Published on September 2nd, 2019 | by Carolyn Fortuna0
Why Is Tesla Underrated & Undervalued? (Don’t Drink The Kool-Aid)
September 2nd, 2019 by Carolyn Fortuna
Tesla is a name that many people — including a lot of us here at CleanTechnica — love. We admire the company’s quest to build a sustainable future for the planet. We get excited about the technological innovations within Tesla’s all-electric car catalog. The network of Superchargers and Gigafactories. The power it can deploy through its energy storage systems. The possibilities of a solar roof on every building. We who have followed the Tesla journey are intrigued by high-tech offshoots like SpaceX, Neuralink, and the Hyperloop. Is Tesla underrated? Yes! That is what we who follow all things Tesla often feel we need to shout.
Not everyone agrees with us, however.
Since a December high, the company’s market value has been cut nearly in half and has fallen below that of Ford and GM for the first time in 2 years. Tesla bond prices have weakened at the same time that the price to insure its debt against default has skyrocketed. To some people, these factors cause trepidation about Tesla’s fate.
Is a decade of evidence that Tesla can point the world toward renewable energy consumption enough to persuade the marketplace that Tesla is a viable long-term investment? Let’s track some of the Tesla legacy, hiccups, and potential to see.
Tesla’s Fluctuating Valuation
Tesla’s valuation has risen and fallen in significant gut-wrenching waves over the last year. A feeling of being immersed in turmoil is especially true for those who have attended closely to the company’s surges and plunges. Yet Tesla (TSLA) has always been, and likely will continue to be, a complicated, non-traditional, wholly-grown US company that releases ground-breaking technology innovations into the marketplace but also experiences deflating moments when experimentation doesn’t translate as quickly or efficiently as anticipated.
A business with multiple dimensions, like Tesla has, requires investors to be technologically savvy, long-range focused, or at least willing/able to acquiesce to periodic — and occasionally upsetting — fluctuations in stock worth.
Tesla’s market value is up more than 1,000% since it first sold stock in public markets in 2010. Investors who targeted the initial public offering’s price per share of $17 are smiling today. Nearly a decade later, a 2010 $1,000 investment in Tesla is worth more than $11,500 (calculated on August 16, 2019), according to CNBC. By comparison, a $1,000 investment in the S&P 500 would have earned a total return of nearly 220% over the same period — about a quarter of the Tesla whole.
Many Tesla advocates point to the media as the source of Tesla criticism. And there’s a big reason why Tesla is the target of such media vitriol: Tesla could realistically and completely shatter a century of top US automaker monopoly and dominance. That is hard for many to comprehend and accept, and it is an existential threat captured by CleanTechnica Director Zachary Shahan:
“A transition to electric cars threatens the ‘financial health’ of conventional auto companies. Many shareholders would be pissed to see so much investment in gasoline car technology ‘wasted.’ Executives who built their careers on engine expertise would become much less valuable. Automakers would have to shift much of their business strategy, operations, factories, and workers. They’d be tossing their highly valued patents & knowledge down the drain.”
As tried-and-true auto manufacturers begin to retool their plants toward battery power, they also have to learn to speak a new marketing language — high tech galleries replace a pushy and condescending sales force. Jargon switches from miles per gallon to miles of range. Connectivity is more important than cylinders. Sustainability is the new catch phrase.
Ah, this is Tesla territory.
Billionaire investor Ron Baron remains bullish on Tesla and CEO Elon Musk despite “some self-inflicted wounds” and shares of the company falling about 32% in 2019. The CEO and chief investment officer of Baron Capital told CNBC that Tesla’s ongoing expansion in China, its revenue growth, and its advancements in all-electric vehicle technologies are reasons for his continued support.
“Tesla has an opportunity,” he said, referring to its inherent advantage over most other automakers due to its advanced technology and the continual price decreases of batteries. Baron Capital owns more than 1.6 million shares of Tesla valued at $358 million.
