Tesla: A Changing World

Tesla (TSLA) continues to struggle with Model 3 production. The company went through similar machinations with the Roadster, Model S and Model X, though this time things were supposed to be different. Why does the company continue to command a premium valuation considering their ongoing difficulties? Investors in the company - both long and short - would be wise to understand this valuation dynamic and how it is likely to change going forward as more electric cars, from more manufacturers enter the market.

Exceptionally Valued

Tesla is an exceptional company. The market assigns a value to Tesla similar to that of General Motors (GM) though Tesla only makes a tiny fraction of the cars GM does. Tesla isn"t making money (overall) at the moment, and while their reported manufacturing margins have been high compared to those of many legacy carmakers, those margins alone are insufficient to justify the high premium enjoyed by Tesla shares.

A purely economic analysis of the company based on reported results cannot justify the current share price. Many analysts have performed this kind of evaluation of Tesla again and again going back all the way to Tesla"s IPO. Currently on Seeking Alpha, analyst EnerTuition is looking to see a $ 1 billion loss for Tesla in Q1, David Trainer suggests TSLA holders bail because the company will never earn enough to justify its price, and reliably pessimistic (and short) Montana Skeptic points us to another analyst"s record loss prediction.

The simple fact is that Tesla shares have never been worth the price based on the company"s financials. The market has always, and continues to factor future expectations into the price of Tesla shares. For investors, this means that understanding Tesla"s financials alone is not enough. Sound investment decisions about Tesla also require an assessment of how the market will view the company and its vision for an electric vehicle future going forward. This kind of market sentiment assessment is by its nature qualitative, not quantitative.

This article explores something even fuzzier - the overall circumstances against which Tesla"s vision will be seen and assessed. I believe it is important to look at this topic now because the world of players and rules surrounding the company is changing and this will likely change the way the market looks at Tesla. Investors who continue to view Tesla as playing in a world without significant competition are likely to reach different assessments of coming market sentiment and perhaps suffer as a result.

Tesla - What Success Looks Like

To be successful enough to justify the current market valuation, Tesla must grow to many time its current size, perhaps 50-100 times current unit volume. This implies that the vision of a successful Tesla is of a carmaker producing 5 million to 10 million cars and trucks annually within a decade or so. A successful vision of Tesla growth might look something like this.

Presented in isolation, this kind of growth for Tesla appears impressive indeed. And, it really doesn"t matter too much whether peak of the curve is 5 million or 20 million units. This is a story of exponential growth and many investors will want to be along for the ride. There are and will always be naysayers who believe the company will implode, collapse or retire to bankruptcy court, but those folks don"t buy the stock. What matters is that the kind of growth scenarios that inspire investors to purchase Tesla shares look something like this, and presented in isolation, such growth projections look spectacular.

The change that is coming for investor expectation is significant BEV offerings emerging from large legacy carmakers. Volkswagen (OTCPK:VLKAY) for instance has made major commitments to new battery-powered models and recently concluded $ 25 billion in battery supply contracts. General Motors has publicly committed to 100% electric cars, with 20 new models by 2023. Audi, BMW (OTCPK:BMWYY), Hyundai (OTCPK:HYMTF), Jaguar (NYSE:TTM), Kia (OTCPK:KIMTF) and Nissan (OTCPK:NSANY) are introducing new or updated electric cars to the US this year.

Improved battery manufacturing processes are lowering battery cost and in some cases circumventing supply barriers such as that of limited cobalt supplies. This means that quite soon, Tesla will not be operating, or viewed by investors, in the same degree of isolation as in the past. The following graph illustrates why this matters.

In this chart, the same Tesla growth is shown as in the first chart. Notice how this growth that looked so spectacular when viewed in isolation looks more subdued in the context of a market with other players. These two charts show exactly the same, arguably spectacular, Tesla growth scenario, but the "gut level" impact is very different when the context changes from Tesla operating in isolation to participating in a larger market with other players. And, this difference in perception is, in the case of Tesla, quite important. Because as pointed out earlier, the price of the company"s shares reflects market perception more than it does Tesla"s hard operating results.

Neither of these charts represent deep analysis, nor should they be taken as prediction of specific outcomes either for Tesla or for the car market generally. They are intended only to illustrate how differently Tesla"s "story" is likely to be perceived as the context surrounding the company changes and more electric cars from more carmakers enter the marketplace.

We should perhaps remind ourselves that Tesla can become very, very successful without making all, or even most of, the world"s cars. Tesla does not need to drive GM or Volkswagen or Toyota (NYSE:TM) or any other carmaker out of business to handsomely reward shareholders. For all the company"s trials and tribulations, Tesla continues to move ahead. There is plenty of room in the car market to allow Tesla to succeed in the end.

Tesla investors in the near to medium term will look more to perceptions about how the company fits into the overall car market than to company performance and vision seen in isolation. This is a different investor viewpoint from the one that has driven Tesla"s share price in the past.

It may be better for the stock price, or it may be the opposite. That will depend most likely on what specific news about the company emerges over time. Investors should be attuned to the idea that the market will begin to view Tesla news from a different point of view than in the past. Because, investors who see things most clearly are often the ones who come out on top.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TSLA over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: These writings about the technical aspects of Tesla, electric cars,components, supply chain and the like are intended to stimulate awareness and discussion of these issues. Investors should view my work in this light and seek other competent technical advice on the subject issues before making investment decisions.

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