By Ulvi Haqverdi.
Your commercial awareness dose!
According to its market valuation in July 2020, Tesla is the biggest car manufacturing company in the world, valued at $226 billion by investors. The company has been founded by engineers Martin Eberhard and Marc Tarpenning as Tesla Motors in 2013. According to the company website, the founders “wanted to prove that electric cars could be better than gasoline-powered cars.” Popular technology entrepreneur Elon Musk, who also owns its 21% of the company’s equity, is its current Chief Executive Officer. Tesla has a prominent global reputation for manufacturing environmental-friendly electric cars, such as its Model S, Model 3, and its newest sci-fi reminiscent cybertruck.
As a part of its business strategy, Tesla aims for affluent buyers when it comes to its luxurious electric car sales and plans to expand to larger markets to aim for lower-value car buyers. The most differentiating factor of Tesla from its most competitors is its ‘vertical integration’ strategy – Tesla owns its own supply chain, rather than accessing a majority of components through suppliers and focusing only on engine manufacturing and final assembly. Tesla’s factories are located in California, Nevada, Berlin and Shangai, while the company does not cooperate with any dealerships. Alternatively, interested customers can view the company’s models at Tesla showrooms and can order their customised choice at Tesla’s website.
Despite a rapid 60% drop in its share price value during coronavirus breakout, Tesla’s shares soared afterwards this year. The latest development was another 7% increase in the company’s share price following the better-than-expected deliveries announcement in July 2020. The company’s shares skyrocketed threefold year-to-day, traded at $1,550 each on the stock market. According to some analysts, Tesla’s internal combustion engines and leadership in the electric car industry is the rationale behind its market valuation. A sudden ramp-up in its production since January can also be named as one of such underlying factors, while production and sales in China are also believed to have a significant impact on such a rise. However, there is a great deal of discussion in the investment community – is Tesla actually more valuable than all of its competitors – car manufacturing giants such as Toyota, Volkswagen, BMW and others?
In order to answer these questions, we need to analyse some essential facts. Compared to its nearest follower Toyota, who delivered nearly 11 million cars last year and has a long track of announcing annual profits, Tesla delivered only 368,000 cars in 2019 and is yet to achieve a profitable year (regardless of some significant quarterly results in its history). Volkswagen also managed to produce 11 million cars last year that is nearly 30 times more than Tesla, despite its emission scandal in 2015. Whereas Toyota’s current valuation is only 16 times higher than its annual earnings, Tesla is valued 220 times higher than its annual earnings. Toyota announced that it might deliver %80 less than its expected profits, and economists expect a 15% drop in global car sales globally.
Tesla CEO Elon Musk, in his controversial tweet in May, stated that a Tesla share price was overvalued, even though its share price on the day back in May was twice lower than its current value. This led to a 10% drop in its value, and there was a significant amount of short-sellers questioning the accuracy of the company’s financial statements. However, it should be borne in mind that Elon Musk had issued an incorrect claim regarding Tesla buyout through his public Twitter account in 2018. In following, he was warned by US Securities and Exchange Commission not to issue any market-moving tweets without consulting with Tesla’s in-house legal counsels.
Alongside being criticised for allegedly not complying by GAAP (Generally Accepted Accounting Principles), there are some other controversies existing within Tesla. In many instances, Tesla was subject to public disapproval due to significant delays in production and deliveries. Tesla also recently filed a lawsuit against Alameda County after its Fremont factory was restricted from operating, which was rescinded once the permission was received. There are significant health and safety concerns in Tesla’s factories’ operation during the pandemic. One of the company’s employees was even fired after she criticised the company of taking insufficient protecting measures from Covid-19.
In conclusion, it can be argued that in order to preserve its ranking as the highest valued car manufacturing company, Tesla still needs to ramp-up its production significantly and needs to be more transparent when it comes to its accounting. The potential global recession, the weakened consumer confidence, giants such as Daimler, Volkswagen shifting to electric car production, and the company facing stiff competition from Chinese electric car producers, such as BYD and BAIC (taking Tesla’s significant presence in China into account) are potential obstacles Tesla has to tackle to maintain and expand its production and profits.
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