Declining core business in a brutally competitive industry, much smaller secondary business also now facing growth challenges, and a trial of a new product in one city that is garnering mixed reviews. Will that be all, Sir? A trillion dollars please, and I’ll throw in some ideas for a robotic business for free. Sound crazy? The stock market capitalisation of Tesla (NASDAQ: TSLA) is currently just over $1trn.
Am I missing something – or does this seem loopy?
Figuring out what Tesla actually is
The key to unlocking this puzzle, I reckon, is figuring out what Tesla actually is.
Is it a car company (with sharply declining sales volumes in the first half of this year), with a much smaller power generation division to boot?
In that case, looking at the $45bn market cap of Ford or $51bn market cap of General Motors, Tesla’s $1trn looks ludicrous even if the vehicle business showed signs of strong growth, which it does not.
Looking to the future
On the other hand, what if Tesla is not just a vehicle company?
Following this line of thinking, maybe it has been spending years learning how to build self-driving systems, harvesting data to optimise its performance.
That experience has also taught the company valuable lessons, in vertically integrated manufacturing, strengthening customer loyalty, and robotics.
By applying this knowledge more broadly, such an analysis suggests, Tesla could perhaps perform well in multiple emerging and possibly massive industries, such as robotics, self-driving taxis, and even AI.
An inflection point
The critical question when it comes to valuing Tesla stock is: which of these two approaches is correct?
For now, I think either could be. Or, to put that another way, it is too early to call.
The car business has hit sizeable bumps in the road this year. But it is huge, has repeatedly demonstrated its resilience, and has competitive advantages including a large installed user base.
Meanwhile, the other businesses are smaller. Power generation and storage is at least a business, albeit much smaller than the car division (though still significant).
By contrast, self-driving taxis like the ones currently in trial (under human supervision) in Texas and robotics feel to me more like ideas at this stage. They are being worked out but it remains to be seen what, if any, long-term commercial potential they may really have.
At some point, perhaps over the next year or two, I think we may start to get a firmer handle on what Tesla really is: a car company with some other odds and ends attached, or a wide-reaching business centred on digital expertise learned from flogging motors.
I’m in no rush to invest
If it turns out that cars are indeed only the launch pad for a far more expansive set of enterprises, I think Tesla stock could potentially end up moving far beyond its current level.
Based on what we know now, though, that seems like a leap to me.
I see a lot of potential outside the car and power generation business – but far less in terms of tangible commercial prospects.
On that basis, Tesla stock looks too pricy to me. I won’t be investing.
