As Tesla shares surged past $300 last week and the company’s market value surpassed Ford’s, even its founder, Elon Musk, acknowledged on Twitter that the company was “absurdly overvalued if based on the past.”
By “the past,” he presumably means old-fashioned valuation measures like price-to-earnings or price-to-sales ratios, the traditional benchmarks for evaluating stock prices. By those measures, Tesla — a company that lost $773 million last year — is indeed off the charts.
Tesla’s market value of nearly $49 billion is not only higher than that of Ford, which earned nearly $11 billion in profit last year, but is within easy striking distance of General Motors, which earned $9.4 billion.
In contrast to Tesla, Ford and GM shares have dropped recently on fears that auto sales have hit a cyclical peak.
“It’s nuts,” Bruce Greenwald, a professor at Columbia Business School and an expert in value investing, said of Tesla’s stock price. “Investors believe it’s going to dominate a market that no company has ever dominated before.”
But Tesla is not a stock, or a company, that is measured by the past, as Musk is well aware. He also wrote on Twitter that stock prices represent “risk-adjusted future cash flows” — and Tesla is about nothing if not a utopian future of safe, reliable, powerful, self-driving electric vehicles powered by solar-fed batteries that are easy on the environment.
In that regard, Tesla has ascended into a rarefied realm of so-called story stocks — companies that have so bewitched investors that their stock prices are impervious to any traditional valuation measures because their stories are simply too good not to be true.
And to the dismay of short-sellers, who believe they have ample rational reasons to bet against such stocks, their share prices can stay in the stratosphere for years, even decades. Ron Baron, the billionaire investor and founder of Baron Capital, disclosed last year that he owned about 1.6 million Tesla shares. For all the excitement and promise surrounding such companies, there are many cautionary tales.
“Stories are great before bed, but are disastrous as a stock-selection technique,” Montier wrote in his 2009 book ‘Value Investing: Tools and Techniques for Intelligent Investment.’
Adam Jonas, a Morgan Stanley automotive analyst who is hardly a starry-eyed optimist about the industry, upgraded Tesla shares to overweight in January. He singles out the company’s new autonomous driving technology as a compelling safety feature that will significantly reduce occupant and pedestrian injuries and fatalities. This week he said he expected “vehicle safety to be the primary differentiator in Tesla’s upcoming product offensive,” referring to the eagerly anticipated introduction of Tesla’s new, lower-price Model 3, which will be equipped with the new technology.
That Tesla is an all-electric, environmentally-friendly, non-fossil-fuel vehicle — the story that once excited investors — is barely mentioned anymore.
Even more futuristic is the idea that Tesla cars will be entirely self-driving, able to cruise streets nearly full time. In this vision, Tesla owners will share their vehicles with Tesla when not using them, and during that time they will ferry other passengers, serving as Tesla’s version of Uber. Thus Tesla will disrupt Uber’s nascent market dominance.
And Tesla is no longer seen just as a vehicle manufacturer. With its solar and battery technologies, it is in a position to dominate two other enormous industry segments. Even if all that comes to pass, it may not be enough to justify Tesla’s valuation unless it can sustain a competitive advantage over time, as Greenwald, the value-investing expert, put it. Tesla is spending heavily on research and development, and perhaps its technology will be difficult or impossible for others to replicate. The established automakers have had years to catch up to or overtake Tesla’s Model S, with a conspicuous lack of success.
But for committed value investors, the writing is on the wall: “Is Tesla going to dominate its industry? That’s the key question,” Greenwald said. “When it comes to the global auto industry, no one ever has, and in all likelihood, no one ever will.”