Tesla passes BMW on Model 3 optimism

BMW AG makes ultimate driving machines, but Tesla Inc.’ s stock is the one that’s motoring.

A week-long 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 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 all-in 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 Ri s k 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 i ts 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.

Tesla’s surge in value is controversial. Short interest represented about onefourth of the shares as of the latest quarterly filing. Investors i ncluding 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 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 at the Bloomberg Invest New York Summit on Tuesday. 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 sales and profits. The German carmaker sold almost 2.4 million vehicles 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 at Robert W. Baird & Co. If the car market is near an inflection point in which batterypowered vehicles become the big draw, then Tesla not only has a lead, but players like GM and BMW have a lot of capital trapped in making gasoline-powered autos that could be in decline.

“If we do make this transition to electric vehicles, the other car companies have stranded capital,” Kallo said by phone.

If Tesla stops trading on potential growth and starts trading on profitability, the stock would plummet, Tynan said. Musk would need to raise billions to get to BMW’s size. It takes the German carmaker about US$ 59 billion in plants, property and equipment to generate its US$ 104 billion in revenue. Tesla, by comparison, uses about US$6 billion in plants and equipment to generate US$7 billion in revenue.

In addition to giving BMW a run for its money in the markets, Tesla is about to be competing more head-on in showrooms.

The Model 3 will start at about US$ 35,000 and may typically sell at prices similar to BMW’s bread- andbutter 3 Series sedan. BMW has the i3 plug- in hybrid in its lineup and plans to sell an electric version of its X3 sport utility vehicle in 2020. Volkswagen AG’s Audi and Porsche brands also plan to introduce sporty electric cars.

Not to worry, says Kallo — Musk has a lot of fans. “I’m not sure if people want electric cars, but they do want Teslas,” he said.