Tesla continues to transform the auto market and entrepreneurs have taken notice. The innovative automotive company has seen its stock increase 700 percent in just one year. Today, the auto industry is worth billions of dollars and continues to grow because of these key players: Fiat Chrysler, Ford, General Motors, and now, Tesla.
Tesla started out with high-end sedans and today, the car company is known for its sleek, modern electric models that are energy-efficient and self-driving. Their latest automotive invention, the Cybertruck, looks just as futuristic as it sounds. Imagine a Mars Rover or a Transformer. It doesn’t look like your average, heavy-duty pickup truck. So, that’s the best way to describe Tesla, they aren’t your average car dealership. They are a game-changer when it comes to renewable energy vehicles, and within the next 20 years, most cars will be electric.
Ford, Chevy, and other big names in the car business want to keep up with Tesla and sell cars with renewable energy, and entrepreneurs who follow the auto market want to join the industry as well.
The Tale of Tesla and The Brains Behind It
So, how did Tesla become the billion-dollar, innovative automotive company it is today? It started in 2003 when two guys, Martin Eberhard and Marc Tarpenning, noticed General Motors Company, home of Buick, Cadillac, GMC, and Chevrolet, recalled its first electric vehicle, the General Motors EV1. They crushed all-electric cars in a junkyard, despite protests from the general public and customers who already owned the vehicles. EV1 owners even held a candlelight vigil to protest the death of their cars. That’s when Tesla Motors was born, but the company needed a smart investor to help them get the wheels turning on their business.
Elon Musk is an entrepreneur, businessman, and tech genius who founded Paypal, SpaceX and made Tesla the automotive leader it is today. Musk is incredibly smart and his fascination with technology started at a young age. At 17, he moved from South Africa to Canada to attend university and avoid mandatory military service. A couple of years later, he left Canada to study business and physics at the University of Pennsylvania. Then, he pursued a Ph.D. in energy physics at Stanford University but dropped out after two days to join the big Internet boom.
Musk took an entrepreneurial risk to launch his first company, Zip2 Corporation and it was incredibly successful. He sold it to Compaq Computer Corporation and made $307 million. With all this money, Musk decided to create Paypal, and at 22 years old, he earned his first billion-dollar paycheck after Paypal was acquired by eBay for $1.5 billion in stock.
His other business ventures include SpaceX, an aerospace manufacturer, and space transportation services company, and Tesla. He saw big car companies killed off their electric vehicle programs and Tesla was their one shot to create an EV-only company, but it was a huge risk to take. Today, it has a wide range of electric car models and Musk has a net worth of around $23.6 billion. And, he hasn’t taken a single paycheck from Tesla. In fact, Musk will be paid nothing for the next 10 years until the company reaches $100 billion. If this happens, Musk will officially be the richest person in the world!
Tesla Stock Is Constantly Moving. So, What is Tesla’s Business Strategy?
Tesla’s stock is unique from other automotive businesses because it is always going up and down. But, why is that? There are many factors, but Tesla’s innovative business model is different from traditional car dealerships, and this can possibly contribute to the fluctuation of their stock. Their business model is a three-pronged approach:
- Direct sales through showrooms, online, and urban centers, such as shopping malls.
- Service centers where Tesla owners can visit the company’s technicians, called Tesla Rangers, to fix any issues they have with their vehicles. Many issues can be fixed wirelessly, so owners don’t need to physically bring the car in.
- Tesla’s supercharger networks include stations nationwide where owners can charge their car for free and it only takes about 30 minutes to charge up.
So, What’s the Difference between Tesla vs. A Car Dealership?
Tesla’s approach to car sales is different than how cars were sold in the old days. Ford, Chevy, all the big names in the car industry usually sell their vehicles at a car dealership, not online, and this is still true today. Tesla also wants control in the sales of their vehicles, whereas car dealerships serve as the middle man for automotive manufacturers who want to sell their cars.
Apple Talks with Tesla About Buyout
It was later revealed that Tesla founder Elon Musk once reportedly tried to get Apple CEO Tim Cook to buy the electric car company when it was bleeding cash, but the offer was ultimately turned down.
