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Should Tesla Be the Most Valuable Automaker in the World?

The difference between Tesla and traditional car makers is that it innovates at the pace of Amazon or Google, not at the pace of the automotive industry

On Wednesday, the fortunes of PayPal founder, and Tesla technology company’s principal shareholder, founder, and CEO, Elon Musk, surpassed those of Amazon founder and CEO Jeff Bezos, making him the richest man in the world.

Elon Musk’s fortune surpassed Jeff Bezos’ when Tesla’s stock surpassed $800, setting a record for the company’s market capitalization, of which Musk owns 21%. Tesla is now the world’s most valuable automaker.

Tesla’s share price growth has been meteoric, increasing by 731% in 2020, a surprising performance considering that it is a relatively new car manufacturer in the market, with only four models to offer so far, and the company only started making profits last year, while during 2018 and 2019 it reported losses close to $1 billion.

It is surprising then, that today Tesla’s valuation -despite having only a quarter of the sales of its competitors such as GM, Ford and Toyota- exceeds the value of the nine main car manufacturers combined.

Tesla’s share growth has led Elon Musk, the company’s largest shareholder and CEO, to become the richest man in the world. (EFE)
What does the market see in Tesla that makes it so valuable?

Many see Tesla as an automotive company, which manufactures electric cars, and while this is true to a degree, Tesla is more than just an automotive company. It is a technology company that has a line of business that manufactures cars.

But let’s not fool ourselves, right now vehicle manufacturing is the line of business that finances its operation and has to stand out in the marketplace in some way. The strategy Tesla has sought is to substantially reduce both manufacturing costs and future costs to the user, the key: its simplicity.

The difference between Tesla and traditional automakers is that Tesla innovates at the pace of Amazon or Google, not at the pace of the automotive industry.

Tesla, automakers, Elon Musk, El American
Despite having only four models, Tesla’s market capitalization surpasses the next 9 biggest automakers together (EFE)

To begin with, Tesla doesn’t just sell a car, it sells a software product just like Apple sells an iPhone; that is, the functionality of the car depends on software, which with an update of a few hours can improve the user experience. An ordinary car remains the same throughout its existence, and to improve its functionality requires an expensive visit to the shop.

Although expensive, buying a Tesla in the long run is cheaper when you consider the savings in parts, because a Tesla has far fewer parts, starting with its engine –less than 20 parts compared to the more than 2,000 parts in a regular engine- saving thousands of dollars in muffler parts, oil changes, and other revisions.

Tesla has also greatly simplified the purchase of a car, since it can be purchased and customized online, scheduling the date and location where the vehicle will be picked up, saving the customer the process of going to a dealership and waiting days to receive the car.

Besides, Tesla has done intensive research in the search for new lithium batteries that can store a greater amount of electrical energy for a longer period of time. This technology becomes extremely valuable at a time when the fight against global warming has become a public policy priority, favoring automotive companies that prioritize the manufacture of electric cars over ordinary cars.

Solar Panels | Tesla
Tesla, apart from the automotive sector, has been strongly involved in the manufacture of solar panels and lithium batteries. (Tesla)

The search for more efficient batteries is not only a necessity in the automotive sector, but in general in the entire energy sector with the intention of replacing dependence on fossil fuels. This search makes Tesla a key player, which is also making inroads into electricity generation by becoming a major supplier of solar panels, with quite a bit of experience in battery development.

In addition, with Joe Biden as president, electric car manufacturers, as well as the clean energy industries, are looking to the federal government for a possible stimulus as part of the Green New Deal, which Biden has pledged to pursue in his campaign, turning investors’ attention to companies just like Elon Musk’s.

Finally, there is the monetary factor; the Federal Reserve has injected billions of dollars into the market to stimulate an economy affected by the closures to contain COVID-19. Much of this money injected by the Fed – at zero interest rates – has been captured by the stock market and investors who point to a rapid recovery of the economy, seeing technology companies as extremely valuable.

Tesla’s not so bright side

Despite Tesla’s performance, its profits are still lower than the income of international automotive companies, and some investors think that the valuation of its stock responds more to the market’s euphoria for easy money than to the economic moment in which the world finds itself.

Among these investors is Michael Burry, who anticipated the 2008 mortgage bubble, and who was played by the actor in the movie The Big Short by Christian Bale. The film tells how a group of investors got rich by anticipating the crisis.

Burry mentioned Tesla as his biggest “short” position. A short position or sale is an investment or trading strategy that speculates on the decline of a stock price or other securities.

Entre estos inversionistas está Michael Burry, quien se anticipó a la burbuja hipotecaria de 2008, y que en la película “The Big Short” fue interpretado por el actor por Christian Bale. El film cuenta cómo un grupo de inversionistas se hicieron ricos anticipándose a la crisis.

Richardson Wealth | MacBeth MacLeod Partners - Dr. Michael Burry predicts a  crash in passive investments
Dr. Michael Burry is part of a group of investors who believe that Tesla’s share price is overvalued. (Pinterest)

In a short, a position is opened by borrowing shares of a company or other asset, (in this case Tesla), which the investor believes will decrease in value at a set future date – the maturity date. The investor then sells these borrowed shares to buyers willing to pay the market price. Before the borrowed shares are repaid, the trader bets that the price will continue to decline and can buy them at a lower cost. The risk of loss in a short sale is theoretically unlimited since the price of any asset can rise to infinity.

Burry is also skeptical of the overly optimistic behavior of financial indices in general driven by the so-called FAANG companies, (Facebook, Apple, Amazon, Netflix and Google/Alphabet), and believes that the market is making a bet rather than a safe investment.

Is Tesla a great innovative company, or a time bomb? It is difficult to know. On the one hand, it is true that it is an innovative company with cutting-edge technology, on the other, it is still entering a relatively new sector and whose scope may be overestimated by the market. Only time will tell.

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