Tesla's stock has been on a tear.
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On Monday the carmaker's market cap exceeded that of General Motors: $51 billion. This is about $15 billion more than where Tesla was valued for much of 2016. And it's about $7 billion more than Ford.
None of this makes any sense. Tesla's business fundamentals haven't changed substantially since late last year, and its first-quarter deliveries — 25,000 vehicles — set a sales pace for 2017 that will see Tesla produce about only 100,000 cars in 2017, an improvement of 20,000 over 2016.
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One explanation for Tesla's most recent surge could be that short sellers (traders who had bet against Tesla) are finally throwing in the towel and covering their positions. That, by definition, would have them buying the shares.
This does make sense, as Tesla is one of the most heavily shorted stocks on Wall Street, and those short sellers have been suffering lately. The financial-analytics firm S3 Partners estimates that the shorts have lost $3.2 billion this year.
But given that Tesla was already heavily overvalued based on its core business — building and selling luxury electric cars — and that it has only a few billion dollars of assets to claim, it would be logical for investors to start discounting the value of Tesla's future.
Now that it's on a massive upward trajectory, its first-quarter 2017 earnings loom as an opportunity for a more rational outlook on the company's valuation to take hold and could put new investors at real risk of being flushed out.
An alarming increase
But the manner in which Tesla spikes in the absence of real news and in defiance of the numerous challenges it faces over the next year becomes more alarming as the company's paper value climbs ever higher. Tesla bulls argue that Elon Musk's enterprise will be legitimately bigger than GM's and Ford's in the future because electric transportation will displace gas-powered mobility over the next few decades and Tesla has the best brand and largest head start.
Bears insist that Tesla is a sucker's game and a capital-obliteration scheme. They point to the company's inability to make money a decade into its existence, and to Musk's steady refusal to consolidate the business, preferring to push forward and, for example, launch a mass-market electric car (the Model 3) later this year. Or create an energy-storage business. Or buy the struggling, debt-laden SolarCity for over $2 billion. If the stock indeed represents a claim on future cash flows, they point out that those future cash flows could be zero.
Both angles overlook the company's most glaring problem, which is that Tesla is a carmaker that still isn't very good at making cars. The cars that it does make are impressive (at Business Insider, we've test-driven them all). But Musk expects to be delivering 500,000 vehicles by 2018 and 1 million by 2020 — the former represents a fivefold increase over projected 2017 production, and the latter would require Tesla to either double the capacity of its Fremont factory or build a new plant.
Viewed in this context, Tesla trading at $311 is flatly insane. Even if it were to sell 1 million vehicles by 2020, most of them would be lower-margin small cars. The most profitable market segments — big SUVs and large pickup trucks — would still be owned by the three Detroit automakers (GM, Ford, Fiat Chrysler Automobiles) that the markets have decided are worth less in the future than Musk's operation.
The situation with Tesla's valuation will probably get worse before it gets rational.
The rally that began early this year occurred after another money-losing fourth quarter. Anyone who is a hardcore Tesla short simply needs to take solace in that Tesla's stock chart has always looked like a roller coaster; shares always go down, typically taking billions in market cap with them. (GM, Ford, and FCA charts, by contrast, look boring.)
A larger question is why Tesla has in the past three months so wildly outperformed even growth-driven stock indexes, such as the Nasdaq. Yes, the markets overall have enjoyed a rally since President Donald Trump won the election. But Tesla has enjoyed a mega-rally — one that's actually out of character with what shares generally do at the beginning of a year, as investors recalibrate their expectations and, if they've owned Tesla for a while, grab some profits.
Beyond trader dynamics — longs versus shorts — Tesla's surge isn't driven by the company's actual performance, and that's exactly what anyone calling a speculative Tesla bubble would latch on to. But that's also old news because Tesla's fundamentals have been analyzed to death, with the obvious conclusion that a $300-plus stock price demands a level of execution that the company hasn't yet reached.
At this point, a Tesla bubble looks obvious, and it looks as obvious as it has since early this year. The difference now is that it's grown so large that it's become terrifying.
