Motor City Blogman

Is Tesla Really Worth More than GM and Ford?

Imagine all those electric cars without the hype

A license plate frame on a BMW i3 parked in a Royal Oak, Michigan, grocery store parking lot said it all: “My next car is an electric Tesla.”

The owner of that Bimmer can’t wait to take delivery of his Tesla Model 3. Elon Musk, Tesla’s CEO, promises production will begin in the second half of this year, though the first cars will go into a captive fleet, so the i3 owner’s delivery date remains a bit uncertain. Wall Street, meanwhile, can’t wait for the automotive market to flip from 1.5-percent battery-electric (about 1 percent, globally) in the U.S. to 100 percent electric, which is why Tesla’s market capitalization recently passed Ford Motor Company’s, then during the week of press days at the New York International Auto Show, General Motors’.

By Monday, April 17, Tesla’s share price had slipped somewhat, to $301.44 per share, or $49.16-billion, compared with GM’s $33.90 per share, or $51.08 billion. It still was well ahead of FoMoCo’s $44.92-billion market cap ($11.28 per share), however.

The question lingers: How did this small, niche automaker, which has never posted an annual profit, become worth more than Ford and as much as GM?

Tesla-Model-3-front-and-rear-views-from-above

The answer from Wall Street analysts, especially lead Tesla bull Adam Jonas of Morgan Stanley, is that Tesla has a future, and GM, Ford and hell, probably even BMW, considering the apparently sagging loyalty of its i3 customers, do not. It’s a resolute belief in Silicon Valley’s ability to “disrupt” Rustbelt businesses like the auto industry and the inability of executives, planners, engineers, and designers working in places like Stuttgart, Munich, Wolfsburg, Tokyo, Gothenburg and especially, Detroit, to change their ways.

To be fair, Jonas and company have a point. Before the Lehman Brothers collapse and the subsequent bankruptcies of GM and Chrysler, and the Energy department loan to Ford, these automakers relied too heavily on pickup truck and large SUV profit margins. Alongside the Lehman Brothers collapse, oil prices hit record highs and sent pickup and SUV sales plummeting, turning GM’s Hummer division into the poster truck for Detroit’s shortsightedness.

About the time of the Obama administration-forced GM bankruptcy, the automaker’s CEO at the time – I don’t remember whether it was Rick Wagoner (pre-bankruptcy) or his replacement, Fritz Henderson – assured journalists that the company would be able to make money on its upcoming Chevrolet Cruze compact. It’s easy to forget what a big deal that would be, but thanks in part to the economic stimulus program, truck sales began to rebound in 2010 and ’11, and we never really had to find out. Whether or not GM is making any money on its Chevy Cruzes now, we can pretty much count on its inability to make money on Chevy Bolts and Volts.

But if Bolts and Volts don’t make money, what about the Model S and X? Tesla fanboys point to a piece in The Motley Fool, circa 2012, that claims the Model S has a margin of 20-25 percent. Only a few conventionally powered models sold today make anything near that sort of margin, and they’re most likely to be exotic sports cars, Rolls-Royces, Bentleys, Mercedes-Maybachs and perhaps large body-on-frame sport/utility vehicles. And if Tesla is making anything on its Model S or Model X, it’s not showing up on the bottom line of its quarterly reports.

Semi-truck tractors also tend to have high margins, which may explain Musk’s promise in a Trump-like tweet last week: ‘Tesla semi truck unveil set for September. Team has done an amazing job. Seriously next level.”

But I’ll be surprised if Tesla shows much more than a few renderings this fall of the truck. Nevertheless, the tweet was enough to push Tesla shares higher, again, last week.

However, even Jonas has become more circumspect about Tesla. In February, he lowered his target for its stock from $450 to $333 (it was just $195 per share at the time), because, he predicted, the Model 3 would be “later than Tesla expects, more expensive and in a cheap gas environment, less popular than many anticipate,” Business Insider reports.

2019 Tesla Model 3 Pre Production Front Three Quarters

Eighteen months earlier, in August 2015, Jonas made a prediction, based on the way Musk refused comment to Jonas’ question in a quarterly earnings call, that the electric carmaker would be worth $465 per share in 12 to 18 months “as Tesla launches an Uber-like driverless Model 3 cab service – transforming personal transportation.”

So this is the sort of thing that helps push Tesla’s market cap above Ford’s and GM’s.

Back in the real world, Tesla faces the fact that no matter how groundbreaking its electric power technology is, it still needs to assemble its own cars. Save for hiring robots and maybe an eventual shift to 3-D printing, there’s no huge manufacturing advance over the way Henry Ford built Model Ts. Tesla must still buy seats, carpeting, steering wheels, suspension bits and tires, or make most of this stuff himself, the way pre-1956 Ford did.

As if manufacturing wasn’t tough enough, now Tesla must shift production from the $69,000-$135,500 Model S and X to one that starts at $35,000 or so. If Tesla can’t make money on those models and their 25-percent margins, what kind of profits should we expect of the Model 3?

Musk also estimates Tesla will boost production to 500,000 next year and 1 million by 2020, which means he’d better get moving on a new $1 billion-plus assembly plant to provide the capacity.

Elon Musk in 2012 Tesla Model S

Not that Musk will balk at the notion of building more factories. Tesla’s construction of the first of up to five lithium-ion Gigafactories it has committed to build is under way, providing another ray of hope for future profits at Tesla. The automaker/batterymaker’s purchase of a related start-up, the panel-maker SolarCity, was met with the most skepticism Wall Street has mustered when Musk announced it last year. This year, investors are more optimistic that Tesla’s SolarCity can be on the leading edge of a move away from fossil fuel consumption. But if SolarCity can leave behind the coal powerplants that help fuel electric cars, it doesn’t immediately follow that Tesla Motors will leave behind automakers that have been developing EVs for a quarter-century or more.

None of this criticism should be taken as begrudging Tesla its lofty goals, its green mission, or its quick, long-range sedan. The 2012 Tesla Model S is the first aspirational, zero-emissions vehicle to be mass-produced, and if Musk had concentrated on high-end luxury cars and had kept production low, a slower growth might have built a sustainable business that doesn’t need huge, regular infusions of venture capital. How much better would our automotive future be with an organically grown Tesla, and without all the Wall Street and Silicon Valley hype?

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