SolarCity: R&D Isn’t Instant Gratification
In a recent Vanity Fair expose, author Bethany McLean declares, “It’s easier to fall in love with ideas than it is to look at reality.” In the article, she calls the Buffalo Gigafactory 2 “a high-stakes move to dominate America’s growing market for solar energy.” Acknowledging that “SolarCity professed to be focused on changing the world,” the narrative accuses the Tesla deal with New York state to build a factory in Buffalo to be “tainted by corruption from the very start.”
The SolarCity acquisition has drastically increased Tesla’s debt position, according to Motley Fool, as its market share has declined “meaningfully down” to 7% of the US residential solar market, and installations have declined about 85% since the acquisition.
Yet SolarCity and Gigafactory 2 will offer a full suite of energy products that incorporate solar, storage, and grid services. As the world’s only fully integrated sustainable energy company, it has encouraged businesses and individuals all along to think electric car + solar panels + battery storage as an integrated whole. An investor and media announcement a year ago spoke to Tesla Energy as in transition, recognizing tremendous demand but capacity for low Tesla solar volumes and cash flow expected in 2018.
That forecast has played out for 2018 and is now trickling into 2019. A long road of product development continues. Prospects for Tesla’s solar roof continue to look favorable, as the cost of the roof tiles will continue to fall as Tesla ramps up production. Of course, moving from current low production volumes to the time where Tesla manufactures 1,000 systems per week will create another frenzy reminiscent of the ramp up to the Model 3.
But isn’t it worth it to offer the masses access to solar power and energy independence?
The usual Tesla naysayers proclaim that, due to customer complaints, the Tesla brand is in a process of “destruction” that “is likely to lead to slower revenue growth going forward.” They also acknowledge Tesla’s 2019 record quarter, reputation as a car company that has provided fast repairs, generous gifts, and legendary customer service, and cars that “were miles ahead of the competition.”
But here’s the rub. The naysayers point to news outlets who received complaints from customers about long service times and problems with their vehicles. Remember when arbitrators, not news media, fielded customer concerns? Not any longer. Tesla stories make a lot of money for media outlets — and stories of dire circumstances sell more than complimentary Tesla analyses.
Indeed, our own CleanTechnica‘s Johnna Crider notes that headlines in the recent Vanity Fair article portraying Tesla were written with some form of psychological motivation, so that readers would want to click in response to “bold, identity-smearing claims.” Crider argues that real journalism “doesn’t attack without extreme care” for the validity of claims and their implications. “They do not emotionally manipulate readers or viewers in order to benefit specific friends or sources.”
Tesla's brand value shouldn't be overlooked. The power behind their brand is supported by a culture of innovation, a conscious ethical mission for clean energy and environment, and the media's constant recognition and attention of Tesla's story/battle.
— autonomyEV (@autonomyEV) August 29, 2019
Ask any soon-to-graduate college engineering major at which company she’d like to find employment. The answer is likely Tesla — due to brand recognition.
Tesla is most often seen as an auto company, but can also be classified as an energy company. The company expects energy storage revenues to equal auto revenues in the medium term. Additionally, Tesla’s opportunity in the fully autonomous mobility space is arguably underrated by investors and the public. “We believe investors underappreciate / undervalue Tesla’s Autonomy business,” Morgan Stanley analyst Adam Jonas said in a note to clients in June.
Tesla shares had slid over the previous months, including a 6% drop that triggered another Jonas comment: “Tesla is not really seen as a growth story.” Then again, the stock rebounded afterward, and Jonas gave investors a list of the parts of Tesla he thinks are underrated, with autonomous driving technology foregrounded.
Even more significantly, the potential of the Model 3 on Tesla’s overall valuation is all-too-often minimized. The Model 3 is starting to make the Tesla brand ubiquitous on US streets.
Since Tesla is a fast-growing innovator with a premium brand and ambitious plans for growth, current production or current profits are simply not rational valuation measures. Instead, investors should look at where they assume Tesla will be in 5 years’ time and then act accordingly. Investors should stop drinking the anti-Tesla media Kool-Aid that’s underwritten by legacy US automakers and, instead, focus on the sustainable future of tomorrow toward which Tesla is leading us.
Disclaimer: The author holds 5 shares of Tesla stock.