Summary List Placement
The big question about Tesla has always been, “How would the company handle a major crisis?” The 17-year-old startup dodged bankruptcy during the financial crisis, but from about 2012 on, it grew rapidly. In 2020, its stock went on a tear, making it the most valuable automaker in the world by a wide margin, despite modest sales relative to giants such as Toyota, General Motors, and Volkswagen.
The backdrop for that growth was a historic boom, with record car sales in the US market and surging demand for electric vehicles. But with a skinny bank account and the need to fund more growth, Tesla and CEO Elon Musk looked as though they might struggle during a sales downturn, whenever one inevitably arrived.
Well, the cyclical downturn didn’t arrive, but a major crisis did. When the coronavirus pandemic hit earlier this year, the entire auto industry shut down production in China, the US, Europe, and South America. This was unprecedented: Even during World War II, Detroit kept its factories running, building tanks and planes rather than cars.
Big Auto is very big, and that’s a problem
Tesla idled its plants in California and China, but after about a month, it brought them back online. In the third quarter, the company reported record sales, with almost 140,000 vehicles delivered. That was a fraction of Ford’s sales during the same period — the Blue Oval sold almost 222,000 F-Series pickups alone — but Big Auto is currently struggling mightily with the intractable issues of its scale. Idling dozens of plants and then firing them back up is no easy task, and carmakers are struggling to make up for lost production as demand has recovered.
Before COVID-19, Tesla’s smallness and relative inexperience had been construed as negatives. The company wasn’t good at making cars, the argument went, and the more demand for EVs that appeared, the more Tesla would be tested with the blocking-and-tackling of manufacturing fundamentals. It was also assumed that Tesla’s cost of operations, which had undermined profits for most of its existence, would continue to dash investors’ hopes.
But the opposite has happened. Tesla has posted four consecutive profitable quarters, and when it reports its third-quarter earnings later this month, that streak could stretch to five, setting Tesla up for a fourth-quarter in the red and its first-ever full-year profits. (It isn’t clear that Tesla could post much of Q3 profit, and under the circumstances, analysts expect it to break even.)
Tesla has retired its execution risk
That doesn’t mean Tesla isn’t wildly overvalued. A market cap of almost $390 million makes it worth 14 Fords. In order for Tesla to vindicated investors’ confidence, it’s going to have to go from selling fewer than half a million vehicles a year to, if you go by just the Ford comparison and cheat the math a bit, as many vehicles as rolled off dealer lots in the entire USA in 2019: some 17 million cars and trucks.
OK, Tesla’s valuation isn’t strictly correlated with a potential sales volume, but …read more
Source:: Business Insider