Sizzling Tesla speeds past BMW in market cap
Bullishness on affordable electric cars boosts value against formidable rival
BMW AG makes ultimate driving machines, but Tesla Inc.’s stock is the one that’s motoring.
A weeklong rally in Tesla shares, spurred by chief executive Elon Musk’s confidence in selling electric vehicles at scale, vaulted the company’s market capitalization past the German luxury carmaker in early Friday trading. The amount of ground Tesla covered was vast: BMW was valued at a US$30 billion premium as of early December.
The change in rank is no small matter. Luxury carmakers like BMW trade at a higher value than the likes of General Motors Co. or Ford Motor Co., which Tesla passed back in April. BMW has a powerful brand among car buffs and affluent consumers and its vehicles command premium prices and fatter margins. In bidding its market cap past BMW, Tesla investors are signalling confidence the company can go up against a formidable player that also sells electric cars — and prevail.
“The argument is that Tesla has the ability to do things that the others can’t and that, being allin on electric cars, they will win,” said Kevin Tynan, an auto analyst with Bloomberg Intelligence. “It’s a flawed argument. You can’t tell me that BMW can’t do what Tesla can do.”
After climbing as much as 1.9 per cent and surpassing BMW’s US$61.3 billion market value, Tesla shares reversed gains after Hedgeye Risk Management added shorting Tesla to its best ideas list. The stock closed down 3.4 per cent to US$357.32 in New York, dropping its market cap about US$1 billion below BMW’s.
Musk, 45, engendered optimism this week by telling shareholders Tuesday his most affordable electric car thus far, the Model 3, will start production as scheduled in July. Within two to three years, Musk sees following that sedan up with a cheaper crossover model, the Model Y, that eventually will draw more demand and need its own assembly plant.
Tesla’s surge in value is controversial. Short interest represented about one fourth of the shares as of the latest quarterly filing. Investors including Jim Chanos, who famously bet early on energy company Enron Corp.’s failure, point to the carmaker’s sparse profits — it’s posted losses in all but two quarters of its history — and expect Musk to go through billions in cash to fund his lofty ambitions.
“We think they are going to be burning close to US$750 million to US$1 billion a quarter for the next handful of quarters,” Chanos said. “(Tesla) has its big test ahead of it, the Model 3. It has been losing money selling US$120,000 cars, but it hopes to make money selling the US$35,000 car.”
Tesla has a long way to go to catch up to BMW in terms of sales and profits. The German carmaker sold almost 2.4 million vehicles cars in 2016, while Tesla delivered fewer than 80,000. Tesla lost about US$725 million in 2016; BMW made US$7.7 billion.
What will eventually decide whether Tesla justifies its valuation is whether electric cars really take off in demand, said Ben Kallo, analyst with Robert W. Baird & Co.