Will Tesla's Model 3 turn out to be the iPhone of the electric car world? Or might Elon Musk's company become a key supplier of batteries and electric powertrains to the auto industry as it moves beyond internal combustion engines; or a juggernaut of self-driving software, the brains for fleets of robot vehicles?
Or will it be just another carmaker?
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When it comes to Tesla, stock market investors have let their collective imagination off the leash. A year ago, some of Wall Street's smartest were betting that Musk faced a hard landing, and possibly even bankruptcy. Now, if the stock market is to be believed, he has the world at his feet.
The result has been a mesmerising "melt up" in Tesla's share price as investors have chased the stock higher, culminating in an electrifying 48 per cent leap during the first two trading sessions of this week. In one sign that the incredible stock market levitation was affecting the popular psyche, many people who typed "Should I" into Google this week were offered the auto-complete, "buy Tesla stock".
The frenetic start to the decade caps a sea-change in Wall Street's attitude towards Tesla that had been under way since the middle of last year.
From a low of less than US$180 ($281.20) in June, the shares ran up to hit a high of nearly US$1,000 on Tuesday, before letting off some steam and falling back more than 20 per cent, to under US$750. At about US$135 billion, Tesla is still worth more than Volkswagen, the world's biggest carmaker by volume — and Musk has seen his personal stake in the company leap from US$7b to US$28b.
Behind this surge has been a growing belief that the financial instability and operational challenges Tesla faced with its mass-market Model 3, launched in mid-2017, are now firmly behind it. Its latest quarterly earnings, released in January, set the seal on this rebound. Rather than devouring funds on the way to a dire financial reckoning, the company generated US$2b in free cash flow over the last three quarters.
For Wall Street, setting aside the worries about Tesla has been like jettisoning the ballast weighing down a hot-air balloon. Investors have turned their eyes to what an unconstrained Tesla might one day become, allowing the stock to float freely upwards and punishing the short-sellers in the process.
"There has been a mindset change. There is a big reallocation," says Philippe Houchois, an analyst at Jefferies. Until recently, he says, "they weren't investable. Now, after the results and without the bankruptcy risk they had, they are investable."
More than that, the money flowing into Tesla shares shows that Wall Street has decided the switch to electric cars — which still represent only 2 per cent of global car sales — is reaching a pivotal moment, according to Adam Jonas, an analyst at Morgan Stanley.
Far from being overvalued, though, Pierre Ferragu of New Street Research argues that the company is now fairly priced considering what it has the potential to become by the middle of the decade: a US$300b leader of the premium electric car market. With such expectations now baked into the share price, anything less could bring a severe stock market reckoning.
The most pressing question Tesla faces now is whether, as electric cars move further into the mainstream, it can hold on to its early lead. The electric car market is about to become intensely crowded, as every major brand launches battery-powered models to meet emissions targets in Europe and China.
Volkswagen, the world's largest auto group, is the most ambitious, with plans to launch 70 electric vehicles by 2028 and have 40 per cent of sales from battery cars by 2030. Its onslaught begins with the VW ID3 electric car, with the company hoping to build hundreds of thousands of battery cars next year — an output that could match Tesla's annual production.
Some of Musk's rivals are counting on their size to help them win, using their volume production to snuff out the Tesla challenge before the company becomes entrenched.
Herbert Diess, chief executive officer of VW, is among those who openly credit Tesla for its technology and product innovations. "The next big thing is software — and they're strong in software," he said late last year. He added: "Their cars are nice, and they have some properties which I really like."
But Diess also believes that Tesla will be at a big disadvantage once it faces competition from large-scale producers like VW. "Software is really a volume game," he said. "If you do software, you have to use it on 10 million devices and not on 1 million."
To Tesla's fans, this severely underestimates the difficulties involved in creating an effective software platform. Tesla also starts out with a big lead in the efficiency of its electric vehicles, thanks to years of work perfecting many aspects of its batteries to get the most out of the technology.
