Hurdles ahead despite Tesla’s spectacular success
TESLA’S share price performance this year is nothing short of stunning, rising over 250 per cent since January.
There’s some justification for that performance.
The production lines have proven more resilient than many expected and last week the company announced four successive quarters of profit for the first time.
However, it’s worth having a closer look at what’s driving that success. Revenue from car sales only crept up 1 per cent in Q2, and growth was really driven by a 21 per cent increase in regulatory credit sales. Tesla earns credits in recognition of its zero-emission vehicles and sells them to other manufacturers who need to offset emissions. Broadly speaking, as more Teslas hit the road, the group earns more credits. However, as rivals increase the number of electric vehicles they build those credits will become less valuable.
But without credit sales Tesla would have been profitable in just one of the last four quarters.
Tesla’s done an excellent job ramping up production, with new factories popping up every year. But the “if we build it, they will come” approach is a concern. Ultimately, the group needs to rapidly increase sales. However, if prices have to be cut that raises questions about appetite. That leads us to our core concern, Tesla’s valuation.
At $295billion (£230billion) with a share-price-to-share-earnings ratio of 176, it’s the world’s most valuable automotive company. The economic outlook is gloomy and it’s hardly an ideal time to be asking drivers to reach for their credit cards – especially with the “affordable” Model 3 priced at a fairly hefty £40,000-plus.
Tesla has enjoyed a period of technological superiority, with a great investment story. But as time goes on, the hurdles for success have become even more formidable.
“This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”