The Company That’s Valuable Without Being Profitable: Tesla

By November 24, 2017featured

Tesla isn’t making a profit, yet it’s considered the most valuable carmaker.  Why?

The answer is simple: This is the stuff dreams are made of. It’s the future unfolding before us, and it looks better than the past.  It’s not always about the cold, hard facts, the company financials…  Sometimes, it’s about sentiment, and Tesla has that in spades.  

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The brain behind Tesla, Elon Musk, is indeed already the stuff of legend. And he’s certainly not shy about responding to his detractors. Most recently, when investors insisted that he add two more independent board members, he more or less said: “Buy Ford”. But indeed, they will be added—after Tesla completes its merger with Solar City.  

When earlier this year Tesla became America’s most valuable car brand, overtaking GM by $1 million in market cap, to hit $50.887 billion, Musk tweeted “Stormy weather in Shortville…” and it must have been from politeness that he didn’t rub those investors’ noses in the fact that despite a close-knit board of directors and despite it not yet making a profit, Tesla is the country’s most valuable carmaker.

Musk is a big part of the answer why almost everyone loves Tesla.  He is an entrepreneur, a visionary, an innovator – someone who actually wants to not just make money, but to make money to use it to save the world, quite literally.

 

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Here’s how Tim Urban, the Wait but Why blogger who has done very extensive coverage on Musk’s endeavors, describes the business model Elon Musk uses in all his companies: a business model that doesn’t just aim at growth but at much more and that certainly makes it stand out in the crowd:

The formula works for all other companies as well, Urban says, and Musk seems to be making companies the way others make shopping lists. All of them inevitably attract a lot of attention as the ultimate stated goal of each and every one of them – Tesla, SpaceX, OpenAI, Neuralink, and the Boring Company – is the same: Increased chance of a good future. What’s not to like about that? Especially among the younger generation, the millennials, who, surveys have shown, are very big on sustainability indeed. Sustainability is what Musk is offering in various forms.

But let’s move on from the top man at Tesla. The company started as a luxury car brand – as an ambitious attempt to marry luxury and sustainability, and then, still more ambitious, make it affordable. The Model 3, to be released later this year, will have a price tag of just $35,000 before incentives, will have a maximum range of 215 miles on a single charge, and it will be assembled by robots. Target production figures are for half a million Model 3 cars to leave the Fremont factory annually, starting from next year, so speed of production is of the essence.

What’s more, Tesla  released a semi-truck this September, entering a segment that may turn out to be even more disruptive than electric cars. One analyst, Alexander Potter, actually downgraded his stance on two truck companies, Paccar and Cummins, citing the pending release of the Tesla Semi.

This same analyst, by the way, after driving a Tesla for seven months, upgraded the company’s stock price target to $368 and summed up what makes the company unique pretty nicely: “More so than any stock we’ve covered, Tesla engenders optimism, freedom, defiance, and a host of other emotions that, in our view, other companies cannot replicate.”

Cool tech stuff and cheap e-cars – and semi-trucks – aside, there is something even cooler about Tesla. It is not just a carmaker, not anymore. Based on the business model above, it was likely never conceived of as just a carmaker. Tesla is taking care of the whole transportation thing: it’s currently building a Supercharger global network and plans to have more than 10,000 Superchargers and 15,000 Destination Charging connectors all over the world by the end of 2017.

Then there is energy storage, an increasingly important part of Tesla’s business after the launch of the world’s first gigafactory for rechargeable batteries. The energy storage business recently hit the spotlight after Musk offered Australia’s PM Malcolm Turnbull to fix east Australia’s energy shortage problem with a Tesla battery farm that would be installed and ready to start working within 100 days. Failing that, the farm would be free of charge, no pun intended. Needless to say, Turnbull took the wager.

All Without A Profit

The Tesla effect is actually so strong that analysts are not even worried about it being still unable to turn in a profit. In 2016, the company couldn’t reach its own car shipments target of 80,000, delivering 76,230 instead, due to production problems. Even so, ahead of the release of its Q1 2017 report, analysts were upbeat, little caring if Tesla posted yet another loss. Apparently, the growth potential of the company is so huge that actual performance while this potential is realized becomes largely irrelevant.

Finally, to be completely fair, not everybody loves Tesla. One guy, venture capitalist Doug Derwin, cancelled his Tesla order and initiated a campaign with the slogan “Musk Dump Trump” as a demonstration of what he called “principled opposition” to Musk’s joining an advisory body set up by the President, in yet another clear sign that he has no qualms about swimming against the current. Bloomberg called him “supremely logical.” It may very well be that this supreme logic is what has turned Tesla into the unique company it is.

 

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