The Tesla Bubble

The Tesla Bubble

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Investor confidence in Tesla remains strong, but the clock is ticking for the EV company to start delivering

During a raucous fourth day at the Republican National Convention in 2016, PayPal co-founder Peter Thiel decried that US innovation was in “staggering decline”. Singling out the transport industry, where fighter jets “cannot fly in the rain”, Thiel argued that today’s scientific achievements pales in comparison to what was achieved in the 1960s. While no man went to the moon this year, 2018 did mark the first time in which an electric vehicle was successful launched into space, transported by the most powerful rocket ever made. Clearly, what Thiel possesses in intelligence, he lacks in clairvoyance.

The launching of Elon Musk’s old Tesla Roadster into space was dismissed and deified in equal measure; what some saw as transparent publicity stunt, others treated as a tentative first step towards human colonisation of Mars. It was probably both. In the past, the Tesla and SpaceX CEO has expressed fears of an AI-induced apocalypse on Earth, and Mars, Musk believes, is the most viable solution for protecting the human species. On the other hand, a Tesla Roadster orbiting around the planet is a fantastic advertisement for the brand.

Beyond corporate peacocking, Musk finds himself in a precarious position back down on Earth. Tesla, the dominant market leader in electric cars, reported losses in excess of $2 billion in 2017 and in Q4 alone, the company haemorrhaged as much as $675 million. So far, investors have not been spooked. At the time of writing, Tesla’s share price is up by 20% over the past year to $332 per share. It has a market cap of $55 billion, which Musk confesses to being “higher than [Tesla has] any right to deserve”. Musk’s comment should not be mistaken for modesty; in spite of only delivering 101,000 vehicles in 2017, Tesla has the fourth largest market cap out of any car automaker.

Musk is not new to life in the red. In 2008, a year that Musk described as the “worst” of his life, Tesla was on the verge of bankruptcy. In the wake of the financial crisis, the company was one of the many American automakers that required a bailout from the government, receiving a $465 million loan. Tesla remains the only car manufacturer to have repaid the government in full, but its mushrooming capital expenditure this year is only going to burn a bigger hole in investors’ pockets. According to a Barclays estimate, Tesla will spend around $4.2 billion in 2018 and given that the company only had $3.4 billion available at the end of 2017, it is likely that Musk will require another cash injection.

Investor confidence in Tesla can largely be attributed to the CEO himself. If Tesla was a religion, Musk would be its Pope. A bona fide genius, Musk oozes charm, confidence, and above all else, a likability, a rare trait among tech moguls. Musk has a loyal army of followers, 500,000 of whom have placed orders for the Tesla Model 3, its most affordable car yet. Most however, have not been able to take their new cars for a spin because they have not left the factory. Marred by a series of bottlenecks and supply chain difficulties, Tesla produced a mere 260 Model 3s out of the 1,500 promised for the entire Q3 last year.

Tesla is also struggling to preserve its first-mover advantage in an increasingly crowded market. This month, Jaguar unveiled their new i-Pace, a small electric SUV, which surpasses Tesla’s Model X range by seven miles (310 miles) and is £20,000 cheaper. The i-Pace will join a burgeoning market of electric vehicles including the Nissan Leaf, Chevrolet Bolt, Hyundai Ioniq and Renault Zoe. Furthermore, if they have not done so already, virtually all car manufacturers have revealed plans to ‘electrify’. Daimler, the parent company of Mercedes and one of the world’s largest car companies, are investing $1 billion in an Alabama plant to produce all-electric SUVs and $10 billion in electric car development overall. VM, the world’s largest car manufacturer, announced late last year that they would invest around $84 billion into EV technology.

For all its inter-planetary allure, 2018 is going to be a critical year for Musk and Tesla. Until the electric car company can alleviate itself of its supply chain woes, investor patience is going to wear thin. And now that there are cheaper, more efficient models on the market, Musk will need to formulate a coherent strategy to protect his consumer base from competitors. Unfortunately there are only so many Roadsters that can be launched into space before the Rocket Man’s fuse burns out.

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