I cannot speak for the rest of the $58.78 billion market cap of Tesla [TSLA], but from my perspective as a tiny, tiny, tiny shareholder and as someone who has obsessively covered Tesla professionally for several years, I’ve got a few thoughts on why it is Tesla has surpassed GM and Ford to become the most valuable American automaker. Let’s look at this in 7 parts.
The World Will Electrify
There’s no stopping the transportation trend toward electrification. Just like cell phones couldn’t be stopped, smartphones couldn’t be stopped, computers couldn’t be stopped, laptops couldn’t be stopped, tablets couldn’t be stopped, LED TVs couldn’t be stopped, dishwashers couldn’t be stopped, and The Simpsons couldn’t be stopped, electric vehicles cannot be stopped. (I mean, yes, they do have brakes and they will stop like other cars — better, even — but electric vehicle sales growth won’t be stopped.)
When you accept this baseline point, which I think many in the industry now accept, the next big question is, which automakers will gain market share from the transition and which will lose market share? Ford and GM? Hmm, we’ll see. Tesla? Ha, it will certainly benefit!
But … Profits?
Critical factor number two: can Tesla make money? For many Tesla bulls, this has never been a serious question. Tesla could have sat on the Model S and made profits, same with Model S + X. The reason it didn’t is that it wanted to pumped as much money as possible, and more, into scaling up production and selling mass-market cars. It finally got the Model 3 into mass production and Tesla showed that it could make profits on the cars … but then those profits went away in Q1 2019. Again, long-term bulls were not very concerned, because we expected demand for Tesla’s products to grow over time, expected ongoing improvements to capital efficiency to help with profits, and saw Q1 as a unique timeframe. Still, those less bullish were concerned.
No profits in Q2 spooked more people (including influential people working for institutional investors) and pushed them out of the stock. This was surely amplified since it was on the back of Elon saying in 2018 that Tesla would be profitable every quarter going forward, except in special circumstances. Elon’s profitability forecasts were seen as not super trustworthy as a result. Q1 and Q2 might have had special circumstances, but if so, why did Elon make those comments about ongoing profitability toward the end of 2018?
I think many people were indeed scared about Tesla’s ability to make profits after the Q1 and Q2 results, but they suddenly got more bullish on Tesla when the company reported a Q3 profit this past week.
But don’t Ford and GM make more in profits, don’t they? Yeah, sure, of course — but the question for those companies is about how long they can do so if the world is moving toward electrification. Will they be making profits in a year or three, or will they be showing losses as they lose market share to Tesla and other EV leaders? We really don’t know, but it seems the investment world is not super bullish on their long-term prospects compared to Tesla’s. (At the moment, Ford’s market cap is more than $24 billion lower than Tesla’s and GM’s market cap is more than $6 billion lower than Tesla’s.)
Fundamental to profits and long-term growth, however, is demand. How much consumer demand is there for Tesla vehicles, really? This has been the giant question of 2019. In the midst of and following the huge growth in deliveries Tesla showed at the end of 2018, people were wondering how many of those were crazy enthusiasts who had gotten in line for a Tesla years prior and waited so patiently for the Model 3 to arrive. And, more importantly, how many new buyers would find their way to a Model 3.
The first matter to consider on this topic is long-term demand. Extreme bulls expect enormous, earth-shattering demand for Tesla vehicles in the long term. Extreme bears thought the demand would dry up in 2019 following deliveries to early reservation holders and fans — and never return. And then there are people in between, who are more open to swinging their investment strategy or position on Tesla.
Aside from long-term demand, the bigger question for many of us was what mid-term demand would be. Even if we felt that word of mouth would sell the heck out of the Model 3 in the long term, we wondered if there would be a lull for months or a year or more while people slowly learned about the car, experienced it a few times, and were eventually on the market to buy a car again. Strong deliveries and guidance for Q2 helped to build some confidence, but there were still a lot of cars being delivered to overseas markets and the Standard Range Plus had not been available for very long, so must have had some pent-up demand Tesla was still working through. However, Tesla’s Q3 numbers and guidance going into Q4 were strong — very strong — giving investors ample confidence in consumer demand again. Combine that with quarterly profits and you get a big boom.
The big long-term play that Tesla keeps reiterating and supreme bulls are betting on is self-driving tech and robotaxis. Many people are certain this is years or even decades away. Tesla’s timeline is blasphemy to them. Others are optimistic but cautious. And then there are those of us who expect Tesla to more or less nail its timeline, which means cars that are essentially full-self-driving capable (with close human oversight) in 2–3 months, cars that are masters of self-driving in a couple of years, and regulatory approval of robotaxis in … well, there are no solid guesses on that final part.
While there may not yet be big money betting on Tesla because of this topic, Tesla’s release of Smart Summon must have inspired some confidence in the firm, and in Elon’s predictions about where Tesla is headed. Promises of a Full Self Driving rollout in a few months, not that long off, provide another shot of excitement and bullishness.
We’ll see what happens when Tesla does indeed roll out the ability to have your car drive from parking space to parking space. Hmm…
Something that doesn’t get talked about as much these days is Tesla’s battery leadership. A core underlying bulk of an electric car is its batteries. The biggest challenge to make electric cars cost-competitive with gasoline and diesel cars was (for decades) bringing down the cost of batteries. Tesla has done that. Others are working on it.
Tesla Gigafactory 1 was a wild and crazy idea. Until it wasn’t. It was a massive investment that was burning cash and was going to lead to Tesla’s emphatic and blazing collapse. Until it didn’t. Instead of the doom and gloom around Tesla’s big battery bet, Tesla did exactly what it said it was going to do — scale up production, bring down costs, and produce low-cost, high-performance, long-range batteries that would enable the Tesla Model 3, the world’s first truly mass-market electric car.
But investment is not about today and yesterday, it’s about tomorrow. The thing that many people realize now is that Tesla leads on battery innovation, battery production, battery economies of scale, vertical integration (which seems to only be increasing), and battery supplier priority — because suppliers know that they will have strong long-term demand with Tesla.
Why does no other automaker have a mass-market electric car on the market today? Physically speaking, the #1 reason is, It’s the batteries, stupid! (That’s a reference to a famous political phrase from the 1990s that a top Bill Clinton adviser used — “It’s the economy, stupid!” I’m not actually calling you stupid.)
Inherent in a few of these topics is innovation. Elon Musk, Jerome Guillen, and Tesla as a whole are obsessed with innovation. They demand and implement innovation on a daily basis, for anything from the vehicles’s seat production to Solarglass Roof tiles. This obsession with product innovation, innovation to improve capital efficiency, and innovation in thought and business management keeps pushing Tesla further and further ahead of the competition. Some investors are taking notice.
Elon Musk may not care for the term and may not focus much on “branding,” but I don’t know of a better way to communicate this important topic. Other options are “identity” or “image,” but “brand” seems most complete. Tesla’s brand has become something of fairytales and hero movies. Tesla is a beast of a brand and I’m not sure there’s a stronger one today in terms of long-term influence. It is the coolest brand in cars, in tech, and I think in general. Even kids love Teslas, including kids who are a decade or so away from getting a driver’s license (if they ever decide to get one) — a sign you’re headed somewhere good.
While certain grumpy old men may not like Tesla, and may have some burning shorts they are not happy about this week, Tesla is growing a stronger and stronger brand as the world’s EV leader day by day, hour by hour, minute by minute. Every second of the day, people are out there talking up their Teslas to friends, family members, and strangers on the street who had never given the company much thought. When electric vehicles have 50% automobile market share, who do you think will benefit the most — Ford, GM, or Tesla?
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