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Is Tesla really that S3XY?


Elon Musk is well-known for his special sense of humour

Elon Musk has so far launched four Tesla models named S, 3, X, and Y on the market.

X AE A-XII (no, not a password, but Musk Junior) probably needs to have the word-play of the Tesla models explained to him by his father at some point, in addition to his own cryptic name...


The value of the Tesla share has multiplied in recent years, so that the stock market value is extremely high compared to the sales and profits. But are the high hopes for a rosy future for Tesla at all realistic?

The stock market world is arguing about this and voices are repeatedly raised that see a massive overvaluation of the company on the stock market.

Nevertheless, a large number of investors are obviously positive, otherwise the current relatively high share price would not come about.


Marketing and Fan Culture

Similar to Apple (see Blog Post), there is a real fan culture at Tesla.

The visionary appearance of Elon Musk coupled with his high presence and popularity in social media is a significant factor in this hype.

In addition, the company stands for technical progress and is considered a pioneer in the electric car industry. Tesla was the first company to sell luxury electric cars in series. The parallel to the Apple brand, which is also strongly supported by fans, is recognisable, because here there is a pioneering position in the area of smartphones and laptops.


Future fantasies

On the stock market, there is a fundamental focus on future company values. Tesla not only offers shareholders the prospect of possibly being one of the largest carmakers in the coming decades, but is also very well positioned in the development of innovative technologies.

Innovation is extremely important for Tesla

In the field of autonomous driving, for example, Tesla is most likely the current leader. It is important to note that Tesla develops most of the software for its cars itself and is therefore not just a "simple" carmaker, but rather a technology company. This classification is also very clearly reflected in the high valuation of the share.

VW, for example, is considered more of a simple carmaker and is much more favourably valued if you look at the price-earnings ratio. This value is about ten times higher for Tesla (53) compared to VW (4.4), for example. In contrast to Tesla, the majority of people do not believe that VW will become an important software manufacturer.





Green energy

In order to achieve the climate targets, low-CO2 drive technologies will play an increasingly important role.

According to current knowledge, electric drives are the essential solution in the automotive sector.

While Tesla is not the only car manufacturer responding to these developments, it is highly likely to have a head start on the competition.

It is striking to me, for example, that almost every car advertisement touts a model that has a hybrid or fully electric powertrain.

VW CEO Herbert Diess has even publicly announced that Tesla is several years ahead.


Speed in growth

At Tesla, it's not just the cars that are fast, but also the expansion of the company.

Despite environmental concerns, the Tesla factory was built relatively quickly even in very bureaucratic Germany. After only about 2 years of construction, the first cars were already produced in Grünheide in March 2022. With thousands of workers and hundreds of thousands of cars produced per year, this factory is no lightweight and was built in a relatively short time.

Tesla's growth in sales and profits can be described as rapid.

In 2019, sales were $24.5 billion, then $31.5 billion in 2020, and by 2021 it was $53.8 billion, a growth of almost 120% over 2019. Compared to the loss of $842 million in 2019, this represents a profit of over $5.5 billion in 2021. In the first quarter of 2022 alone, Tesla has now announced a profit of $3.3 billion, so further strong growth can be expected.

 

High valuation of the share

As already mentioned, the price-earnings ratio of Tesla shares is extremely high compared to other car manufacturers. The aforementioned quarterly profit of 3.3 billion US dollars compares with a market capitalisation (value of all shares) of around 700 billion dollars, which corresponds to a current P/E ratio of around 53.

Tesla would therefore have to continue to grow extremely strongly to justify this high valuation.


Manufacturing defects

Some customers complain about insufficient or poor quality workmanship in the interior of the vehicles. Since luxury products are expected from Tesla, this leads to disappointment. A broader crowd among existing and potential customers who also share this assessment would mean the risk of greater image damage.


Competition

Of course, the news has also spread among other carmakers that most likely the demand for electric cars will grow strongly in the next decades. This growth, of course, means a big market that the other carmakers want to get into as well.

Tesla's competitors usually entered the field of electric mobility a few years later, but they are currently doing everything they can to catch up as quickly as possible.

VW, for example, as a huge company with around 200,000 employees and 250 billion euros in sales per year, has the opportunity to boost the production of electric cars in a relatively short time. VW CEO Herbert Diess declared the goal of catching up with Tesla by 2025. Other manufacturers such as Mercedes Benz, BMW or the Asian carmakers are also rapidly converting to electric drives.

Especially in the area of relatively cheaper models for the broader market, VW, for example, could even be one step ahead of Tesla in the near future.


Conclusion

The other manufacturers will certainly pose challenges to Tesla and put pressure on the company to continue to positively differentiate itself from the competition.

However, in my estimation, the electric mobility market will be so large that there will be many manufacturers that will be profitable.

For example, it may well be that VW will develop an affordable electric model that will be bought by the masses. Tesla, on the other hand, is classically more in the luxury segment and would not compete directly. In the luxury segment, while there is also likely to be good competition, Tesla's pre-existing image provides an edge in customers' valuation of the brand that should not easily melt away.

Personally, I expect Tesla to be the first manufacturer to produce fully autonomous driving and licensed cars. This should also be a very positive boost for the company's image and future viability.


Whether the share is currently "correctly" valued or whether there is room to move up or down is difficult to assess because the valuation premium is so high. Personally, however, I think it is relatively likely that Tesla will continue to grow at a relatively rapid pace in the coming years and occupy an important position in the electromobility market. That's why I still see a lot of potential for the share.


 



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