Tesla Inc (NASDAQ:TSLA), at least for a brief while there, overtook General Motors Company (NYSE:GM) as the largest U.S. automaker by capitalization after exceeding a market capitalization of $50 billion. That came amid a run that sent TSLA stock to all-time highs.
For more than a century, Detroit has been home to some of America’s largest vehicle manufacturers. But that might soon change with Silicon Valley threatening to become the new Motown, even as the automobile industry continues to rely more heavily on software and other cutting-edge technologies.
With Tesla, You’re Paying for Potential
The comparison between Tesla and General Motors is more stark when you look at their respective valuations. TSLA stock sports a forward price-to-earnings ratio of … well, zero (it has no earnings), but negative 112 if you’re going by the loss figure, versus a thin 5.6 ratio for GM stock. General Motors is, of course, solidly profitable while Tesla has yet to find a way to generate earnings consistently.
That kind of stratospheric valuation clearly tells you that investors hope that Tesla will one day grow to become as big, or maybe bigger than, General Motors. Consequently, they are willing to pay top dollar for a company whose markets, including home energy generation, are still embryonic at best. After all, General Motors sold 10 million-plus vehicles in 2016, completely dwarfing Tesla’s 76,000 deliveries.
Tesla investors are happy to pay for potential, and forgo the huge profits and cash flows that large automakers such as GM and Ford Motor Company (NYSE:F) generate.
But are investors getting ahead of themselves here by expecting too much from Tesla? Is TSLA stock a disaster waiting to happen?
An Expanding Market
Forecasts for the growth trajectory of the electric vehicle market are currently all over the place. For instance, Bloomberg New Energy Finance (BNEF) released a report in 2016 that estimates EVs will hit 35% market share by 2045 up from around 1% currently.
Goldman Sachs is, however, a lot more optimistic and sees 22% of the market being EVs by 2025.
The Energy Information Administration has EVs at 8% of the U.S. market by 2025, which though small is still double the firm’s 2016 estimate and more than 10 times its 2014 forecast. The firm believes pure plug-ins by companies like Tesla will dominate the market with hybrids only playing a marginal role.
Adam Whitmore, adviser on climate change policy, observes that new technologies such as EVs generally take 20 to 30 years to reach 80% market penetration once they reach 1% deployement (where we stand currently). EV is a replacement technology, and replacement technologies tend to gain market acceptance faster than new off-the-block tech.
Digital cameras took about 15 years to almost completely replace film while DVDs condemned VHS to oblivion in less than a decade.
TSLA Stock Is Ahead of the Curve
Whichever way you slice it, one thing is clear: EVs face a bright future. And the good thing is that Tesla is well ahead of the curve compared to rivals.
Tesla has lined up Model 3 to be launched later in the year, and only GM’s homely Chevy Bolt comes anywhere close in terms of popularity. GM, of course, beat Tesla to the punch by releasing the Bolt a whole year ahead of Model 3, but sales of ~6,100 units by end of March suggest that it’s Tesla that will have the last laugh. Tesla had 373,00 Model 3 reservations at last count, and that tally has likely not changed much.
Tesla owns 30% of the U.S. plug-in market. If EVs take just 10% of the 100 million-plus U.S light vehicle market by 2030, Tesla’s share will probably be around 3 million units, or 39 times what the company pushed out in 2016.
That level of production would necessitate a huge infrastructure buildout, and Tesla seems to be up to the task — the company has announced plans to double its supercharger network to more than 10K by year-end and finalize locations for three more Gigafactories in the same time frame.
With the EV market still so young, it might seem like a stretch to expect Tesla to one day grow as big as, or bigger than, GM.
But if the Model 3 hype turns to reality, then the sky might be the limit for TSLA stock.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