COMMENTARY: According to its announcement of January 3, 2017, Tesla (NASDAQ: TSLA) produced 24,882 vehicles in Q4, resulting in total 2016 production of 83,922 vehicles. This was an increase of 64% from 2015.
Tesla delivered approximately 22,200 vehicles in Q4, of which 12,700 were Model S and 9,500 were Model X. When added to the rest of the year, total 2016 deliveries were approximately 76,230. Our Q4 delivery count should be viewed as slightly conservative, as we only count a car as delivered if it is transferred to the customer and all paperwork is correct.
Tesla said the transition to new Autopilot hardware resulted in the company’s vehicle production being “weighted more heavily towards the end of the quarter than we had originally planned.” In total, about 2,750 Tesla vehicles missed being counted as deliveries in the fourth quarter of 2016, which the company ascribes to “last-minute delays in transport or because the customer was unable to physically take delivery.”
Tesla said that even though those sales were counted toward 2016, the deliveries were not because the customers did not physically take possession of their cars. Tesla says about 6,450 vehicles are still in transit, and that their deliveries will be counted toward the first quarter of 2017.
The company said.
“We were ultimately able to recover and hit our production goal, but the delay in production resulted in challenges that impacted quarterly deliveries, including, among other things, cars missing shipping cutoffs for Europe and Asia. Although we tried to recover these deliveries and expedite others by the end of the quarter, time ran out before we could deliver all customer cars.”
While it fell short on delivery, Tesla was able to beat its production rate for 2015. Tesla said it produced 24,882 vehicles in the fourth quarter of 2016, resulting in a total of 83,922 vehicles produced in 2016. This was an increase of 64 percent from 2015.
Vehicle demand in Q4 was particularly strong, Tesla says. Net orders for Model S and X, which were an all-time record, were 52 percent higher than Q4 2015 and 24 percent higher than the company’s previous record quarter in Q3 2016.
Early last month, Tesla announced that it will begin charging owners who leave their cars at Supercharger stations after they have completed charging. The new fee is an attempt to increase turnover at the charging stations, which have become increasingly congested as more Teslas are sold.
Tesla Lithium-ion Battery Gigafactory
Deep in the Nevada hinterlands, under the scorching desert sun, Elon Musk is quietly building a $5 billion, 5.8 million square-foot battery plant that will forever change the auto industry.
Now, most of the attention Tesla receives has to do with its cars. And perhaps justifiably so. Just last week, Motor Trend announced that Tesla's Model S P100D can go from 0-60 MPH in a record-breaking 2.2755 seconds. (That level of torque puts Tesla on par with Ferrari, by the way.)
But the major focus should not be the actual vehicles Tesla is producing. Rather, it's about something much bigger, and, in my view, infinitely more important for Tesla's long-term success: The Gigafactory.
In partnership with Panasonic, Tesla's Gigafactory is building lithium-ion batteries - the same type of battery that's been popular for use with personal electronics but deemed too expensive for electric cars. The Gigafactory is changing that.
As of January 2017, Tesla has begun mass production of the cells, and by 2018, the Gigafactory will "reach full capacity and produce more lithium ion batteries annually than were produced worldwide in 2013," the company says. The facility will be staffed by 6,500 full-time Reno-based employees and "single-handedly double the world's production capacity for lithium-ion batteries," according to Bloomberg.
The company also plans to be producing one million electric cars by the end of the decade.
Now, let's take a step back. Why is the Gigafactory such a big deal, you ask?
Well, two main reasons: Cost and storage.
Batteries for electric vehicles are historically not very cheap, nor do they hold a very good charge. But Musk wants to change that. Specifically, he wants to drive down the per kilowatt hour (kWh) price of the battery pack by more than 30 percent to make it suitable for electric cars, while increasing the amount of energy storage in the battery pack. Must sai at a January 2017 event.
"It really comes from the first principles of physics and economics. That's the way we try to analyze everything."
