Will Tesla Be The Electric Car Maker of The Future? The company has an absurd market valuation, while it keeps losing money. Does it matter?

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WASHINGTON – Thank God, US IT tech companies are still in the lead. It is hard to match the combined strength of Apple, Google, Intel, Facebook, Cisco, Microsoft, Oracle, and so many others.

A high-tech car company

But now we also have Tesla, the high-tech electric vehicle (EV) manufacturer, aspiring to be part of the super high-tech, high valuation technology companies club.

And here is a problem. Undoubtedly, Tesla is a tech company. But it makes cars, not software. Can Elon Musk, its founder, keep saying that because he is creating a technology revolution about to transform the automotive sector the metrics about unit costs and profitability that would apply to traditional car makers do not apply to Tesla?

You buy into the revolution 

Who knows really. As Philip Delves Broughton notes in a well crafted FT op-ed piece, (To be rational about Tesla is to miss the point, August 27, 2015), if you are buying Tesla’s stock you are buying into a huge bet. And the bet is that this particular EV technology will indeed disrupt the entire car industry, soon enough displacing the old, established players.

If this is indeed so, then forget about the traditional metrics. Forget about the fact that Tesla’s stock is absurdly over valued. Indeed, as Broughton notes, the entire company is worth about half as much as BMW, a competitor that makes 35 times as many cars.

You buy Tesla stock simply because you believe what Musk says about massive future sales based on the guaranteed success of new, affordable EV models that have yet to be produced.

Well, if Musk is right, then he is the man who will transform the world automotive industry. Again, if this is so, then Tesla stock at $ 200 or even $ 300 a share is a bargain.

If Musk is wrong 

But if Musk is just a clever marketer, your investment most likely will be worth nothing in just a few years. Indeed, what if Tesla EVs cannot deliver any real profits? What if there are other companies out there that will come up with a more efficient electric engine and/or a new generation of truly revolutionary low-cost, high charge, low weight batteries?

Well, then it is good-bye Tesla, the trail-blazer that got it only half right.

Subsidies 

And just one more thing. Tesla current lousy numbers would be a lot worse without the subsidies that Tesla and other EV manufactures receive from the federal and state governments.

Policy-makers love anything that replaces the internal combustion engine. Therefore Tesla buyers benefit from a tax rebate, while the company gets carbon credits that it can sell to others, this way making extra profits.

Look, nobody denies that Tesla already makes a great car. The Model S gets fantastic reviews. But it is not a cost-effective product.

The Concorde was great, but it kept losing money 

By the same token, when a French-British consortium launched the Concorde, back in the late 70s, many thought that we had entered a brand new era of cost-effective supersonic air travel.

Well, it was not so. Nobody said that flying the Concorde was a bad experience. On the contrary, it was wonderful. But it was a commercial disaster. Therefore, after a long agony, the Concorde was finally pulled out of service in 2003. This does not mean that supersonic commercial jets will never be made. It simply means that it will have to be something other than Concorde.

Now, are Tesla vehicles the real thing, or just the automotive versions of the old Concorde?

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