By the middle of last year, Tesla’s losses were mounting, sales weren’t enough to cover expenses, and big debt repayments were looming.
The situation was so bad that an influential Wall Street analyst raised the possibility that Tesla could not pay its bills and would have to be restructured financially.
Since then, the shares of electric car and solar panel makers have skyrocketed, increasing by around 700% this year alone. On Monday morning, he joined the prestigious S&P 500 index with a market value of over $ 600 billion. This is the biggest addition in the history of the index.
Tesla’s rise to become the world’s most valuable automaker and rank among America’s 10 largest companies is a surprising achievement given that the company lost $ 1.1 billion in the first half of 2019. The increase is so astounding that even CEO Elon Musk said the shares are overpriced.
Global sales hit a record close to 140,000 vehicles in the third quarter, debt was reduced thanks to the proceeds of the stock offerings, and the Musk company is building two huge factories to make new vehicles and meet demand.
Extremely loyal followers invested billions and Musk became the third richest man in the world, according to Forbes.
Tesla and Musk for years spawned strong divisions on Wall Street, and the rise from near collapse to astronomical valuation is no exception.
Many of the investors who drove Tesla up in value are individuals who bought the stock after a five-to-one split lowering the price of a single share earlier this year.
The Bulls are betting heavily on the future of the company and point to five consecutive profitable quarters, rising sales, and world leading battery and software technology to justify their bets.
Bears, including short sellers who have lost millions of bets against the action, are still predicting a meltdown. They cite limited markets for high-priced Tesla vehicles, repeated quality issues, huge capital costs for factories, and growing competition from conventional automakers.
Tesla was among the biggest percentages of decline among the 500 companies traded on the index, falling 5.8% to $ 654.58 on Monday. Shares hit an all-time high on Friday.
New York investment manager Ark Invest has always predicted Tesla’s meteoric rise.
Ark claims Tesla has a technological advantage over other automakers in terms of performance and range of its vehicles. And if Musk delivers on his promise to cut battery costs, demand for electric vehicles will rise, with Tesla uniquely positioned to respond at scale.
“If you look at a company like Tesla, it’s sort of the only one making that curve, because it’s the biggest producer of batteries,” analyst Tasha Keeney said.
Tesla’s cheapest vehicle, the Model 3, attracts buyers from major brands with a base price of $ 37,990, Keeney said. This can quickly exceed $ 40,000 or even $ 50,000 with options. Tesla’s next Angular Cybertruck pickup, starting at $ 39,900, will fetch a mass market price on par with other pickups, Keeney said. And Musk has promised breakthroughs in the battery that will bring a more affordable $ 25,000 vehicle, she said.
Ark sees Tesla shares rise to $ 1,400 by 2024. The investment firm also sees Tesla’s earning potential by one day using its vehicles to run a profitable autonomous robotic taxi service.
Tesla, Keeney said, is building a huge database of the experiences of cars currently on the roads, which gives it an edge over its competition, including Alphabet Inc’s Waymo, considered the technology leader. autonomous driving.
All this does not make sense to the bears, who view Tesla’s valuation as absurdly high.
On paper, Tesla is worth more than Toyota, Volkswagen, General Motors, Ford, Fiat Chrysler, Nissan and Daimler combined.
“Tesla shares are in our opinion, and by virtually all conventional measures, not only overvalued, but dramatically,” wrote Ryan Brinkman, analyst at JP Morgan, in a note to investors. He has a one-year price target of $ 90 on the stock.
Demand for Tesla shares is expected to be strong on Monday, as institutional investors buy to make their portfolios mirror the S&P 500. But Brinkman recommends against doing so.
Tesla Inc’s valuation is more than double that of Toyota Motor Corp, which typically sells more than 10 million vehicles globally each year. Last year, Tesla sold 367,500 units. Toyota’s profit of $ 4.5 billion in July-September was more than six times greater than Tesla’s net profit during its five-quarter earnings streak.
On a earnings conference call in November, Toyota chairman Akio Toyoda said Tesla was not yet a true automaker.
“You can use the kitchen and chef analogy,” Toyoda said. “They haven’t created a real business or a real world yet, but they’re trying to trade the recipes. And the chef says, well, our recipe is going to become the standard of the world in the future. I think it’s kind of a business that they have, ”he said.
Tesla, which disbanded its media relations office this year, did not respond to requests for comment.
One of Tesla’s challenges is to profit from vehicle sales. The company would lose money without payments from other automakers who buy regulatory credits to make up for failure to meet government pollution standards.
Erik Gordon, professor of business and law at the University of Michigan, notes that revenue from these credits will drop as other automakers roll out their own electric vehicles, he said.
“At some point, Tesla has to prove itself as a business and not as a stock market phenomenon,” Gordon said.
To do this, Tesla must sell more vehicles. The Model 3 was initially billed as a $ 35,000 vehicle for the masses, but it doesn’t make any money at that price, Gordon said. The Cybertruck is Tesla’s best chance to go beyond a niche seller, as people will pay more for vans, he says.
But the three Detroit automakers have announced plans for their own electric pickup trucks and will defend their main source of profit.
“They will fight to the death for it,” Gordon said.