As stated in a January 2017 investor presentation, Musk announced that the drivetrain for Tesla's much-anticipated $35,000 Model 3 will be built at the Gigafactory 1 in order to vertically integrate the battery production with car production. In a subsequent Q&A session, Musk "compared the concept of the Gigafactory's vertical integration to Ford's effort 100 years ago at River Rouge Complex, the largest integrated factory in the world at the time," Electrek noted.
The big question for investors, however, is whether or not the Gigafactory will pay off in the long-term.
My belief is that yes, it will.
Let me explain.
The Gigafactory Will Push Tesla's Cars Costs Down And Increase Demand For EVs
There's a whole host of reasons why electric cars are the future (fewer greenhouse gases, unstable oil price, a smaller amount of serviceable components, etc.) but the purpose of this article isn't to prove why electric cars are the future. That's just the reality.
By 2040, about 23 years from now, analysts at Bloomberg predict that electric cars will account for 35 percent of all new vehicle sales. Some have even rosier predictions for the EV market: The Argonne National Laboratory predicts that electric cars will make up 58% of the light vehicle market by 2030.
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Right now, what's holding back the sale of EV cars is battery cost and quality.
By owning the production of low-cost batteries with the Gigafactory, the thinking goes, Tesla will establish itself as the king electric vehicle automaker in the long run.
It should be noted, too, that Tesla already has an enormous position on the incumbents in the market, meaning that when the factory is fully up-and-running, they will be best-positioned to target consumers interested in electric vehicles.
Best-selling all-electric cars in 2016
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Tesla is forgoing short-term profits to invest $5 billion into a battery factory (a decision some in the market have criticized) the long-term rewards are well-worth it.
David Keith, an MIT professor studying automotive technologies, told Quartz recently.
"The cost of batteries is so critical in all this that it justifies (Tesla) having this control. No one else is going to push as hard as they want to bring down the cost of batteries, and to push the market as fast as they need it to go."
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The Gigafactory is Opening To Europe - Taking Tesla With It
In November 2016, Tesla announced that they'll be building Gigafactory 2 in Europe.
Since then, plenty of country officials have thrown their hat in the ring, practically begging Musk to choose them. The Dutch Minister of Finance, for instance, officially expressed his country's interest, while Cyprus began a social media campaign to attract Musk. Portugal, however, is perhaps the most gung-ho about the Gigafactory. As DW reported:
"Euphoria has nevertheless gripped many Portuguese over a possible Tesla investment. There's even a Facebook group called 'Bring Tesla Gigafactory to Portugal.' It has only been online since mid-November, but just one month later, it already has nearly 70,000 members. Whether that will help sway Elon Musk as he considers his options for siting Europe's first Gigafactory remains to be seen. It's expected that he will make the siting decision sometime in 2017."
Tesla Stock Bubble
I haven't tracked Tesla shares since late last year, so was very surprised to discover that the shares had increased +104.99 or +53.43% since mid-October 2016. However, the bad news is that Tesla's share price has risen because short sellers have had to buy shares t o minimize their losses. This is a type of "forced demand" that has, for lack of a better word, "artificially drivenup" the price of Tesla Shares, and the increase has been so significant, that retail buyers and speculators have come in and drivenup the price even more. The result is a price per share that is not inline with its financial performance. Tesla's CAP is now higher than General Motors, which is ridiculous since they are both in the same market category. If you are going to invest in Tesla, you must realize that Elon Musk is a high risk taker, who gambles big. Tesla is bigger than fancy electric cars with the latest technology, but about a far bigger mission -- insuring the health of our planet and reducing greenhouse gases. It is a race against time, and this requires rolling the dice. Musk has done this with Space-X, Solar City and Tesla. Forget shortterm profits and look at the bigger picture If investors believe in the bigger picture and true mission for Tesla, then maybe, just maybe, the current valuation is justified on the basis of future potential and not current unit sales of electric cars. If they can grasp the true vision that Elon Musk has for Tesla, then things will sort themselves out. Sure, there may be stock price adjustments, every public company has them, but I truly believe in Tesla's future potential.
Courtesy of an article dated April 10, 2017 appearing in Business Insider and an article appearing in EVVolumes.com and an article appearing in InsideEVS.com and an article dated February 17, 2017 appearing in Seeking Alpha