Since the beginning of April, Tesla, Inc., a major U.S. automaker, energy storage company and solar panel manufacturer based in Palo Alto, California, has been setting new records in the financial markets. The recent slowdown in U.S. car sales has led investors to sell shares of major automakers such as General Motors and Ford. However, Tesla is the one exception to this. Tesla recently surpassed both car manufacturers in market capitalization, making the fledgling electric car startup one of the top three most valuable automakers in the United States.
The surge Tesla has experienced as of late may seem odd if when comparing the company with its competitors. Both GM and Ford have been in operation for more than 100 years. GM alone sold hundreds of thousands more vehicles in the first quarter of 2017 than Tesla did in the entire year of 2016. Both GM and Ford also had strong profits and nothing alarming on their balance sheets. Tesla, on the other hand, is fully focused on catering to a small segment of car manufacturing demand right now, the electric vehicle market, and as a result, has rarely made a profit. When compared to the two companies, it becomes evident how much more diversified their products are, how many more people they can sell their cars to and how much more money they must utilize in growth and expansion enterprises. Tesla, by comparison, does not possess the capital, resources, manpower or brand name that these companies have, and is yet valued almost as much.
There are numerous reasons why any sensible investor would be skeptical regarding purchasing any stock in Tesla. For example, Tesla is notorious for not turning a profit. The company finally turned a profit in 2016 after 14 quarters of losses and negative cash flows. In the future, the company’s costs are assumed to grow even more because of its business commitments. These include expanding the production facilities necessary to mass produce the Model 3 electric car, financing its recent acquisition of SolarCity Corp. and increasing the number of car deliveries to 500,000 in 2018. The SolarCity acquisition is of particular note because investors believe the former debt-ridden company will eat away at any capital Tesla manages to raise capital that could be used for other business ventures. Additionally, a Model S driver recently died via the use of Autopilot, Tesla’s semi-autonomous driving system, which casts doubt on the company’s ability to deliver on its promises and truly become the future of auto making, as it projects itself to be.
In the past, investors have been hesitant to invest in Tesla for these reasons, but the most important reason is probably the belief that the electric car company is overvalued compared to its competitors, like Chrysler, Ferrari and Fiat, which are established and profitable companies.
Despite all of this, as of press time, Tesla’s stock has risen by 40 percent, reaching its highest market capitalization in company history at $49 billion.
Given that the company rarely turns a profit and that its earnings tend to be volatile and unpredictable, it is difficult to make sense of why investors would continue to prop up its share price.
One explanation for it could be that Tesla offers something neither General Motors nor Ford can match: the potential for large amounts of growth.
“Investors want something that is going to go up in orders of magnitude in six months to six years, and Tesla is that story,” said Karl Brauer, a senior editor at Kelley Blue Book. “Nobody thinks Ford or GM is going to do that.” Elon Musk, Tesla’s chief executive, has done much to promote his company as a vehicle for growth, with some risks included, in contrast to the conventional wisdom that automaker stocks are reliable and safe investments. To do this, Musk seeks to make money through two of the most potentially industry-changing trends in the automaker business now: electric vehicles and automated driving.
To Wall Street and the broader financial markets, Tesla seems to be the only automaker that is really pushing the boundaries on new technology in its attempts to change the industry. Neither GM nor Ford seems to be at the forefront of either electric cars or automated driving like Tesla. As a result, if the new technology takes off, the two companies probably will not benefit as much as Tesla will; investors are willing to bet on the risk that Tesla is taking on, which may deliver explosive growth and, subsequently, explosive profits for aforementioned investors.
That very potential for growth which investors are betting on can be seen in Tesla’s new lineup. The automaker has stated that it would release an electric semi-truck in September, which would be followed up by a pickup truck model in about two years. Tesla is not only trying to perfect its electric car and automated driving technologies, but branch out into other markets besides cars. That potential is what investors see in the company.