Gene Berdichevsky, who in 2004 became the seventh employee hired by Tesla, says big carmakers have underestimated how many different innovations have gone into the company's technology. He puts the performance advantage of Tesla's Model 3 over Jaguar's electric I-Pace at about 30 per cent.
As head of Sila Nanotechnologies, which makes advanced materials for batteries, he is now working with rival automakers which are trying to boost the performance of their own electric cars, but says it will take years before they start to catch up — particularly since Tesla itself continues to improve.
"By 2025, you can see the gap closing," he says. "But it's a substantial lead."
Not that superior technical performance will automatically translate into higher sales for Tesla, even if it can maintain its edge. Branding, vehicle styling, dealership networks, finance packages: many factors go into a car-buying decision. Musk's best hope is that he has done enough to make his vehicles the standard that buyers look to first when considering electric cars, just as Toyota's Prius became the yardstick in hybrids.
"People will continue to associate premium electric cars with Tesla," says Bob Lutz, a former top executive at all three big US carmakers.
Until recently sceptical about Musk's chances, he now argues that the Tesla chief has succeeded in making his vehicles the ones against which others will be judged — something that might even bode well for the controversial wedge-shaped pick-up truck he unveiled late last year.
"The Cybertruck is just plain crazy," Lutz says of the angular oddity. "It's so crazy it could just trigger a wave of enthusiasm from Tesla fans."
On its own, though, winning a good slice of the electric car market may not support Tesla's lofty new valuation. Given the low profit margins and intense competition, investors have not been willing to accord high valuations to the sector.
For now, that has not damped their enthusiasm for Tesla. Many have concluded that it is no longer constrained by the limitations of the automobile sector and have come to view it as a tech stock, according to Jonas.
There are certainly parallels for disruptive new products that overturn the traditional economics of their markets. One that Ferragu points to is the iPhone, which turned the handset market into a far bigger and more profitable proposition.
Comparisons with the iPhone, however, only stretch so far. The huge value that has accrued to Apple's handset reflects its role as a software platform, putting it at the centre of a system of apps and services that power modern life. What are the chances that cars will undergo a similar transformation and that Tesla's will one day become a similarly powerful platform?
One hope rests in driverless car technology. Musk himself has claimed that this is the true key to Tesla's future, arguing last year that the company will only reach sustainable profitability once it becomes the operator of a fleet of robotaxis. His frequent predictions that the robotaxi future is at hand have yet to be born out, however, and few Wall Street analysts currently ascribe much value to the possibility.
Some analysts argue that Tesla could sell its driverless technology to other carmakers — something that would add to the large amounts of data about road conditions Tesla already collects from cars using its software. Embedding its software in 10 per cent of the world's cars could justify about US$70b of stock market value, according to Jonas — but it would require other carmakers to surrender a large part of the value in their vehicles.
Another similar hope that has driven Tesla's shares higher revolves around its battery technology. Jonas estimates that selling its batteries to 5 per cent of global automakers could support a further US$70b of value — though he adds that this would also be an "aggressive" goal that would take many years to achieve, if it were even possible.
It is also still open to question whether Tesla can overcome its natural reticence to sharing its technology, rather than using it solely to support its own vehicles. "Musk has been blowing hot and cold on this issue," says Houchois.
Talk of selling batteries to other carmakers does not even touch on what could be a far bigger market for Tesla's battery technology: static energy storage. As the world moves to clean up its electricity system, storage batteries ease the load on the grid and allow greater flexibility to renewable generation sources such as wind and solar.
All of this has provided plenty of justification for investors looking to push Tesla's shares to new heights in the recent rally, even if some of these business opportunities are purely notional.
Jonas, for one, predicts that the euphoria will subside this year as Wall Street comes to see Tesla for what, at heart, it is: a car company, albeit one with a good position in a promising new market.
He forecasts it could still be worth a lofty US$45b — close to where General Motors trades today. But at only a third its present value, that would represent a significant comedown from the heights its shares have just scaled.
Written by: Richard Waters and Peter Campbell
© Financial Times