of the trade you're on.