In a research note published Wednesday, Morgan Stanley analyst Adam Jonas asked an important question with an elusive answer: “Is Tesla even trying to be a car company?”
The question arrives as Tesla is minting new all-time highs for its shares — $US335 versus Jonas’ target price of $US305 — but still failing to make a profit after 13 years in business.
Over the past year and a half, investors have collectively started to doubt whether or not Tesla can make good on its promise of maintaining its $US50-billion-plus market cap as a carmaker alone. Conveniently, during this same period, Tesla has been busy morphing itself from being a profitless auto company to being a profitless energy-storage/solar-roof/networked-mobility company.
The overarching investment thesis now, if you’re long Tesla, is that the company represents less of a focused disruption and more of an aggregate one. Here’s Jonas again:
We have long viewed Tesla’s stock as a call option on disrupting a $US10 trillion global market for mobility rather than an equity exposed to a $US1.5 trillion traditional light vehicle market. We believe the market is increasingly coming around to the idea of giving Tesla a low chance of success in a far larger addressable market (transport network, data, time) rather than a high chance of success in a smaller addressable market (cars/machines).
You have to credit Jonas with taking a deeply futuristic view, which is nothing new for the analyst. But you also have to deal with the fact that he, like many other Tesla bulls, is knee-deep in a narrative shift.
Long before Tesla’s recent share-price surge, the company endured a period of wild volatility as Wall Street deduced, en masse, that it was dealing primarily with a carmaker stock, not a tech company stock.
On those terms, Tesla has been a weak performer, barely able to build and sell 80,000 vehicles per year while burning through cash at a ferocious rate to attack the low-margin, mass-market car business. Tesla’s disruptive identity was also trapped in 2010, reliant on the fading saga of the electric car. Uber and Lyft had created a new idea — shared mobility, electric or not — and Google was pushing forward on driverless cars.
The big shift
The upshot is that Tesla began to shift its story — CEO Elon Musk turned considerable attention to Autopilot, the company’s semi-self-driving technology — and the financial community joyfully joined in. It knew what Tesla-as-car-company portended: moderate profit margins in a tough business, selling expensive electric cars to a relatively small market.
That’s not a $US50-billion company — or even a $US20 billion-$US30 billion company, which was where Tesla’s market cap hovered when this realisation took hold.
The ongoing denial of Tesla’s core business — not to mention Jonas’ notion that Tesla is on the verge of creating a very valuable new business, “Tesla Mobility” or the “Tesla Network” — is obviously necessary to keep the surge of enthusiasm about the company going. And to be fair, while Jonas is a Tesla bull, he isn’t an unqualified bull. He’s never thought the car business would add up to the company’s valuation over the past three years.
But the core business is the core business and it’s really all Tesla has to pay the bills. After all, Tesla has rarely made money and has been forced to issue convertible debt and hit up the capital markets for additional funding. The company has even had to sell off chunks of itself, as it did with Daimler and Toyota before its 2010 IPO, and more recently to Tencent, with the Chinese company taking a 5% stake.
Still, don’t expect Tesla’s push to move beyond a carmaker to let up, particularly as auto sales in the US plateau and the industry prepares for a downturn. Tesla needs a non-tradition narrative to see it through its first true downturn with a valuation so epic that it now exceeds more experienced players, such as Ford and General Motors.
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