Despite bad news churning out almost daily about Tesla Inc (NASDAQ:TSLA), stock markets are barely reacting. News that the company will miss Model 3 production by a wide margin and rumors of a mass layoff did nothing to move the stock by much. But shareholders ought to take the worsening developments at Tesla seriously.
The media is interpreting that the tweets from Tesla’s CEO, Elon Musk, imply the company has supply constraints, due to production scaling problems for Model 3. If it is true, then the competitive moat Tesla has over its rivals may narrow. Tesla’s first-to-market advantage gave the company many years of lead time to take market share, but this could change overnight. If Tesla 3, which is more affordable than the other models, is in limited supply, Tesla’s market share growth will slow. The delay could also cannibalize Model S sales, as customers who waited for Model 3 in lieu of Model S may now cancel the order altogether.
Mercedes-Benz and BMW are wrestling with releasing a luxury-class electric vehicle (EV) that will compete effectively against Tesla’s line of automobiles. If the market share growth slows for Tesla due to production delays, then the fundamentals for Tesla stock become questionable. TSLA stock trades at around six times sales and has a debt/equity of 1.56 times. By comparison, Ford Motor Company (NYSE:F) trades at just 1.5 times book, though its debt/equity is 4.53 times. General Motors Company (NYSE:GM), which hovers at yearly highs, also trades at 1.5 times book like Ford’s stock but has a lower debt/equity ratio of 1.96 times.
Both Ford and GM could catch up with Tesla if Model 3 production does not pick up at a brisker pace. Ford’s CEO is keen to pivot the company’s cars away from fuel and toward EV. GM’s Volt is hardly a success, but its limited sales will give the company useful lessons. GM needs to get its styling, target market and pricing right if it wants to win over market share from Tesla. Given its lineup of gas cars are doing well, GM has a good chance of restructuring its EV strategy in such a way that sales for the latter will increase.