Understanding Tesla And Its Valuation

Understanding Tesla And Its Valuation

Tesla’s stock price in recent has been hovering around $1500, taking market capitalization of Tesla to $300 billion. Analysts and investors are startled, as the company’s market valuation is greater than the combined valuation of BMW, Ferrari, Volkswagen, GM, and Honda. The interesting part is that even though Tesla’s revenue and profit are lower than these companies, its stock is touching skies. Let’s demystify what is causing this rise.

Crux of the Matter

About Tesla
Musk did not start Tesla but was an early investor in the company founded by Martin Eberhard and Marc Tarpenning in 2003. Musk became its CEO in 2008 and envisioned sustainable transportation by mass production of electric cars – this became Tesla’s business model.

Tesla’s Three Stage Business Model
Stage 1: Launch an expensive electric sports car that could generate adequate money – in 2008 launched 1st generation Roadster that was not affordable to many and had a small market.
Stage 2: Profit from sales of luxury sports cars to be used to develop an affordable sedan – in 2012 2nd generation Model S, and in 2015, Model X launched with medium affordability and a market larger than Roadster’s.
Stage 3: Use the proceeds of stage 2 to develop an affordable electric car – in 2017 3rd generation Model 3 launched with higher affordability and a market larger than that of Model X.

Tesla’s Bussiness plan was unique but at the very same time, new and untested. With the launch of Model 3, the company marked the single biggest one-week product launch ever with more than 3,25,000 bookings in 1 week.

Production Testing Patience
Musk’s parallel vision of a fully automated production assembly line had caused several issues. The problems worsened when conveyor belt ripped off at Fremont production plant and workers had to use forklifts and hands to move body parts of the car. Moreover, robots and automated programs were also malfunctioning. Finally, Musk had to stop the whole production plant for 1 week to make repairs. Since the beginning, the company had reported only a few profitable quarters and debts were increasing. This was the time when investors began betting against Tesla, as its books were clearly stating a bleak future.

Excessive automation at Tesla was a mistake. To be precise, my mistake.

Elon Musk, CEO, Tesla

Back In Business
However, things began to get better when in 2018, despite all odds, Tesla managed to achieve the target to produce 5000 cars per week. Moreover, Tesla reported a quarterly profit of $312 million after a long time in the quarter ending September 2018. In 2019, 3,67,500 electric vehicles were delivered by Company i.e 50% more than the previous year, and launched 2 new vehicles with back to back profitable quarters. Tesla also launched Model Y 6 months early. Despite Covid-19 crisis, it sold 91,000 vehicles.

When something is important enough, you do it even if the odds are not in your favor.

Elon Musk, CEO, Tesla

Stock Price Playing Role?
This year, Tesla’s shares are up over ~300% and its current market capitalization is $263 billion, which is more than a combined market cap of Volkswagen, BMW, Ferrari, Honda, and GM. How is it possible if Tesla is not making consistent profits? The market capitalization of Tesla (or any company) is based on its stock price. Unlike other automobile companies’ investors, Tesla’s investors are investing based on the larger picture of a clear, electric future for mobility and Musk’s hardshell vision for Tesla’s pivotal role in this vision beyond 2025 and 2030.

  • The “PayPal Mafia” is a group of former PayPal employees and founders who have since founded and developed additional technology companies. Companies founded or developed by members of the group are Tesla, Inc., LinkedIn, Palantir Technologies, SpaceX, YouTube, Yelp, and Yammer.
  • Founded in July 2003, Tesla’s name is a tribute to inventor and electrical engineer Nikola Tesla. It was founded by engineers Martin Eberhard and Marc Tarpenning. Elon Musk joined later.
  • As of March 2020, Tesla offers four car models: the Model S, Model 3, Model X and Model Y. The Names of the four models form the word “SEXY”.