Pardon the “click-bait” title, and don’t be alarmed. Your Tesla isn’t planning to mow down schoolchildren and Elon Musk won’t be CEO of Space anytime soon. Don’t listen to that type of hysterical fearmongering. The most harm your Tesla can do is redefine the meaning of a “drive-in movie” with a semi-truck.
From a health and safety perspective, Tesla is doing quite the opposite. You are less likely to die behind the wheel of Tesla’s Autopilot and less likely to contract respiratory cancer from its zero-emissions cars than you would from just crossing the road.
So, what is so dangerous about Tesla? If you live on Main Street, none whatsoever. If you live for Wall Street, plenty.
What is wrong with Tesla in 2020?
For those who haven’t been following the news, Tesla is currently valued at USD380 billion. That is more than Toyota and Volkswagen, combined. That is an out-of-this-world valuation for a company that produced 366,000 cars and generated USD1.1 billion in 2019. Toyota and Volkswagen, on the other hand, shifted 21.8 million and raked in USD15.6 billion in free cash flow.
Tesla adherents will say that valuation is justified, as it is a “disruptor” in the ageing car industry. Unlike many car companies that failed to put their chips into the fancy new technology of battery tech and autonomous driving, Tesla’s drive for innovation will soon upturn the car business entirely. Like all valuations, Tesla’s isn’t banking on the current year’s profits but the company’s future potential.
Much of this potential is driven by how tech companies and “disruptors” redefined entire industries. Exemplary “disruptors” like Google and Facebook have bent the internet to its will. Whereas Uber has made anyone a delivery driver. Tesla, to the true believer, is going to turn the industry on its head.
While it is true that Tesla has caused companies to take notice and fast track development of its electric cars and autonomous driving technology, it is in no way a “disruptor”. Let me explain.
What is a “disruptor”?
In any industry, be it the tech, retail, or smut, there is the product which users pay to use or own and there is the business, the method by which the service or product is delivered.
For Uber, its product is its app, and that app changed the business of commuting. Thanks to the Uber app, you no longer have to worry about hailing a taxi that will fleece you. Instead, Uber hooks you up with another app user and sorts out the fare based on fixed metrics.
Uber, in this case, “disrupted” the way the public commuting industry does its business. It circumnavigated bureaucracy and monopolies. Thus, opening the industry to more business opportunities and forging a new way of how it should be conducted.
So it is with Google and Facebook. Previously the internet was a wild west of adventure and porn. It was a deep lawless foreboding world that could only be navigated with garbled computer language. Then Google and Facebook came in and turned it into an accessible and wonderful world of eCommerce, cat videos, and porn.
Google and Facebook had “disrupted” the way industries conducts business on the internet. Now, instead of being limited geographically, businesses have access to a worldwide audience.
Tesla, on the other hand, hasn’t delivered a product that has “disrupted” an industry’s way of doing business. For all its successes, it is a business that merely “disrupted” everyone else’s product.
Product “disruptor”, not industry “disruptor”
Apart from its insistence of not selling its cars through a dealership, Tesla’s business model is pretty much similar to every other car maker. Customer pays money to purchase a product and drives off with the product. And therein lies the misunderstanding of Tesla’s status as a “disruptor”. Because aside from the sophistication of its product, the sale and delivery is business as usual.
Between the handing over of money and keys, to the owner getting bored of it or it drives itself into a truck, nothing about Tesla’s business model is fundamentally different from Toyota, Mercedes-Benz, or Rolls-Royce’s.
The coming of Tesla has in no way changed the way of life or the method of business for the millions of commuters in South America or South Asia. A sale of a Tesla is still subject to the same government regulations and scrutiny as every other car maker.
Tesla isn’t so much a “disruptor” but a player that is simply ahead of the curve. Electric cars and autonomous cars have been an industry pipe dream for decades. But how long can Tesla stay ahead of the curve?
Tesla’s problems and growing competition
Already Tesla is feeling the heat from competitors. Tesla owners form the majority of buyers of the all-electric Porsche Taycan, sales of Model 3 in Nordic countries is being pummelled by Polestar. While Tesla’s innovation is generating waves amongst tech enthusiasts who brag about not owning a car thanks to Uber, the company’s track record of poor build quality and reliability has spurned traditional car buyers.
Again, if Tesla wasn’t operating a traditional car business model, and was instead operating a car-sharing program, concerns on build quality and reliability wouldn’t be so pressing. But it isn’t. Unless Tesla does something about the shortfalls of its products, you can expect more customers to flock to more experienced carmakers with better built and more reliable products.
The economic reality of Tesla’s valuation
On a normal given day, Tesla’s valuation is perfectly harmless. It is what the market dictates after all, even if it is driven by speculation. It isn’t as though we are in a global pandemic that is beating the economy five ways to Friday. After all, the last thing the electric car business needs is people’s livelihoods being destroyed and finances emptied. Oh, wait.
Not only that, despite the poorer outlook on the world economy, Tesla’s stock price has surged nearly five-fold since March this year. The thing is, many believe that the price rally is driven by even stronger speculation.
As the pandemic hit countries throughout the middle of 2020, institutional investors, massive investment entities like Warren Buffet’s Berkshire Hathaway, which carefully study financial reports and delve into market studies, liquidated much of their stock holdings. These investors cashed out and battered down the hatches in preparation of weathering the coming storm.
However, despite the rout, industrial output dropping, and unemployment soaring, the market continued upwards. Many then realised that retail investors, the Average Joe who believes everything on Facebook and gets all their information from reading click-bait headlines like this one, is creating a bubble by buying up hot tech stocks and driving the valuation.
Thanks to Musk’s mastery in marketing and hype, people believe that his company is a “disruptor” and its stock will be the next big thing. And so, fearing that they are missing out on the next big opportunity, retail investors are buying up tech stocks like Tesla in hopes it’ll secure their finances.
This buying spree drives up Tesla’s stock prices, spurring further buying. It is a vicious cycle that builds a house of cards. Forget the “next”, it is today’s big thing.
The next big thing or the next big bubble?
Unlike industry giants like Toyota and Volkswagen, Tesla long-term profitability is questionable. After years of bleeding cash, Tesla has only been able to turn a small profit recently.
However, with a car market that looks gloomier by the quarter and electric cars still being an expensive limited-purpose option, Tesla’s potential for growth may be stymied. The question is, how long can it remain as the big thing in stocks?
Already market analysts are giving off warning signs that the real economy is in dire straits and the headlines of soaring valuations and new market highs are leading people to pump more money into what may become a catastrophic bubble.
Not only that. The car market is showing signs of stress as people are holding off new car purchases. Instead many are flocking to the used car market. If that isn’t the canary in the coalmine of the state of the market, then I don’t know what is.
Driven by fears of losing out, retail investors may risk losing more when economic reality hits the market. The eye of the hurricane is always the calmest amid the surrounding chaos. But be mindful not to be lulled into a false sense of security. Should the winds shift, that storm is going to slam into you harder than a confused Autopilot.