Tesla Broke the Internet With Smoke and Mirrors

Tesla (NASDAQ: TSLA) broke the internet… again.

Because of CEO Elon Musk, the electric car manufacturer has completely shattered the conventional wisdom that all automakers need to be stable and reliable investments.

Instead, he promotes his company as a dynamic vehicle for growth despite the risks and challenges ahead of it.

This is where Tesla’s “tricks” with smoke and mirrors began. It enabled the company to surpass giants like Ford (NYSE: F) and General Motors (NYSE: GM) to become the biggest and most valuable automaker in America.

The first dethroning happened on April 3 with Ford.

Bloomberg lays out some of the facts of Tesla’s unprecedented and unexpected rise over Ford:

  • In the past five years, Ford reported a net income of about $26 billion. Tesla lost $2.3 billion.
  • The same period saw Ford generate $151.8 billion in revenue compared to Tesla’s $7 billion.
  • In all of 2016, Tesla sold about 40,700 vehicles in the U.S. — roughly the same number of F-Series trucks that Ford delivers every three weeks.

According to these numbers and metrics — which coincide with the traditional wisdom of vehicle manufacturers — there is no way Tesla should have made it to the top.

But considering Tesla’s unique indifference within the industry, these facts have been rendered null and void.

The weight of certain metrics has changed.

The week after topping Ford, Tesla’s shares rose 3.3% on Monday, boosting its market capitalization to over $50 billion.

Tesla ended the day valued at around $64 million more than GM, climbing to the number-one spot in the country.

In midafternoon trading on Monday, Tesla shares rose more than 3% to reach an all-time high of $313.73. This was after receiving the highest price forecast ever issued for the stock by an analyst at a major firm.

The stock closed up over 3% at $312.39 per share.

However, it didn’t outdo the Detroit auto giants in terms of revenue or number of vehicles produced. If that were the case, then Tesla would be far from the top.

Tesla is notorious for under-delivering on its production promises and for burning through cash like rapid fire.

Yet, in the eyes of its investors, Tesla can do no wrong.

Just last year, GM delivered more than 10 million cars to consumers while Tesla produced a meager 80,000.

“In many ways, Tesla seems to play by its own rules,” writes Piper Jaffray analyst Alexander Potter.

The company burns through cash at a rate “better-established” companies would likely be crucified for, devises “unreasonably fast” production timelines, and “spurns industry norms” by doing things like choosing to sell directly to consumers rather than through dealers.

The New York Times reports that while GM and Ford may have strong profits and healthy balance sheets, Tesla offers something Wall Street loves more: the potential for dramatic growth.

Its stock market capitalization rate is what pushed Tesla into the number-one seat in the U.S. for automakers, not its revenue or number of vehicles it manufactures.

For now, Tesla ranks as the sixth-biggest carmaker in the world by market cap behind Toyota (NYSE: TM), Daimler (ETR: DAI), Volkswagen (ETR: VOW3), BMW (ETR: BMW), and Honda (NYSE: HMC).

Although it has a long way to go to match Toyota’s $172 billion market cap, Honda is barely ahead of the electric automaker.

Tesla is just within $1 billion of Honda and cracking the top-five automakers worldwide.

Many consider Tesla’s stock to be seriously overvalued. But investors view Tesla as a technology startup rather than an automaker, solidifying its ability to get away with overpriced shares and unmet promises.

“The market cares more about the potential new market value of the other businesses Tesla is in than about real profits and cash flow,” says Morningstar analyst Dave Whiston. “Right now there is nothing to slow Tesla’s momentum.”

Tesla is breaking loose of the luxury-car niche to enter the mass-produced, consumer-friendly sector with the impending release of its Model 3 compact sedan.

Although Tesla holds the investors’ favor right now, a lot is riding on the promises made about its newest electric car model.

A bad release could cost the electric car manufacturer. But nothing is certain.

Tesla is promiscuous compared to its Detroit counterparts. It’s the wild card.

Its growth and outlook, mingled with a mysterious uncertainty, is Tesla’s ace in the hole. Even if circumstances don’t go as promised, consumers and investors remain steadfast.

This summer, the company is supposed to begin production on the new model that has been promised to sell for $35,000 and drive approximately 215 miles per battery charge.

Musk claims that Tesla’s goal is to make 500,000 cars by 2018, which seems like a hefty promise when you consider the lack of cars it’s manufactured in the past.

“Achieving this goal will not be easy,” senior editor at Kelly Blue Book Karl Brauer says. “That’s a five times growth in volume. I don’t know of any car company that’s ever done that in a two-year period.”

Currently, Tesla only offers two models: its Model S luxury sedan and the Model X SUV in limited numbers that retail for around $90,000 plus whatever options are added in.

However, consumers are gifted with a $7,500 federal tax break for purchasing such an environmentally economic vehicle — a prime selling point for an auto manufacturer with such a volatile future.

“Tesla’s products have a captivating impact on consumers and shareholders alike; this advantage will be difficult to replicate,” Potter, the Piper Jaffray analyst, states. “Even if the Model 3 production launch goes badly, we think consumers (and more importantly shareholders) will withhold judgment.”

But after analyzing Tesla’s 2017 performance thus far, it could live up to the promises it made about its latest model.

NPR reports that Tesla released figures on Sunday demonstrating its delivery of more than 25,000 vehicles in the first three months of 2017. This, The New York Times notes, represents a 69% jump from the same period last year.

At the same time, monthly sales figures for several Detroit automakers “showed them struggling to meet last month’s performance.”

This feat illuminates how Tesla is finally managing its production better.

“Can you name any other company, in the history of mankind, that has gotten to where Tesla has in 10 years?” asks Bob, a Tesla fan who spoke with BBC contributor Dave Lee.

Similarly to Lee, I can’t think of any other company that could match Tesla’s advancements.

Musk often frequents Twitter, emphasizing the misery suffered by those betting against Tesla. This is a popular trade on Wall Street where skeptics once said the company was in danger of being overtaken by older, deep-pocketed manufacturers like GM.

Tesla continues to advocate. Meanwhile, investors continue to bet on it becoming a carbon-free energy and transportation heavyweight.

The company seems to be steadily climbing in the right direction… breaking the internet, expectations, and rules all in the same stride.

That’s all for now.

Until next time,

John Peterson
Pro Trader Today