Article – Is Tesla’s Valuation Crazy?

Inês Esteves

Financial Markets 

Miguel Melo

Financial Markets

Inês Esteves

Financial Markets 

Miguel Melo

Financial Markets

Globalization, along with its socioeconomic and environmental effects, began reshaping our society centuries ago; but the changes in the world’s economic system are faster and more abrupt than we have ever seen before. Combining consumers’ high demand, scarcity of resources and excessive production levels, some of the most serious threats we face are climate change and environmental issues associated with this unsustainable rhythm.

Today’s society is becoming increasingly aware of the high levels of Co2 emissions and of the global warming phenomenon. This has forced global markets to take on different and innovative strategies, trying to respond to consumers’ rapidly changing wants and needs. It is in this context that an increase in electric vehicles (EVs) production and acquisition levels has been registered in the past few years, as ground-breaking vehicles that contribute to a lower level of Co2 emissions.

It is common knowledge that Tesla is one the most important car brands in the market of EVs, with a market share of 68% in the US. Despite this fact, the company’s valuation raises controversial opinions, which bring us the question: “is Tesla’s valuation crazy?”

This company was founded in 2003 by Martin Eberhard and Marc Tarpenning and was named after the inventor Nikola Tesla, who, among other findings, discovered the alternating current. The same way that Nikola, with his creations, took a world reliant on candles and led them to electricity, Tesla described its mission as to stop our dependency on fossil fuels and  allow us to rely on electric vehicles.

Elon Musk only came into the picture in 2004, as an early investor with a $6.5 million entry, which turned him into the company’s most important shareholder. Despite being the current face of the company, in retrospective he never intended to become the CEO, since he had his other project, SpaceX, already consuming a lot of his time.

It was only in 2008 that Tesla produced their first vehicle, the roadster, which was sold at over $100.000 and was heavily inspired on the tZero, a niche handmade electric car that Tesla used as the skeleton to test their technologies. In 2012, Tesla’s most known car was made, the model S, which was awarded the Motor Trend Car of the Year Award in 2013. During this time, the company was facing financial problems, for which reason both Apple and Google tried to buy the company. However, these offers were dismissed by Musk.

Since then, Tesla has released three more models (3, X and Y) and is planning to implement their technologies on other types of vehicles, like the cybertruck, a semi, a quad bike and a full electric car that is reported to cost only $25.000. Today, the company holds various patents, such as their electric car charging stations called Superchargers and their system for self-driving technology. Currently, their biggest project is the Giga Factory, designed to produce electric engines and more importantly lithium-ion batteries, probably the most important component to build an EV. For Tesla to achieve its goal of producing 500.000 cars per year, they would need the entire world’s supply of Lithium-ion batteries. Once finished, the factory is going to be – as the name suggests – immense, so much that the company claims that it will be the largest building in the entire world.

Despite Tesla’s exponential growth, experts still have different opinions on whether the company’s valuation is reasonable or not. On the one hand, EVs are widely seen as the future of cars and Tesla is an established leader in this industry, holding a very strong growth potential. This will become especially truer when the Giga Factory starts working at its full capacity and the company’s production levels skyrocket. Tesla’s growth rates have also been exceeding the analysts’ expectations, having registered a PEG ratio – an indicator of how expensive a stock is relative to its growth rate – lower than the Dow Jones Industrial Average.

On top of that, Tesla’s vehicles have major advantages over their competitors: all models have gotten almost perfect scores in security tests and there was an instance in which, during tests on the model S, it was not the car that broke but the crash-testing gear itself. Furthermore, Tesla has implemented on their cars what they call “Sentry Mode”, in which the car uses its cameras to monitor everything around in order to alert the owner of any obstacle approaching the vehicle. This, combined with the car constantly pinging its location to an app, undoubtedly makes Teslas some of the most difficult cars to steal. Tesla’s attention to technology, both in sensors and big screens, as well as some fun toys implemented into the software, has made so that the model S is considered the most advanced electric car on the market and, reportedly, a very enjoyable car to drive. It is especially famous for its semi-autonomous driving system, which has been passed on to the other models ever since.

On the other hand, some experts are sceptical about Tesla’s valuation. One argument being used is that 2020 was the first year in which the company made a profit – of around $721 million –, which was only possible due to $1.6 billion in regulatory credits, incentives given to zero emissions vehicle producers. Without this government help, Tesla’s costs would have exceeded their revenue from selling cars. There are two faces to this coin: Tesla is currently not able to sell enough cars to cover their costs since they are too high, but, especially with the construction of the Giga Factory, those expenses would diminish over time as their production capability increases.

Furthermore, the appearance of new competitors on the EV market such as Volkswagen, which plans to go fully electric until 2033, and Mercedes, which has recently announced an electric flagship model that directly competes with the model S, is a threat that puts Tesla’s dominance at stake. In fact, both Mercedes’ and Volkswagen’s investments put Tesla’s US EV market share of 68% in jeopardy, concerning the company’s investors. 

Regardless of differing opinions, the truth is, in November 2021, Tesla was worth $631 billion, more than the next seven largest car companies combined, while only employing 70.000 people. For comparison, Toyota had 360.000 employees and Volkswagen 670.000. Another metric that illustrates how successful this enterprise has become is its 7th place in the ranking of the world’s most valuable corporations by market cap in 2022.

To conclude, there is not an easy answer about Tesla being overvalued or not. Only time will tell if the efforts being put on expanding their business will pay off or if they will go down in history as plans that never left the drawing board.

 

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