“During the darkest days of the Model 3 program, I reached out to Tim Cook to discuss the possibility of Apple acquiring Tesla (for 1/10 of our current value),” Musk tweeted. “He refused to take the meeting.”
Since then, Tesla’s stock has surged more than 650% since the onset of the coronavirus pandemic in March 2020, taking the company value to over $600 billion, making it the most valued automaker in the entire world and the 7th largest company in the United States by market cap.
Short Tesla? Depends Who You Ask
Although TSLA has experienced a meteoric rise based on positive investor and consumer sentiment, there is worry amongst experts that the stock is greatly overvalued. On December 21st, JP Morgan issued an advisory against TSLA calling the stock “dramatically” overvalued. While some experts have remained resolute in their faith of the emerging EV market, decline in price of electric batteries, and increasing regulation of combustion engines, JP Morgan expressed doubt.
“We do not believe Tesla will grow to approximate 2x the combined size of Toyota & VW at the same margin (or 1⁄2 the combined size at 4x the margin, or any of the other combinations of volume and margin that could be reverse engineered” to justify the current valuation.”
Quite simply, JP Morgan and other banks simply do not believe that Tesla can sell enough cars to justify a market cap that is exponentially greater than all of its counterparts combined. TSLA currently sits at $660/share, where it goes from there is up for interpretation.
The Bullish Outlook On Tesla
Tesla’s immense success in the automotive industry comes as no surprise given Musk’s visionary role as leader of the company. Like Steve Jobs before him, Musk has brought forth fresh ideas to the field of technology that have changed the way manufacturers and consumers view the world. Tesla is one of several projects that Musk has helped grow into a worthwhile investment.
The company’s growth is not just based on a hopeful view for the future either. Tesla’s sales grew 61 percent from 2016 to 2019 and the car company now dominates the EV sector. Many experts predict that Tesla will own 29 percent of the EV market share for the fiscal year 2020.
Furthermore, there is a growing demand from progressive-minded countries like Denmark, Sweden, and Norway for more electric vehicles on the road and the elimination of internal combustion vehicles altogether.
The growing concern of climate change has also shifted the public mindset towards electric vehicles. As such, the demand for electric vehicles will only rise and Tesla remains well-positioned by offering the best technology and by some estimates, best designed vehicles. If Tesla remains at the forefront of EV technology, expect the company to hit a trillion dollar market cap.
The Bearish Outlook On Tesla
Tesla’s market cap currently sits at a level that could buy the nine largest car companies. If one assumes that valuation should be weighted heavily on sales, Tesla would need to sell 1oo times as many cars as it currently sells. Tesla barely cracked the million mark in cars sold for the fiscal year 2020 while the other nine manufacturers combined to sell over 50 million vehicles in that same time period.
Although Tesla turned profitable in 2020, the car-maker’s gross margins are par with competitors like VW and Toyota whose valuations are far lower. Tesla’s performance over the decade would not only have to completely obliterate Amazon’s 2010 performance, but be historic.
Analysts at Research Affiliates explained in their study:
“Suppose Tesla sales grow by 50% a year over the next 10 years. That means its sales would need to increase 58 times over anticipated 2020 sales. The company’s current margin is not high enough to justify the 100 times multiplier over the rest of the industry. Suppose that in 2030 Tesla has a 10% net margin, higher than any existing auto company and 47% higher than its most recent 6.8% net margin. Nope, still not good enough. A 10% net margin would make Tesla “only” 85 times larger than it is today, not 121 times larger. Such high growth persisting over a full decade is implausible. Amazon’s growth rate over the last 3, 5, and 10 years has been in the high 20s, nowhere near 50% a year.”
If the assumptions are correct, Tesla is undoubtedly a bubble stock – growing based on an outlook for the future that is simply impossible. How far Tesla slips from its lofty $600 plus price is open to debate.
EV Is On The Horizon
Whether Tesla remains a key player in the EV industry is up for debate, but electric batteries are here to stay. With a growing concern over rising temperatures, pollution, and climate change, the need for alternative power has only increased. Furthermore, oil will eventually run out rendering combustion engines obsolete. As the world continues to shift, car manufacturers will have to either adapt or die.