U.S. Markets closed

The futuristic vision that's driven Tesla's value above $30 billion

Michael Santoli
Michael Santoli
The futuristic vision that's driven Tesla's value above $30 billion

By the end of this decade, new Teslas will be more popular than Volvos, and Tesla Motors Inc. (TSLA) will be more profitable than Chrysler.

Drivers of the sleek plug-in electric cars will be able to go cross-country at no cost, thanks to a network of Supercharger stations  and battery costs might even improve enough for Teslas to be less expensive to own, in total, than a gasoline car.

This, at least, is the ambitious vision of our automotive future that's captivating Wall Street and has propelled Tesla’s stock-market value above $30 billion, before the company has sold even 30,000 cars in a year. Tesla now has more than half the market value of General Motors Corp. (GM), which this year will sell more than 9 million vehicles.

A polarizing company

The combination of an impressive product line, dramatic hype about a post-petroleum economy, the lionization of capitalist hero and founder Elon Musk and the lack of real profits to date has made Tesla a matter of fierce disagreement among investors and consumers alike.

The stock is up an astonishing 770% over the past two years, to a price above $257. And yet skeptics keep gunning for Tesla, with bets by short sellers that the stock will fall now accounting for more than 25% of Tesla’s available shares.

As the stock’s phenomenal performance implies, the optimists have been winning the contest lately, although not in a shutout: Tesla shares have undergone two declines of more than 30% in the past year, before recovering to new highs.

While some dismiss the market’s enthusiasm as irrational boosterism and bubbly momentum, the company’s knack for exceeding expectations, ecstatic consumer response and rapid expansion in production capacity are winning the benefit of the doubt, even from veteran car-industry analysts.

The linchpin expectation of the Tesla partisans is that the company will attain its audacious goal of selling 500,000 vehicles by the year 2020. That’s more than Volvo, which has made cars since 1927, sells globally in a year. Hitting 500,000 units would mean Tesla would sell one of every 167 new cars in 2020, based on industry sales-volume forecasts of 83.5 million units.

Gilad Shany, an analyst at big Tesla shareholder Baron Funds, calls the company a “once in a lifetime disruptor of the car industry,” and says that selling half a million cars in 2020 will translate into $25 billion in sales and $5 billion in profit – the latter estimate roughly in line with analysts’ cash-flow forecasts for that year.

The company last year sold 22,000 of its flagship Model S sedans, which list for $85,000. This year it's on track to exceed 35,000 units, and is about to introduce its Model X crossover-SUV, which will be followed by the Model 3 – the mass-market $35,000 car that those 2020 sales volumes largely depend on.

Musk is pushing the company to expand at a furious pace, and in Tesla’s July 31 quarterly report promised it would churn out its zero-emission electric missiles at a 100,000-unit annualized pace by the end of 2015.

Every step of the way, Tesla’s production capacity has been exceeded by the growth in new orders, validating consumer excitement for the cars and making engineering and logistics the company’s main challenge. Tesla now has an order backlog equivalent to 30 weeks worth of current production.

Obsessive scrutiny

While the grand vision for Tesla stretches out years, the company is obsessively scrutinized for its incremental progress every three months.

Morgan Stanley analyst Adam Jonas, who has a $320 price target on the stock, believes the Model X will cheer fans and investors as its mid-2015 release approaches.

“Tesla is trying very hard to contain its excitement ahead of the Model X launch … but this is increasingly difficult to do,” he wrote to clients last week. “We’d be disappointed if the Model X did not sweep every major Car of the Year award on offer by the automotive media.”

Tesla is shrewdly and aggressively running a fevered competition among five Western states to become the site of its planned $5 billion-plus Gigafactory battery plant. This plant, to be operated in conjunction with Panasonic, is crucial to driving battery costs lower, the key variable in determining the competitiveness of electric vehicles for the long term.

The ultra-optimists among Tesla’s fans see the company becoming a huge player as a third-party battery supplier and enabler of power storage for the energy grid, but neither is central to Tesla’s strategy yet.

Musk, of course, is not wholly focused on building a great new major car company. He perceives harnessing electric power as a vital imperative for the human race and not just his business. Carrying the species beyond hydrocarbon reliance is also behind his Solar City Corp. (SCTY) solar-panel firm. Taking humans beyond the planet in routine fashion is the goal of Musk’s SpaceX, which just raised private funds at a $10 billion valuation.

Together, the three companies in Musk’s futuristic corporate empire are valued at nearly $50 billion.

On its second-quarter conference call with analysts, the 43-year old CEO forecast another 30% reduction in battery costs, in addition to the 30% it's already anticipating by 2017.

Deutsche Bank analyst Rod Lache says he is “increasingly convinced that Tesla is on the cusp of a very significant development,” and that in the 2020 to 2025 period Tesla’s vehicles “will reach cost parity” versus comparable gasoline-powered cars.

(Tesla has an advantage in this cost race: Global emissions standards being phased in will steadily increase the production cost of gasoline engines in the coming decade.)

This could mean, according to Lache, that should Tesla reach 500,000 deliveries in 2020, investors then will be anticipating "a further doubling of volume over the subsequent five years." Heady stuff.

Big risks

Of course, enormous risks litter the road ahead for Tesla. The cars remain expensive to buy and are untested over an extended service life, and transactions are reliant on government credits and subsidies for green vehicles.

Teslas still have relatively limited driving range, requiring a charge every 150 to 200 miles, a major resistance point for many potential customers. Gasoline prices, meantime, have moderated, and the cost per mile driven for gasoline cars continues to fall.

Sure, the Supercharging centers the company has created are free for Tesla owners to use, but the broader charging-station infrastructure is lacking.

Numerous states prohibit direct sales of new cars outside dealer networks, crimping markets for Tesla’s dealer-skirting approach.

Competition will only stiffen as the no-gasoline car market grows in size and legitimacy. BMW and Honda are seasoned and committed electric-vehicle makers. And some believe hydrogen fuel cells will emerge as a better solution than batteries for cars.

And the reviews can always turn hostile. Consumer Reports, which famously gave the Model S 99 out of 100 on initial review, cited some nagging quality issues in an updated report this month. In response, the company initiated an "infinite mile" eight-year warranty.

With a stock valued at 80-times forecast 2015 earnings based on faith in a payoff in a half-dozen years, any of these could easily cause another nasty spinout for Tesla investors. 

The true believers would treat such a spill as a gift of a buying opportunity, the dug-in skeptics as an overdue comeuppance – which makes Tesla one of the more fascinating fear-and-greed stories in the market.