Will Tesla’s direct-sales strategy make it harder for them to compete?
Tesla Motors (NASDAQ:TSLA) inspires strong opinions among analysts: according to TipRanks, of the top 19 analysts watching TSLA, six rank it a buy, eight a hold, and five a sell, with 12-month targets varying from $155 to $385. Entelligent spoke to Efraim Levy, a senior equities analyst for S&P Global Market Intelligence, to ask why some investors are bearish about Tesla, and whether Elon Musk’s latest “master plan” will be enough to steer the EV pioneer towards profitability.
Why are analysts so divided over TSLA?
This is a company with a visionary leader who’s in the process of changing the industry. The big questions are whether he’ll succeed, and how much investors should pay for that success. Investing in Tesla is like investing in a biotech company that doesn’t yet have earnings — you’re looking at potential cash flow, not guaranteed earnings. If you buy Tesla, you’re purchasing a company that’s losing money, and you have to look out to 2019 or 2020, and decide what assumptions you’re willing to make, and how much you’re willing to pay for that.
Some people just aren’t willing to pay as much up front for potential benefits that may or may not come to fruition. We’ve already seen numerous delays and missed targets from Tesla — there’s no doubt they’re moving in the right direction, and bringing cars to market, but there’s a healthy skepticism among analysts.
What’s your take on Musk’s “master plan”?
The master plan is great as a plan, but when you look at it from an investor’s perspective, or as a Tesla shareholder, it’s changing the company’s investment thesis. Originally, Tesla was an electric-car company that was on its way to creating a mass-market vehicle. Now, you’re adding on billions in new investment for electric buses and trucks — that means it’ll need more external investment, which will dilute Tesla’s existing shareholder base.
Then there’s the SolarCity (NASDAQ:SCTY) acquisition — they want to combine two money-losing companies, which will further increase the likelihood of having to come to market for additional capital. That doesn’t diminish the potential for synergies that will make sense over the long term, but for the time horizon we look at, these aren’t great things for shareholders.
Is there a risk that Tesla will simply run out of cash?
Cash will continue to be available, but the question is at what price. Tesla has been able to use its highly valued stock price to get cash at low cost, but will that continue to be available as investors become more skeptical? It’s a risk factor, but for now there are still lots of fans out there who are willing to support them.
How much is riding on the success of the Model 3?
The Model 3 is the key to Tesla’s success — if they can’t get the cost down and the profitability up for the Model 3, and sell in the volumes they expect, that will crimp their future. There’s also a real risk of delays for the Model 3 — Elon Musk has set an aggressive launch date, but even he isn’t expecting all his suppliers to meet that target. And we’re talking about cars here: maybe you could cope if you’re just missing a floor-mat or something, but most components are critical, and you can’t sell the car without them.
Right now, they have 373,000 deposits, and that means there’s interest there. But it’s not hard to get your deposit back and cancel the order, and the competition is right behind Tesla. GM (NYSE:GM) has its all-electric Bolt coming out much sooner than the Model 3, and the Germans are also competing in the EV market — and if you look down the road, when the market gets big enough, Toyota (NYSE:TM) might decide to participate, and that’d be another heavyweight in the sector.
So the market’s going to change. Technologically, Tesla is in the lead, and they have a unique selling position — their vehicles are very attractive, and they have a loyal following — but there’s a real risk that won’t be enough. Tesla’s branding advantage means people are interested in their vehicles, but some of that advantage will be impacted as we start to see more competition and more choices in the EV sector.
One thing Tesla has to do is make sure their salesrooms can ramp up to mass-market volume. They have some contingency plans — they’re pretty smart, and they’ve definitely thought about this. But it’s one thing when you’re selling a few thousand vehicles a quarter, and another when you’re selling 40,000 a month.
Whether it’s EVs or spaceflight, Musk seems capable of extraordinary things. Should we factor a “Musk premium” into our pricing for Tesla?
It’s definitely a part of my calculations. If I set a $200 target price, I’m factoring into that number the fact that a lot of people are willing to pay a premium for Tesla’s story, and for Elon Musk’s leadership and innovation. And I’m weighing that against the fact that you’re paying a lot up front, and that there are risks involved with that. There are fans who’ll buy into anything Elon Musk touches, but the investment decision ultimately has to be made based on the long-term value Tesla creates.
The fact that it’s such a storied stock does make it harder to value than a GM or a Ford (NYSE:F), but that’s where the artistic part of valuing the company comes in. You know people are paying more for Tesla’s potential than they would for GM or Ford, and you have to factor that into the market reality that you’re weighing when you decide whether to buy or sell or hold.
Are there any companies that could compete if Tesla does everything it’s promised?
If Tesla succeeds, it will remain a leader — the leader — for quite a while longer. Still, there will be others who make inroads into the market: Nissan is making the bet, the Germans are making the bet, American companies like GM and Ford are making the bet, and putting more of their resources into hybrids and electric technology. It’s a changing field, and that’s a good thing for the environment, because it means we’ll be making more fuel-efficient vehicles. All the automakers are looking seriously at sustainability, even if Elon Musk is likely to stay ahead of the marketplace for quite a while.
Ben Whitford is the US correspondent for The Ecologist. He has written for the Guardian, Newsweek, Mother Jones, Slate, and many other publications.