Why Tesla Has Become An Investor’s Favourite

Due to its harnessing the electrical revolution, Tesla has surpassed General Motors and Ford to become the most valuable automotive stock in the US.


Elon Musk’s Tesla Motors Inc. (NASDAQ: TSLA) currently has far more buyers than sellers. What’s more, the company surpassed both General Motors and Ford last week to become the most valuable automaker in the United States. The Tesla stock is now trading at just over $300 per share (up from a previous 52-week low of $178), while General Motors is valued at about $34 per share (up from a 52-week low of just over $27), rendering the market capitalization of both companies at roughly $50 billion, as data from Bloomberg explicates:

teslas wild rise


Yet, these statistics are astonishing given that General Motors made approximately 10 million cars in 2016 while Tesla made a mere 76,000. Additionally, Ford acquired $11 billion in profit last year and General Motors made $9 billion, averaging $900 profit on every car, while Tesla lost $773 million, or $10,200 per car it manufactured, making both earnings and dividends an impossible feat for the company. Nevertheless, Tesla’s market capitalization has more than doubled over the past three years, suggesting that investors still hold Musk’s enterprise in seriously high regard.


So, as Tesla surges past its key competitors in terms of stock valuation, the question of what exactly makes the company so appealing arises, and the answer to such a query is relatively simple, especially if we consider investors stance on Tesla’s current rivals. The price-earnings ratio is generally accepted as a barometer of investors’ optimism in the future profit growth of a company, and the average P/E for the S&P 500 index is in the mid-20s. However, ratios for car companies such as Ford and General Motors lie as low as 10, indicating that investors are far from confident that their profits will last in the long term.
The value of Tesla, on the other hand, is less reflective of its past performance in a more traditional sense (earnings, dividends, profits, assets, and stable growth) and more indicative of future innovation as defined in a non-traditional way. Many pundits predict a surge in electrical car use over the next few years, on which Tesla is undoubtedly capitalising to a larger degree than any other auto company.  In this sense, Tesla has established itself as a “story stock”, a modern enterprise of future prosperity functioning under the eye of the “greatest living inventor” Elon Musk. Thus, as stock prices are driven by expectations for the future, Musk’s insight has proven to be more valuable than the strong financials of Tesla’s major competitors.


That is, Tesla offers innovation for the auto industry where rival carmakers have seemingly plateaued. This fact can be illuminated further if we consider the company in light of Apple’s success story. In 2007, when the iPhone first emerged on the market, it was in a position akin to Tesla, selling just 4 million units in a year when its competitor Nokia sold over 400 million. Nevertheless, fast-forward 10 years and Apple has become the world’s most valuable company, encompassing 20% of global smartphones sales, and the vast majority of the industry’s profits, while Nokia has traded in its mobile phone business altogether. Tesla’s secret, much like Apple, lies in its brand building, and Musk is capitalising on the electrical revolution in a way previously unparalleled, starting with the company’s push towards becoming a clean energy manufacturer via the acquisition of SolarCity last year.


Indeed, the company already manufactures the two most popular electric cars in the U.S., namely the Model S sedan and the Model X SUV. Likewise, it’s most promising up-and-coming product, the Model 3, a relatively affordable sedan (valued at roughly $35,000), is set to debut later this year. Moreover, Tesla maintains a solid tech advantage in its innovative battery technology. Facing a shortage of high-quality and affordable lithium-ion batteries required in the production of electric cars, Musk built his own proprietary “Gigafactory” in order to manufacture state-of-the-art batteries that could cement a permanent advantage for Tesla, the same way that Apple’s hardware has upheld the company reign over the smartphone market. Moreover, Musk is gearing up for the autonomous future by installing self-driving technology in all of his new vehicles, setting Tesla cars apart from other products on the market.


In this way, Musk stands as an exemplar that some can anticipate the future before others catch on, and as he said of his own brand “we’re trying to make an integrated product”, that is to say, a novel product. Thus, despite Tesla’s seemingly ludicrous stock valuation when compared with the statistical strength of its competitors, the company houses the most innovative technology and the strongest brand in the auto market’s largest growth sector, namely the electrical revolution. Therefore, if the electric industry continues to boom, as pundits predict it will, Tesla will only go from strength to strength.

(Kathleen Craig, Research)

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