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David Olive: Tesla’s stock market valuation is preposterous. What attracts the faithful to this ridiculously-priced stock?

David Olive: Tesla’s stock market valuation is preposterous. What attracts the faithful to this ridiculously-priced stock?
Business
The pioneering electric-vehicle (EV) maker itself is real enough. Tesla made a record half million vehicles last year. Its 2020 revenues of $38 billion have more than doubled in the past three years.

The Palo Alto, Calif., company also celebrated its first annual profit in 2020. And the firm can boast that it has about $23 billion in cash to finance its ambitious expansion plans.

There’s just one big problem. Tesla’s stock-market valuation is preposterous.

Last year, amid the investor mania for seemingly everything, Tesla stock skyrocketed in value by 743 per cent.

With total shareholder value of about $990 billion by early January, Tesla became one of the most valuable companies that ever existed. Its shareholder value eclipsed the combined value of the world’s six biggest automakers by revenue.

This year, Tesla stock has dropped in value by about one-third, part of a wider rout of tech stocks on fears of resurgent inflation and investor migration to infrastructure stocks.

But even with its current market cap of $670 billion, Tesla is still the world’s most valuable automaker by far, and one of the most overvalued major companies on the planet.

Tesla’s 2020 profit of $872 million is microscopic against that gigantic market cap.

Tesla shares trade at a trailing price-earnings multiple of 141. By comparison, shares of Apple Inc., with staggering 2020 profits of $69.4 billion (U.S.), are priced at a mere 28 times earnings. And shares of Microsoft Corp., which earned $54 billion last year, are trading at just 33 times earnings.

Stocks are priced according to the market’s view of a company’s future earnings power.

It is doubtful in the extreme that Tesla will ever generate profits to justify its ludicrous current shareholder value. More on why that is later.

So, what attracts the Tesla investor faithful to this ridiculously priced stock?

To start, Tesla has always billed itself as a tech company, not a metal-bashing automaker. And tech stocks command premium prices.

More recently, the ranks of eco-sensitive investors have expanded with the advent of ESG institutional investors (for environmental, social and corporate governance). And most ESG managers regard a holding in Tesla as compulsory.

Finally, the market often overrates companies headed by larger-than-life CEOs.

Musk, a recent guest host on “Saturday Night Live,” is a visionary with about 34 million followers on Twitter. They are continually updated on Musk’s many side ventures, including rocket-ship launches (SpaceX), driverless cars, and a proposed hyperloop that would transport people in solar-powered pods.

Musk is a skilled impresario. He understands that to keep a high-flying stock aloft, it’s necessary to keep the faithful supplied with new reasons to believe.

So, Tesla is vowing to double production this year, to between 840,000 and one million vehicles, a seeming impossibility but a captivating prospect.

Tesla hasn’t got the glitches out of its assembly plants in Fremont, Calif., and Shanghai. Yet Musk has announced bold plans for more assembly plants, in Berlin (Tesla’s first in Europe) and Austin, Tex., also by year end.

And Tesla has a garage full of prototypes of “robotaxis” and other futuristic inventions to unveil whenever investor sentiment appears to sag.

One way to confuse people about something is to throw up a lot of dust around it. So, let’s clear away the dust for a moment.

Tesla remains a boutique auto brand, accounting for just 0.6 per cent of global auto production.

Tesla has never made a profit from cars in its 17-year existence.

Without the crutch of $1.9 billion in regulatory emissions credits sold to rival automakers last year, 2020 would have marked Tesla’s 17th straight year of annual losses.

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Last year, Tesla also took in a stunning $14.5 billion in stock-offering proceeds, a time-honoured Silicon Valley practice that covers a multitude of setbacks. Tesla did so just weeks after Musk boasted that the company had no need of additional capital.

The problem here is obvious. When the Tesla investor delusion fades, the market for Tesla’s habitual stock offerings will dry up.

And Tesla’s sales of lucrative regulatory emissions credits will also dwindle as its rivals convert their lineups to EVs and no longer need emissions credits.

Meanwhile, Tesla hasn’t mastered quality manufacturing. The Tesla brand ranks a miserable 25th out of 26 auto brands in Consumer Reports’ latest annual auto-quality survey.

This year, Tesla has been forced to recall vehicles with faulty parts in the U.S. and Europe. And Chinese regulators are probing quality problems at one of Tesla’s two Shanghai assembly plants.

Videos of angry Tesla owners protesting at the latest Shanghai auto show over Tesla battery fires, unintended acceleration, and other problems have gone viral. Tesla’s China sales plunged by an estimated 60 per cent last month from the March level.

China, the world’s biggest EV market, underlies the faith of many Tesla true believers. China is Tesla’s fastest-growing market, and its second largest. In 2020, Tesla’s China sales accounted for about 30 per cent of the firm’s global output.

But China is a tough market for Tesla. General Motors Co. outsells Tesla six to one in China, a market with scores of EV makers, many of them state supported.

When it comes to rivals, Tesla’s competition is almost every automaker on Earth. Most of the major automakers already have EVs that are credible competitors to Tesla’s mere four models. And most plan to gradually transition to EVs exclusively, as GM vowed to do in January. Tesla has lately been forced to slash prices in a bid to stanch market-share losses to competing EVs.

Do Tesla investors imagine that Tesla can withstand the looming onslaught of EVs from a global industry that produces about 85 million vehicles a year?

As Bloomberg analyst Kevin Tynan puts it, either the traditional automakers, with “their century worth of global engineering, production, distribution and after-sales capabilities” will see their stock-market valuations rise to that of Tesla, or Tesla’s stock price will collapse to reflect the firm’s actual value.

Tesla’s one-third stock drop this year has cost investors about $363 billion. That should be warning enough to Tesla investors about worse to come.

Musk had an exit strategy at PayPal Holdings Inc., the online payments firm he cofounded. He cashed in his PayPal stake to finance the launch of Tesla. But cashing out doesn’t work here because there are no buyers for a wildly overpriced Tesla.

Tesla’s most likely fate is to eventually become part of the brand family of one of the industry’s major automakers.

But they won’t be paying anything close to Tesla’s current market cap of $670 billion for the Tesla name.
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