- Tesla’s stock price has rallied 100% over the past three months and is now at an all-time high above $500 per share.
- The company’s market cap, at about $92 billion, is almost as much as Ford’s and GM’s combined.
- The rally has been driven not by Tesla’s familiar up-and-down story, nor by CEO Elon Musk’s cult of personality, but by facts and fundamentals.
- Tesla sold over 100,000 more vehicles in 2019 than in 2018 and has been posting profitable quarters.
- The fundamentals aren’t going to change; there are no looming plot twists, and consequently the naysayers’ case now lies in ruins.
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At the risk of invoking a cliché, I’ll point out that Tesla isn’t a company whose stock trades on fundamentals, but rather on a story.
Think about that. At a simple level, the fundamentals are facts, while the story is an illusion — a suspension of disbelief. When I was in my 20s, I spent a lot of time on story, before I dropped out of a doctorate program in literature at NYU. Stories have plots, subplots, plot twists, complicated characters who do complicated things. Stories can turn on a dime: in the space of a page, comedy becomes tragedy. As an author, you want to take readers on a ride.
For years now, story has dominated the debate around Tesla. And some large-scale characters, ranging from CEO Elon Musk to big-name hedge-funders like Jim Chanos and David Einhorn, have populated the tale. Even the minor characters have been interesting, and the plotlines and plot twists have been endless.
But the truth is that this story — something of an epic, really — filled a vacuum. Established automakers such as Ford and General Motors, have less lively stories because their actual businesses are so … busy. The fundamentals — the business facts — produce millions of vehicles every year.
Tesla has only recently joined that club: 2019’s total sales were about 367,000, a notable move up from 2018’s roughly 250,000. But just a couple of years back, the company barely sold 50,000.
Story trumped fundamentals — but that’s all changed in a hurry
The sprawling, obsessively detailed, constantly argued over Tesla story happened only because there wasn’t enough production or sales to stop it. If Tesla had built a competent franchise dealer network in the US (or joined with an existing mega-dealer) rather than trying to sell vehicles direct to customers, and if Tesla had hired a seasoned contract manufacturer to build some vehicles and meet demands sooner, the story would have petered out in 2017 or 2018.
Didn’t go that way, and thus we got an insane episode of Musk tweeting his way into an SEC investigation and eventual settlement, a pitched battle between the #TSLA fanboy and the #TSLAQ bankruptcy crowds, and a preoccupation with Tesla’s inner-workings that resembled Cold War Kremlinology.
But look what’s happened since Tesla’s output of actual cars has picked up: the stock has been on a tear, blasting through $300 per share, $400 per share, and (remarkably) $500 per share in a matter of months. Tesla’s market cap, at $90 billion, is nearly equal to GM’s and Ford’s combined.
This isn’t a rally story. Tesla completely dominates the electric vehicle market and can now look forward to potential competitors having to spend, spend, and spend some more if they want to duke it out for market share. This is going to be painful because the traditional automakers won’t have to break a sweat to build EVs, but they’ll be forced to expend millions if not billions of dollars convincing consumers to buy them.
Tesla, meanwhile, isn’t spending anything, and hasn’t. That doesn’t constitute a first-move advantage so much as an only-mover leg up. Electric cars were stupid risky in the past, but Tesla gobbled up that risk. Now, the reward.
Busting through three resistance levels on the stock in three months is mind-blowing. And there isn’t necessarily anything on the horizon to slow Tesla down. It reports fourth-quarter and full-year 2019 earnings in late January, and they’re expected to be positive. If Tesla meets or beats, look out above. The 100% return of the past three months could look like a tame precursor, as Tesla’s substantial short interest is decisively flushed out of the action.
Tesla has challenges, but the old story is over
Tesla has some looming challenges. The biggest is that as it sells more Model 3 vehicles — and soon, Model Y SUVs — at lower price points to less well-heeled buyers, it’s going to be highly stressed on the service front. Like any relatively new automaker, Tesla’s vehicles lack ironclad reliability, so the company compensates consumers with a great warranty.
But without dealerships, Tesla doesn’t have a solid built-in servicing model. Poor service means often means that owners who aren’t living with fleets of vehicles at home fail to buy again from a manufacturer. Up to this juncture, Tesla has been selling to patient early adopters who probably own two or three cars; now that it’s moving toward single-vehicle households, it could endure some pain.
That’s merely the cost of doing business, however. With shares above $500, Tesla can now effortlessly make good on its convertible debt obligations and, should it want to, raise additional capital to bolster its balance sheet. I think that would be smart, and if Tesla goes for it in 2020, the approximately $5 billion that the company has in cash could swell to $10 billion, and Tesla could start to deleverage.
This leaves Tesla’s naysayers, so previously dependent on a story, with not much to use to push the stock around. The facts are the facts, the fundamentals are the fundamentals, and if you think the market for EVs could grow in the US, Europe, and China, then Tesla stock looks cheap in a world were EVs now make up just 2% of global sales.
I’ll use the analogy of a predicted snowstorm to depict the naysayers’ plight. The weather report is uncertain: we could get a few inches, but we could also get a blizzard. The discussion is speculative: What would we do in the worst case, assuming that it probably won’t happen?
But then, the blizzard comes. And you have no choice but to surrender and dig yourself out.
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