January 8, 2020 / 10:35 PM / 19 days ago

Breakingviews - Tesla valuation speeds into ludicrous mode

Tesla China-made Model 3 vehicles are seen during a delivery event at its factory in Shanghai, China January 7, 2020. REUTERS/Aly Song

NEW YORK (Reuters Breakingviews) - Elon Musk’s fortunes have sure turned around fast. Just last June shares in Tesla, the electric-car maker he runs, had halved in six months as investors doubted whether a recent capital raise was enough; short-sellers pontificated about the imminent collapse of the company. Seven months and a near-160% gain later, though, and Tesla shares have hit a new high, and the company is worth just shy of $90 billion. That, like one of the acceleration settings on its cars, is ludicrous.

There are reasons for optimism. The maker of the Model 3 finally hit one of Musk’s targets, delivering just enough cars last quarter to squeeze past the lower end of his goal of 360,000 to 400,000 for the year. And its factory in China is up and running, having taken less than a year to build, and can produce up to 500,000 vehicles a year.

Justifying the stock price, though, requires steadfastly believing in one of two developments. The first is that Musk will soon have his company routinely selling some 3 million cars a year. That calculation is based on Tesla managing to improve its pre-tax margin, which in the third quarter was a lowly 2.8%, to around 7.6% and that as a mature, rather than fast-growing, company it trades at 8.6 times earnings – both metrics a blend of luxury carmakers BMW and Daimler, and the best-performing mass-producer, Toyota Motor. It also assumes a 21% tax rate and that carmaking accounts for the vast majority of Tesla’s revenue.

Those assumptions don’t have to be anywhere near so heady if the company is close to becoming a robo-taxi giant. Musk himself has pledged there will be 1 million self-driving-enabled Teslas on the road in 2020. Its owners could rent them out when not using them, with Musk’s outfit taking a cut as well as running its own fleet. The latter could, over time, bring in 10 times as much revenue as just selling the car, General Motors reckons.

Trouble is, neither is realistic any time soon. The first would require a more than eightfold increase in production, way beyond Tesla’s current or planned capacity; the second demands regulatory approval and then customer acceptance that at present looks many years off. The most recent sales targets aside, Musk’s track record at delivering on promises is abysmal. At this point, shareholders are parking their money on a hope and a promise.

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