Tesla (NASDAQ:TSLA) finally has competition.
Oodles of it.
Germans like Volkswagen (OTCMKTS:VLKAY), Japanese like Toyota Motor (NYSE:TM), Chinese — even Indians. In America, General Motors (NYSE:GM) has produced an electric Cadillac and Ford (NYSE:F) is now offering an an electric pick-up.
What they all have in common is a desire to grab both Tesla’s market — and its mojo. At its Jan. 18 opening price of $325 per share, investors are still paying over three times sales for Tesla shares, while they can have General Motors for less than one-third sales.
The market cap of Tesla — about $58 billion after a 6.5% overnight drop — remains $4 billion ahead of GM, $25 billion ahead of Ford Motor, and is more than double that of Fiat Chrysler (NASDAQ:FCAU), all of whom dwarf it in sales, profits, and numbers of employees.
The posse is on to Tesla
How is Tesla going to compete? By cutting employees, cutting costs and raising profits, according to CEO Elon Musk.
In his e-mail to employees announcing the job cuts, Musk cited the end of U.S. tax breaks on electrics and said the Model 3 needs to be priced closer to its $35,000 base price promise to compete and admitted that “the road ahead is very difficult.”
Tesla is now facing a host of competitors, with more coming all the time. Nissan (OTCMKTS:NSANY) is just the latest big car company promising an all-electric line and a “complete reinterpretation” of what such cars can do.
Tesla also faces a host of competitors in the area of autonomous vehicles, starting with Alphabet’s (NASDAQ:GOOGL) Waymo, which is already running driverless Fiat Chrysler Pacificas in Phoenix. General Motors plans to start tests of self-driving cars in San Francisco this year. Fiat Chrysler’s Jeep unit is experimenting with rentals and car-sharing.
Tesla’s Not-So-Secret Weapon
Given the reality of other car makers’ low valuations, Tesla’s high valuation, and Musk’s admission of trouble ahead, is there anything that might still attract an investor to the stock?
Tesla’s battery factory in Nevada is churning out two battery packs per minute, 24 hours each day, at a cost of $116 per kilowatt hour (kwh). The cheapest competitor pays $146 per kwh — and Tesla is making more such battery packs than the rest of the world combined.
Tesla has plans to build two more battery plants, in Shanghai and in Europe, and to continually redesign its batteries so they both cost less and last longer. Tesla executives say the Nevada plant is profitable and cash flow positive.
The problem is that batteries remain a very small part of the Tesla story, at just over 10% of revenue, even when its solar cells are added in. Also, even here there are competitors, promising to do even better.
The Bottom Line on TSLA Stock
Tesla has succeeded in shifting the direction of the auto industry, away from gas guzzlers, toward electrics and toward vehicles that drive themselves.
But its valuation has attracted enormous competition, and expectations for its own financial performance keep rising.
Tesla is next due to report earnings Feb. 6 and the consensus is for net income of $2.12 per share, while the “whisper number” (what analysts are telling their top clients to expect) is $2.41, on revenue of $6.36 billion. Compare that to earnings of $1.75 per share, fully diluted, reported for third quarter, on $6.8 billion in sales.
Even if Tesla beats these estimates, it’s becoming less unique, as all its competitors are now focused on making the same kind of all-electric, autonomous vehicles it has been promising. Its relative valuation today is based entirely on its lead in batteries, and battery technology.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.