So it’s time to talk about Tesla. Again. I did so addressing its shaky finances in 2019, and I wrote about a first glance of the Model 3 in Q4 2018. As in 2019, the reason this time is mainly financial. This is obviously a car blog, not a financial one, but then again, under all the bells and whistles, Tesla is a car company. And in that sense, when its stock price values it at $300bn or 13 times Ford as it did earlier in July at a stock price of around $1750 per share, you should notice (it’s come back to $1417 at the time of writing, so we’re probably down to something like 11-12 times Ford now). The first reflex is of course to think something major has happened, but that’s not the case. Tesla’s more than tripled stock price since it dip under $400 earlier this year could be called the definition of momentum for future financial text books. Congratulations to all that were part of the ride. I wasn’t.
I’ll happily spare you all the explanations of why the stock has rallied and in any case, the stock price is a poor reflection of a company’s quality. You could probably argue that it’s especially poor in the case of Tesla. Not that things haven’t improved for the California-based car maker. They just turned in their fourth quarterly profit in a row, including $104m in the very lacklustre second quarter 2020. That said, on one hand profits are rather modest and on the other they’re always a bit clouded, including various subsidies and tax breaks. But the trend looks positive, better than in the poor scale of the diagram below.
Tesla is also delivering more cars. Elon Musk has set his target at 500.000 cars in 2020 which doesn’t seem fully unrealistic as Tesla has delivered more than 100.000 cars per quarter in the last quarters. It’s not all rosy though, as the Model 3 now makes up over 80% of all deliveries. Total deliveries of Models S and X have fallen from 28.000 in Q4 -17 to 12.000 in Q1 -20, i.e. less than 10% of all deliveries. This basically means that going forward (and until the cyber truck, that however looks to be a few years away), Tesla profits are riding on the Model 3 and the new Model Y.
There are however problems as well. Quite a lot of them. One is the EV market in total which both in Europe and the US is growing but is still very small. In Europe’s leading car market Germany, EV’s now make up around 3.7% of new car sales. In the US where EV’s is basically synonymous with Tesla, the share is below 3% in all states but California and Washington DC. In most of them, it’s below 1%.
Another problem for Tesla is that the big car brands have woken up and as the EV market grows, competition will only intensify. Were the big guys late to the game, as is so often claimed? Not sure if you look at the above stats of the total EV market. They’re anyway here now and you can already see the effects in Germany where Tesla’s trend is negative since a while back. 4367 Model 3’s were sold in the first six months of 2020, but VW and Renault sold more than 7.000 each of the E-Golf and the Zoe, and the Model 3 will probably also be overtaken by the VW E-Up and the Audi E-tron still this year. An E-Golf or a Zoe are not comparable to the Model 3, but neither is an E-tron – in the other direction. The EV mass market will no doubt be in Zoe land, but the premium market will increasingly move from Tesla towards Audi, Mercedes and other large brands. This is not a big surprise. Tesla was never a premium product in quality – only in pricing.
This brings us back to the stock price, because of course, Tesla doesn’t need to dominate the world. It’s already turning a small profit on the current production of around 400.000 cars per year, and if it can increase that by a few ‘000s, it would look pretty good. That would however also be necessary for coming necessary capital expenditure. In any case, it’s not enough to put a value on the company at 13 times Ford, who by the way sold 1.13 million cars worldwide in Q1 -20, a 20% drop on the previous quarter.
I have no clue where Tesla’s stock price is going next, but personally I stay away from emotionally driven companies, and this is a prime one in that regard. It may be useful to remember that in the dot.com boom and bust 20 years ago, a young online retailer called Amazon lost 94% of its share value before it turned things around and moved to dominate the world. That’s not something Tesla will ever repeat, but irrespective of the stock price, I wish Tesla all the best and think it’s amazing what they’ve managed to achieve. My guess is however that when we look back at this in five years, if Tesla is still around, it will be selling almost all its cars in the US where the EV market share will still be in single-digit territory.