Why do investors value TESLA so highly? – Why can Tesla be hurt by global geopolitics?
Nation Toyota is considered the largest automotive company in the world. The one that produces the most cars has the most employees and earns the most revenue. Toyota generally sells more than 10 million cars a year and has a market capitalization of 280 billion dollars, tesla the company that manufactures electric vehicles sold 2020 about 500 000 cars and for the first time in its history made annual profits.
Even 2019 was considered a good year for tesla because it lost less than in 2018. From these figures, one could conclude that Toyota is worth more than tesla, but this is not the case. Despite selling, only five percent of what Toyota sells and making less profit tesla has a market capitalization of over 940 billion dollars or more than twice as much as Toyota.
So the questions are: why is tesla so highly valued by investors? Why doesn’t tesla still have high profits and why can tesla be hurt by global geopolitics? Tsla is not only worth more in the market than Toyota but also more than general motors ford, Toyota and Volkswagen, combined even its owner Elon musk went so far as to say that tesla’s stock price was too high.
A company’s market price can be very volatile and vary for many reasons, from a tweet to the enthusiasm of amateur investors.
Those who are optimistic about tsla’s future justify its value, because, in the future, cars will probably run on batteries and not gasoline. In addition, this company has an advantage over traditional manufacturers, and that is that it not only produces vehicles but is also a supplier of components.
As a dealer and owner of service stations in this way, costs are reduced and the entire production and sales process is integrated, while traditional manufacturers usually outsource their processes to other companies. For example, if Chevrolet sells a car to a dealer, it must sell it with a margin in favor of the dealer so that the dealer can make a profit by selling it to the final consumer in the case of tesla.
It can avoid these intermediaries because it owns its dealer network and keeps that profit margin, which means that tesla’s sales are made by the company itself or directly through the internet, and in this way, it is more efficient and increases profit margins. Another advantage in favor of tsla is that it has its electric vehicle charging network, while the other traditional manufacturers do not have any income, because the gasoline is provided by another company.
In other words, Chevrolet does not generate any income from the supply of fuel in its branded cars, tesla does from the supply in its charging networks. These advantages help explain in part tesla’s business model, plus many investors are optimistic about the company’s future because they believe tesla is not comparable to other automotive companies, but to other technology.
Companies, for example, apple not only generate revenue by selling cell phones and computers, one of apple’s, most profitable segments are other services such as iCloud storage or apple music subscriptions, and in the same way, then these investors look to tesla not only as a car manufacturer but also as a potential major supplier of batteries for third parties of other software services of the content offered to users and as a promising player in the ride-hailing and ride-sharing business, that’s not to mention the project to manufacture a truck that goes from zero.
To one hundred kilometers per hour in just 20 seconds, with 36 tons of cargo, however, as promising and innovative as tesla’s future may seem, the fact is that in 2018 it made a loss of 796 million dollars in 2019 its losses were 862 million dollars and in 2020, despite having met the goal of selling 500 000 vehicles of more than 40 000 each, it barely made a profit 721 million dollars.
So the other question is why hasn’t made a profit commensurate with its sales? T’s initial plan from its inception was to make an electric car like no other and use the revenue from it to make a more affordable one and reach the masses, but that is only possible by achieving economies of scale.
The first car to be built was the roadster using the chassis of the existing lotus, elise to reduce manufacturing complexity. However, the company began to customize more and more parts which caused costs to spiral out of control.
In the end, the roadster and the lotus had very few parts in common. They were practically different cars, even though they were initially intended to be based on the lotus structure, tesla was on the verge of bankruptcy. Several CEOs came and went, and finally, Elon musk took over in 2008.
He made drastic changes to the company, reduced the staff, and got 50 million dollars from the Daimler company and, according to Elon musk, this loan saved tesla the roster shocked the world. Electric vehicles at the time were small and unfun.
While this one was a one hundred thousand dollar luxury red convertible, a total of only two 2450 were sold, but it was the first step. The next car was the model s followed by the model x, both with very good range. Excellent acceleration and handling. Both models were poised for success, but tesla’s potential was still limited by the high cost of lithium-ion batteries.
Thus, electric vehicles could never compete in price against gasoline-powered vehicles and would never become mass-market, and this is one of the reasons why tesla is not so profitable. It has not achieved economies of scale, that is, it has not been able to manufacture as many cars as possible so the cost per unit is very low.
Consider that Toyota sells 10 million cars per year and tesla sells 500 000. If tesla could manufacture two or three million cars per year, we could expect a lower cost per vehicle and therefore a higher profitability margin.
To achieve this, Elon musk revealed in 2013 his plans for the tesla gigafactory to achieve economies of scale in the manufacture of lithium-ion batteries and make electric vehicles cheaper than gasoline-powered ones. At present, tesla has four gigafactories two in the united states, one in China, and one being built in Berlin, Germany, but the latter faces strong opposition from german environmentalists due to the cutting down of trees to build the factory.
This and other restrictions and regulations have delayed the project. On the other hand, china represents tesla’s second largest market. However, Chinese authorities, who used to show sympathy for the u.s company are showing signs of fatigue towards tesla. Because of this, the company will likely not only face obstacles in achieving economies of scale but also in dealing with geopolitical tensions.
Tesla claims that autonomous driving is the future of transportation, so concerns about data collection and national security in china will only increase in early 2021, the Chinese government restricted the use of tesla vehicles to military personnel and employees of some state-owned enterprises for security reasons.
In addition, at the end of June, Tesla was forced to recall more than 285 000 vehicles in china due to faults detected in the navigation control system. This has affected sales considerably to compound the situation. Tesla’s Chinese competitors are taking advantage, such as the manufacturer neo, which is strongly increasing its sales and has already received authorization to sell its cars in Europe.
Firms such as jp morgan, lowered, their share price target to 200 others put it at 400, a more optimistic forecast, but meaning less than half its current share price of around 900. Others remain optimistic because they see tesla as more of a technology company.
That also makes cars with potentially lucrative businesses related to software maps entertaining ride, sharing autonomous driving battery suppliers and fully autonomous, robot taxis, tesla’s goals are ambitious and the company’s strategy is even considered naive by some.
But let’s remember that Elon musk said some time ago that he was going to land a rocket and reuse it almost nobody could believe him, but he finally succeeded so we are facing a company with multiple difficulties, but that has certainly been a step ahead. Will tesla be able to justify its high stock market valuation in the coming years?