Wall Street, New York. On February 19, at the closure of the stock market, Tesla has reached the highest valuation since the company’s listing in 2010: $917.42 per share. A new outstanding record for Elon Musk’s creature, a company that has a tormented and turbulent history, but which, in good or bad times, has always attracted the interest of supporters and detractors.
Just a few weeks before (January 21), the company that has revolutionized the car market has topped $100bn of market value for the first time, capping a dramatic rally that has seen its share price rise 125% in the past three months. At that level it is worth more than Volkswagen, the world’s biggest carmaker by volume.
This is not the first time that Tesla’s stock is protagonist of extreme bullish runs, but this time it seems to be different than in the past, when sudden rises have been followed by drastic plunges. Maybe a true turning point has been reached, for a company that just few months ago was on the verge of collapsing (in May 2019, in fact, Musk told Tesla employees that the company would have run out of cash in about 10 months unless “hardcore” cost-cutting efforts were made).
From its inception, the electric car maker has always lived a difficult financial situation – burning billions of dollars and being very far from profitable. The margins realized on the sales (Tesla’s cars are mainly positioned in luxury and sport categories) have never been enough to counterbalance the production issues and huge R&D costs, much of which were allocated to the development of autonomous driving vehicles. Nonetheless, Tesla’s brand has become known as a symbol of ultimate technological development worldwide, and one that has built a group of loyal customers that some critics confuse with fanatics.
Despite weak financials, Tesla’s stock has had relatively high valuations with much higher multiples with respect to the carmaker’s competitors in the past, mainly because of future growth and profitability expectations that quarter after quarter looked more and more distant from being realized.
This until the third quarter of last year, when the company reported extremely positive earnings reaching $1.86 EPS (i.e. Earning per Share) vs -$0.42 EPS expected by market consensus. From there on, the stock price has started its unbelievable rise, reaching and now breaching, the $100bn market cap milestone, which marks a moment of vindication for Elon Musk, who will have the option to buy about 1.69 million shares at about $350 each if the market capitalization remains above this threshold over a six month period (a payout worth more than $370 million before taxes at the current stock price).
Tesla has just released another better than expected earnings report for the last quarter of 2019.
Here’s how the company performed against the expectations:
- Earnings: $2.14 adjusted vs. $1.72 per share expected (an increase of 7% YoY)
- Revenue: $7.38 billion versus $7.02 billion (an increase of 2% YoY)
The main reasons for this positive performance can be identified by the following drivers:
- Cash position
Tesla has decided to focus on Model 3 production which has reached a 42% increase YoY with respect to a 29% decrease YoY for Model S, whose demand has never been very high during the year with respect to the lower positioned Model 3 (Model S is priced at about $75k vs $40k for Model 3). The company has been able to start Model 3 production in Gigafactory Shanghai in less than 10 months from breaking ground and has already begun the production ramp for Model Y in Fremont, which may give further boost to sales in the following year.
An even greater achievement for the electric car maker has been the increase in deliveries. For Model 3 they have increased by 46% YoY, confirming the increase of demand and the improved capability of the company to fulfil these orders especially in Europe and in the Chinese region.
From the financial point of view, the most important achievement for Tesla is the cash position. Quarter-end cash and cash equivalents increased by $930M (+17%) QoQ to $6.3B, driven by positive quarterly free cash flow of $1.0B. Capital expenditures increased sequentially due to investments in Gigafactory Shanghai and Model Y preparations in Fremont. As stated in Outlook of the Tesla’s Update File, the company expects “positive quarterly free cash flow going forward” and above all that the “business has grown to the point of being self-funding”, instilling trust in all investors concerning one of the main drivers for companies’ valuation.
Another great performance has been delivered by the Energy Business, less known but as much important as the automotive one. Energy storage deployment reached an all-time high of 530 MWh in Q4, which included the first deployments of Megapack, the new commercial scale 3 MWh integrated storage system that is preassembled at Gigafactory Nevada as a single unit. Since the introduction of this product, the level of interest and orders from various global project developers and utilities has surpassed company’s expectations. In 2019, Tesla deployed 1.65 GWh of energy storage, more than what has been deployed in all prior years combined.
After all these positive results many analysts have now changed their valuation of the stock, some increasing the target price to $800 per share and being confident that the company is finally on the right path towards becoming what it’s supposed to become from the beginning: a world changer.
The future of the company has a much better outlook but will depend on greater efficiencies in production, on differential improvements to self-driving technology, on moving into the world’s largest automobile market, and on long-term orientation. Tesla has a substantial competitive advantage with respect to “traditional” car makers which have only recently begun to heavily invest in the electric segment (e.g. Volkswagen’s investment amounts to ~$40bn). For this reason, a lot of Tesla’s future performance will also be conditioned by how quick and effective the competition will be in terms of catching up on performance, technology and convenience.
A lot can be said about Tesla, but the results speak for themselves – this is not a traditional company. Its mission is not to sell cars, or even to sell batteries, it goes much further. Its mission is to anticipate the future, a much better future, and to make it easier for us to think about how to get there. Will it really accomplish this extremely challenging purpose? Is this the beginning of a new era for automotive world with Tesla leading the way? Who knows, maybe only Elon Musk does…
Author : Mirko Filice