The Tesla Bubble

By Emma Nelson

Last Monday, Tesla passed G.M. as the most valuable American auto-company. With a current market capitalization of $50.9 billion, Tesla’s stock has been climbing in recent weeks following an immense market surge by investors driving up the market share price, which as of Wednesday had weakened slightly to $302 off of record highs of $312. However, the question on every investor’s mind: is this growth sustainable or is Tesla overpriced and bound to be a risky investment in the long-term?

Despite trepidation about its valuation, Tesla remains an industry darling. The electric carmaker is currently trading at twenty eight times 2020 estimated earnings with exuberant investors more focused on long-term prospects than its unsteady profit history. Yet for all the investor confidence that has surrounded Tesla for years now, its plan to radically expand in the next few years has caused skepticism amongst investors. For instance, it remains to be seen if the company would be able to ramp up production to a level that would allow it to deliver its new Model 3 to a mass-market as current company plans estimate. CEO Elon Musk predicts that by 2020, Tesla will be producing around one million cars a year to meet the rampant demand. However, in 2016 the Company delivered only 76,000 vehicles, falling well below targets following short-term production challenges at the end of Q4 and Morgan Stanley analysts predict Tesla output to only reach one million until 2027. Clearly, there remains a disconnect between market realities and Musk’s vision for Tesla.

While the stock has surged thirty five percent over the past month, much of which has been traced to market confidence about Musk’s goals for the Company, many investors are calling for a shake-up of Tesla’s top management. A letter signed by five major investment groups on Monday called for two independent directors who lack any ties with Musk to be added to the board. Clearly, investors are worried that Tesla’s valuation may reveal institutional weakness from within in the coming years and are doing their best to quell any market doubts. Tesla, despite these weaknesses and emerging competition from auto giants like G.M., remains a market leader in electric cars and is poised to take advantage of a massive change in consumer preferences that many leading analysts predict could revolutionize the auto-industry.