By Alex Kimani
It is now becoming increasingly clear that the world’s most popular electric vehicle manufacturer is an all-weather play that simply will not stop. Tesla Inc. (NASDAQ: TSLA) shares soared 9 percent on Monday’s session to close at a new all-time high of $1,208.34 after the company soundly beat delivery expectations for the second quarter. The Palo Alto, California-based EV manufacturer delivered 90,650 vehicles, easily smashing the Wall Street consensus of 83,000 units. The highest forecast was for ~86,000 units.
The latest rally means TSLA shares have nearly tripled in the year-to-date, giving the company a valuation bigger than that of oil and gas giant ExxonMobil (NYSE: XOM) at $224.05B vs. $186.38B. In sharp contrast, XOM stock is down 36.8 percent YTD.
Further, Tesla’s market cap is now bigger than Toyota Motor’s $205.2B, making it the most valuable automaker in the world.
It’s also several times bigger than the combined valuation of the U.S. ‘Big Three’: General Motors (NYSE: GM), Ford Motor Company (NYSE: F) and Fiat Chrysler Automobiles US (NYSE: FCAU) with market caps of $36.12B, $24.07B and $20.13B, respectively.
That’s a pretty remarkable feat by the company, given the backdrop of the massive COVID-19 economic fallout and demand destruction. But more importantly, it’s proving that even ultra-low oil prices cannot kill Tesla or stop the green revolution.
Defying Bearish Expectations
Tesla reported that production was down 20 percent to 82,272 units mainly due to the closure of the main factory in Fremont for much of the quarter, though the company reported that production has returned to prior levels.
Tesla deliveries represented a 5 percent Y/Y decline, which would have given the bears a field day under any other circumstances. However, the decline was far smaller than expectations and relatively tame compared to that by its ICE cousins, the majority of whom recorded double-digit declines.
General Motors sold 492,489 vehicles during the second quarter, good for a 3 percent Y/Y decline; Ford sales were down 33.3 percent to 433,869 with the popular F-Series recording a 22.7 percent drop, while Fiat Chrysler suffered the biggest decline at 39 percent after managing to sell only 367,086 vehicles. Even more niche brands like Honda only managed to move 6,380 units, marking a 23 percent drop.
Tesla is defying bearish expectations that ultra-low oil prices would destroy the bullish thesis.
In a past article, we reported that some analysts predicted a bleak future for Tesla due to persistently low oil prices. Mark Wakefield, global co-head of the automotive and industrial practice at AlixPartners, has argued that low oil prices would act as a disincentive for people to purchase EVs since lower fuel/operating costs were top on the list of reasons why they were ditching their gas guzzlers.
However, we debunked that line of thinking by pointing out that fueling a Tesla was still considerably cheaper than filling at the pump. For instance, this handy tool provided by the U.S. Department of Energy estimates that an eGallon currently costs $1.21 compared to the $2.17 national average for a gallon of regular petrol as per the AAA.
Further, gas prices have remained fairly low over the past half-decade, yet Tesla has mostly remained resilient save for a few blips here and there.
The million-dollar question right now is whether or not Tesla deserves its lofty valuation.
At the current share price, the market is valuing the company more as a tech play than an auto manufacturer. Tesla is on course to deliver 500K vehicles in the current year and could quadruple that to 2 million vehicles annually by 2030, according to Morgan Stanley. Still, a $1,000+ share price means investors expect it to sell ~4 million/year by the turn of the decade, which might be asking for too much even from Tesla.
With the clean energy transition and ESG drive in full swing, it’s likely that investors also expect Tesla’s solar business and battery business to grow in tandem with its core EV line. According to Piper Sandler’s Alexander Potter and Winnie Dong, Tesla could convert its hordes of loyal EV customers to buyers of its solar products by convincing them that charging their vehicles using coal-based electricity isn’t very green and they should instead generate and store their own solar power. However, these are merely auxiliary businesses generating less than 10 percent of the company’s revenue at the moment.
The latest rally confirms Tesla’s growing billing as a cult stock. Wall Street remains lukewarm on TSLA stock, with only one in four analysts rating the shares a Buy, which is less than the average 55 percent Buy-rating ratio for Dow stocks.
Tesla will come under plenty of scrutiny in the coming quarters as the bears wait to pounce on any execution missteps. This is likely to make the stock quite volatile, though it remains a sound long-term bet.
By Alex Kimani for Oilprice.com