Electric Vehicle Revolution or Tesla “Tulip” Mania?

Tesla’s year-to-date share price has increased a whopping 600%, from $86.05 per share on January 2nd to $609.99 per share on December 11th, making Elon Musk the second richest person in the world, according to Forbes. One could call that a successful blast-off despite the pandemic’s impact on household income! As compared to 2010, the year of its initial public offering, the share price has increased almost 18,000%. The company’s market capitalization is over $578 billion, indicating that Tesla is worth more than twice the combined value of Volkswagen and Toyota, the world’s two largest automakers. Even the combined market capitalization of General Motors, Ford, Volkswagen, BMW, and Toyota cannot compete with Tesla.

What is driving this launch in Tesla’s share price? 

One possible factor could be its growing production and sales. In the first nine months of 2020, Tesla produced and sold 329,980 and 318,350 vehicles, respectively. Compared with the first nine months of 2019, this represents a production and sales growth rate of 27% and 25%. Tesla targets 500,000 vehicle sales in 2020, which means sales need to accelerate in the final quarter of the year. In contrast, Volkswagen and Toyota sold a combined 22 million vehicles in 2019. It would appear that Tesla’s lofty valuation is not justified based on its current vehicle production and sales. 

Alternatively, Tesla’s earnings may provide a clue. Tesla generated a loss of $69 million before interest and tax in 2019, but in the first nine months of 2020, it swung to a profit of $1.4 billion. This seems paltry compared with its market capitalization and the fact that Volkswagen and Toyota generated a combined profit before interest and tax of $40 billion in 2019. 

While Tesla’s car production, sales, and earnings are expected to continue to grow, it has a long way to go before reaching twice the vehicle sales and profits of Volkswagen and Toyota (44 million vehicles and $80 billion earnings before taxes). However, that is if it is valued like an automobile company. 

Perhaps Tesla should be valued like a technology company instead. The NYSE FANG Index (the acronym FANG representing technology companies Facebook, Amazon, Netflix, and Google) has been compared with Tesla and has an average price-to-earnings (PE) multiple of 53 times, according to Bloomberg. On the other hand, Tesla has a PE multiple of nearly 1,000 times. It would appear that Tesla’s PE multiple is also stretched compared with other technology companies. 

Conceivably, it is the vision Elon Musk has portrayed through the transformation of the old to the new, and the future is just within reach of Tesla’s hands, with driverless electric vehicles and chargers in every solar-paneled home, that have driven Tesla’s ever-rising share price. Whatever is driving the share price, one warning seems to stand out. It is Elon Musk’s warning to shareholders and investors that Tesla’s share price could “get crushed like a souffle under a sledgehammer” if expectations of the company are not met. 

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