Tesla’s rapid share-price increase has made it an extremely popular stock among BetterInvesting members – and one that doesn’t align with the organization’s investing principles.

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As a longtime observer and analyst, I’ve noticed that trends in the global automotive business (just as in vehicles and elsewhere) have a shelf life. What’s hot today probably won’t be in a few years.

Accordingly, for a decade or so Tesla looked to me like an impressive niche manufacturer of expensive electric vehicles (EVs) that was bound to collide one day with mass market indifference to battery power. The company’s stratospheric market capitalization in light of non-existent earnings added to my doubts. Eventually, reality would smack down Tesla shares.

My view has evolved – from negative to neutral.

Tesla’s rapid share-price increase has made it an extremely popular stock among BetterInvesting members – and one that doesn’t align with the organization’s investing principles. The stock is among very few that boast outsize share-price growth without paying a dividend or displaying long and steady earnings growth. In fact, the company’s recent earnings are dependent on the sale of fuel-emission credits to other automakers needing to avoid government penalties for failing to meet standards.

On financial fundamentals alone, in my opinion, Tesla remains a “sell.” 


Balancing that negative is an X factor, the potential for battery-powered vehicles to gain global mass-market status sooner than anyone thought – and Tesla’s advantage as an early mover into the field.

The History of Tesla, Inc. (TSLA) 

Tesla got its start in the early 2000s on the premise that emission-free vehicles were the future, that CO2 as a contributor to climate change faced more and more government regulation. With EVs as a way to reduce CO2, Tesla had grabbed the leading edge of a budding clean-air technology.

I knew at the time that EVs boasted quick acceleration and were fun to drive. But they were costly compared to conventional vehicles, their range at full charge was limited and, since recharging equipment was scarce, keeping EVs fueled was more trouble than driving over to a gas station or 7-11.  Most people need convenient, reliable transportation that’s as inexpensive as possible. (The collapse of crude oil and gasoline prices has only made EVs less attractive.)

I never doubted that EVs were one day headed for the mainstream and, perhaps, consistent profitable growth – I just wondered how long “one day” would be? A decade? A half century? Longer? Shareholders don’t need an immediate payoff; but they’re also not looking to bequeath beaten-down stocks to their grandchildren.

Unpredictable events intruded.

Unpredictable events intruded. China, with few natural resources and a wish to avoid pressure from foreign oil producers, in 2009, announced its intention to provide substantial incentives for makers and buyers of EVs. Since then, incentives have grown larger in the world’s largest automotive market, along with the country’s ambition to dominate the field.

A raft of new China-based EV makers represents competition for Tesla – yet the competitors also are legitimizing EVs to consumers and hastening their acceptance as a mainstream technology. Tesla now operates a second assembly plant in Shanghai, in addition to the one in Fremont, California.

The electric vehicle (EV) trend is growing. 

One by one, incumbent automakers like Ford, General Motors, FCA, Daimler, Nissan, Hyundai, BMW and others are acknowledging that the risk of falling behind the EV trend is growing. Each has committed to investing billions in EV development and manufacture. Notably, Toyota has remained cautious on batteries, preferring one day to replace internal combustion engines (ICE) with fuel cells. Fuel-cell vehicles (FCVs) run on electricity too, but the juice comes from hydrogen rather than rechargeable batteries.

A new level of incentives to manufacturers is unfolding as political leaders worldwide vow to ban the sale of gasoline-powered vehicles over the next 10-15 years in a bid to blunt climate change. California’s governor signed an executive order to that effect in September, 2020, and the Prime Minister of Great Britain followed with a similar statement.


At the very least, EVs no longer feel like a niche technology. How fast consumers accept them – and whether governments stand by their promises to end fossil fuel vehicles – remains in question. That’s why I am upgrading my view of Tesla to neutral.

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Doron Levin is the Editor of BetterInvesting Magazine.  His lengthy career includes writing about business and economic subjects for The Wall Street Journal, New York Times, Detroit Free Press and Bloomberg. He is the author of two books and an acknowledged expert on the world automotive industry.


 

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