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Tesla and the dreamer’s paradox

Despite being plagued by a series of production delays and cash-flow problems, this car manufacturer is still managing to entice the market.

The troublemaker of the car industry is starting to make a habit of this. On Wednesday 3 January, Elon Musk announced further production delays for Tesla’s Model 3 electric car – a car that is considered crucial to the company’s future. The news would have caused any other car manufacturer’s share price to plummet... but not Tesla. On Wall Street, the company’s stock only shed 2% in the wake of the press conference and then rebounded to normal levels.

The California-based company is creating a curious paradoxical effect on the stock market. Despite successive delays, a sustained lack of profitability and the fact that the company is haemorrhaging cash, Tesla is still highly favoured by investors. Its market capitalisation stands at more than $50 billion. Tesla is also more highly sought after than renowned car manufacturers like Ford and Renault, who are in-profit and produce 6.4 and 3 million cars every year respectively, compared to Tesla’s output of 76’230 cars in 2016.

And the repeated warnings issued by analysts do not seem to dampen the enthusiasm for the brand. “In the long term, we still think that the capital intensity of the Tesla model will produce a lower return on investment vis-à-vis the top car manufacturers, ” wrote Philippe Houchois in a note published in November. The analyst from Jefferies – a global investment bank – recommends selling your positions in Tesla, as the pessimistic price target values the stock at $240, versus its current value of $350.

 

The car manufacturer’s value is based more on belief than economic logic. Some people even talk about it like a religion

 

How can this difference be explained ? In a report published in early January, the digital innovation analysis firm Faber Novel gave one possible explanation : in addition to pure economic data, “ Tesla is all about a vision. The company isn’t just a commercial venture – it’s a philosophy. With its vision for a better world, Tesla attracts, captivates and involves all of its stakeholders : investors, customers, employees, the media and believers alike. This ambitious vision is the engine driving the Tesla adventure. ”

In other words, the car manufacturer’s value is based more on belief than economic logic. Some people even talk about it like a religion. Some of Tesla’s most ardent supporters, such as Adam Jonas, analyst for Morgan Stanley, believe that Elon Musk’s company “is not just a car manufacturer” but a concept that will really establish itself on the market, in the same way that the iPhone turned the GSM market upside down.

The sceptics, on the other hand, claim that all the car manufacturers are now getting into the electric vehicle market and that Tesla’s window of opportunity has closed. How, then, can the Palo Alto-based company continue to survive amidst the deluge of new electric models produced by prestigious car companies such as Mercedes, VW, Audi, Volvo and BMW? And which of these manufacturers represents serious competition for Tesla?

Faced with this challenge, Tesla seems to prefer to remove any doubts. In April 2017, Elon Musk decided to send a daring tweet to his 12 million followers: “Tesla’s stock is obviously high based on past and present, but low if you believe in Tesla’s future.” Nevertheless, as Christopher Nicolas Dembik – head of macroeconomic analysis at Saxo Bank – points out, “appetite for a certain stock is often accompanied by a poor understanding of the risks”.

 

“Appetite for a certain stock is often accompanied by a poor understanding of the risks”

Christopher Nicolas Dembik of Saxo Bank

 

And there are certainly risks. In its 15-year history, Tesla has never made a profit and has been bailed out eight times in the last seven years by its shareholders. In 2015 and 2016, the company made losses of $888 million and $675 million respectively. The accounting situation does not appear to be sorting itself out: production of the Model 3, in Musk’s own words, is “a nightmare” and analysts are sceptical about the objectives announced by the company. They believe that Tesla will be forced to recapitalise or borrow to increase its production.

Rather than focusing on this problem, Tesla’s CEO prefers to increase the number of projects. In addition to announcing the delays hitting the production of the Model 3, Musk also presented a prototype for a futuristic lorry. This is an expensive distraction for the company and its CEO, who, in addition to wanting to revolutionise the automotive sector, aims to go to Mars (SpaceX) and construct a futuristic high-speed train (Hyperloop) that would run between New York and Washington. Watch out for overconfidence though... “When investors expect significant growth, a high valuation is not out of the ordinary,” explains Yann Olivier, portfolio manager at Aesope. “But when companies are happy to sell a dream that is disconnected from all economic reality, then we are talking about a bubble.”

 
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