The new conventional wisdom says Tesla (NASDAQ:TSLA) is the dominant car company in the world. That’s made Tesla stock a winning name in 2020.
The stock opened for trade June 23 just below $1,000 per share. That’s a market capitalization of $185 billion. Toyota (NYSE:TM) opened with a market cap of $177.5 billion.
Toyota had roughly $275 billion in sales in 2019. Tesla’s sales were under $25 billion. Toyota had earnings of over $16 per share last year, and paid a dividend of $3.59. Tesla is unprofitable.
The market says Tesla can scale production more than 10 times and make money at it. Tesla produced about 100,000 cars during the first quarter of 2020. That means it could make 500,000 this year. Toyota’s production for 2020 is estimated at 8.8 million.
Toyota isn’t even the company that Tesla should be worrying about.
Tesla Stock Benefits From the Company’s Scale
The comparisons with Toyota reflect the fact that Tesla has left its American competitors behind.
Tesla is now producing cars in Fremont, California and in Shanghai, China. It will start building a plant in Austin, Texas and is building one in Germany. Neither is in production, although Tesla does some assembly in the Netherlands.
Get all those plants running at full capacity, however, and you’re still just doubling current production rates. Tesla needs four more factories, beyond those in operation or on the drawing board, to match Toyota’s production.
Tesla’s valuation, then, has little to do with its auto production. It’s really about batteries. Tesla has scheduled a “Battery Day” for Sept. 15. It will draw all the excitement of an Apple (NASDAQ:AAPL) product unveiling.
While batteries are the secret ingredient in Tesla cars, 85% of Tesla revenue still comes from cars. Demand for Tesla’s battery business now far exceeds its capacity. Tesla talks up its solar roof, but it’s still a tiny slice of the business.
And Tesla warned a year ago that supplies of lithium, nickel and copper for batteries were becoming dicey. You can add cobalt to that list. Analysts feel supplies are still adequate through 2025, with prices rising just $100 per car from increased demand.
Ramping up battery production, and keeping rivals from doing so, is the Tesla story right now.
Bears Remain in Hibernation
Tesla bears remain in hibernation because Tesla stock remains in a short squeeze.
On June 22, some 28% of the company’s trading volume was short interest. This means traders are borrowing Tesla shares, betting their price will decline. The short squeeze has helped Tesla shares rise from under $400 at the bottom of the novel coronavirus lockdown to the current $1,000 price.
Bears point to rising executive pay as one reason for pessimism. They insist Tesla’s battery lead isn’t as big as bulls believe. They see production being cut back in Shanghai. And they see Tesla’s stock price as completely divorced from its fundamentals.
The Bottom Line
The bears are right, but it doesn’t matter.
So long as Tesla stock remains subject to a short squeeze, there’s a floor under the stock price.
That doesn’t make its value realistic.
To justify its current price, Tesla must grow ten-fold and make money. It must double car production and increase battery production four-fold, at a minimum. To justify its current price Tesla must dominate the market for battery materials, and technology, so that no other company can compete.
That’s not happening. China has hundreds of electric vehicle makers and is the largest electric car market. Volkswagen (OTCMKTS:VLKAY) is making deals to control a big piece of that market with its MEB platform, and taking it global.
Tesla stock won’t fall until it meets a real challenge in electrics. But that challenge is coming.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL.