To Buy Or Sell? The Rise & Fall & Rise Of Tesla Valuation
Generally, history shows an unwavering correlation between the unemployment rate and the stock market. However, that all changed last month when unemployment went “literally off the charts,” while the S&P turned in its best April numbers in decades. Sure, the stock market is not the economy, as only about half of people in the US own any stocks at all. The disconnect between the stock market and the real-world economy is nothing new. Many experts suggest that stocks rise and fall based on predictions of future economy trends, rather than the current state of the economy. If that is the case, then how do investors forecast the rise and fall of Tesla valuation against the backdrop of a pandemic?
Will the all-electric car company continue the path it’s been on over the last 2 years, in which some dips led to tremendous surges in Tesla valuation?
Financial theory states that the value of an investment is determined by the sum of the future cash flows the investment is expected to produce. Essential to this definition is the concept of financial discounting — the idea that a payment deferred into the future should be worth more than a payment made today in order to compensate the recipient for the costs and risks inherent in waiting.
How does a pandemic that closes businesses around the world alter this definition?
In March, 2020, Daniel Sparks of The Motley Fool stated, “Tesla is executing very well, with deliveries soaring and profitability improving. In addition, the automaker looks poised to grow its business rapidly yet again in 2020 — and 2021 looks promising as well.” But Sparks also reminded investors that Tesla’s “exciting growth prospects are already baked into this stock,” so that Tesla necessarily incorporated risks and wild volatility that “might be worthwhile over the long haul.”
Then again, a bear’s point of view on the same site this week contradicted a future-based Tesla valuation. Speaking to Musk’s own recent comment that the stock was overvalued, John Rosevear allowed that, while Tesla’s products are sleek and futuristic and run on advanced software, it is still a car company. He noted that it incurs currently high fixed costs, doesn’t generate typical high software profits, and is immersed in a cyclical/seasonal business. Rosevear gives the nod to Tesla valuation — for a 10 year out period.
So, what is it? Is Tesla a good short-term bet, better for the long haul, or destined to plunge?
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As in Literature, Life
In Shakespeare’s Romeo and Juliet, a plague-related series of misinformation leads to the suicides of both Romeo and Juliet. The plague causes everything in the Venetian society which had been known as normal to become disrupted, and the unexpected quarantine of Friar Laurence initiates Romeo’s misinterpretation that Juliet is dead instead of asleep. Each of the star-crossed lovers commits suicide.
A sense of extended miscommunications seems to have affected Tesla, too, during our own pandemic. CEO Elon Musk had announced that the Fremont, California factory would reopen, over the objections of Alameda County. Musk openly refuted the closure decree on Twitter, demanding that the government reinstate people’s “freedom” — the call came in reaction to the Gigafactory’s continued prohibition from production. CNBC reported Tesla planned to resume “limited operations” at its factory, bringing back about 30% of workers of the total regular employment of 10,000. Fremont mayor Lily Mei expressed concern about the potential economic implications of continuing the shelter-in-place order without provisions for manufacturers such as Tesla to resume. Since then, Musk has threatened to withdraw Tesla headquarters and factory production from California if case-by-case exceptions are not granted.
How will this dialogic exchange affect Tesla valuation? Meeting production quotas are essential to Tesla’s future stability. Employment in this case is key to production and profitability, to the point where Tesla has now filed a lawsuit to reopen the Fremont factory and just started operating again despite a county health official’s decision to hold off on a green light.
In a recent New York Times article, Gabriel Garcia Marquez’ son muses, “Not a day goes by that I don’t come across a reference to your novel Love in the Time of Cholera, or a riff on its title or to the insomnia pandemic in One Hundred Years of Solitude.” He reminisces how Garcia Marquez said once that what haunts us about epidemics is that they remind us of personal fate.
In 2019, Tesla grappled with logistics as it delivered cars to customers in more points around the world than ever before. Fast forward to Q1 2020. Tesla reported that it delivered approximately 88,400 vehicles in the first quarter of 2020. “For Q1, please keep in mind that the industry is always impacted by seasonality,” CFO Zachary Kirkhorn noted. He allowed that the coronavirus might cause temporary impacts, including a “one to a one-and-a-half week delay in the ramp of Shanghai-built Model 3 due to a government-required factory shutdown.”
Musk’s personal fate seems to be tied to his obdurate resilience. The Tesla Shanghai factory, which manufactures Model 3 sedans, returned to full force after only a slight interruption due to the novel coronavirus earlier this year. But then this week it was reported by the South China Morning Post that Tesla suspended production at its car plant on the outskirts of Shanghai following the 5-day workers’ Labor Day break. Tesla said in a statement that its Shanghai factory is conducting normal maintenance work and that the company made use of the May 1–5 holidays to conduct production-line adjustments. Unverified reports also claim that component shortages were at the core of the shutdown.
Tesla began delivering vehicles from its $2 billion Chinese gigafactory at the end of 2019, less than a year after breaking ground. Since then, the Model 3 has soared in popularity with Chinese consumers. Success depends in part on factors outside of the company’s control, so that Musk’s personal fate and the fate of his meticulously designed vertically integrated company seem to be interwoven — and these forces often try the patience of people like Musk.
Final Thoughts
To invest in Tesla is to buy into a dream. With an EV charging network, solar panel and solar roof tile manufacturing, battery energy storage from home to grid scale, and multiple production and assembly plants, Tesla is much more than a car company that designs, manufactures, and sells high-performance electric vehicles and electric vehicle powertrain components. Many of these production areas are relatively new to the US marketplace, so that skepticism, envy, and awe are common reactions to the Tesla story.
Kevin O’Leary, a star of ABC’s Shark Tank, admitted recently that he would not have funded him “if Elon Musk came into the Shark Tank and told me to invest in his electric car company before he started it.” Usually someone who only bets on current profit producers, O’Leary now believes, “Sometimes you have to think out of the box.”
Although the S&P has lost some slight value since the early part of 2020, Tesla shares have actually risen. Q2 is a very important period for Tesla, and the ability for Tesla to get its Fremont factory running again and back to full production is key to Q2 success. Investors should be assessing government proclamations about reopenings carefully, recognizing that what’s been the norm for stocks like Tesla is now aberrant as public health lies in the balance.
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