Tesla's Future

Dear Reader,

Tesla is currently valued at 683.43 billion USD by public markets.

Basically, the future of Tesla if it is to be positive, lies in achieving profitability. Yes, in Q1 2021 Tesla reported a net income of 464 million USD or approximately 4.5% net profit margin for Q1 2021, which is in line with the profitability of other large luxury sedan makers brands like BMW, Audi and  Daimler.

It remains to be seen whether this is a one off event.

If Tesla does not achieve sustainable profitability soon, stock markets could well crash and Tesla could not be able to get the money it needs to function from the stock markets. Up till now investors, influenced by the clean energy, electric vehicles story have financed Tesla's vision. The increase in Tesla's stock prices helped this trend to perpetuate. Investors who poured money into Tesla saw their equity holdings increase in value due to Tesla's surging stock price. And they participated in the next equity financing round.

The problem for Tesla is that its revenue continues to grow briskly, but at the same time Tesla fails to achieve economies of scale which will make it sustainably profitable and to the extent so as to substantiate its current market capitalization. This has to do with the inherently high costs of producing electric cars. One of the main inputs in vehicles is ferrous metals. And due mainly to the electric batteries, it takes a much larger quantity of base metals to produce electric cars. That is why, for now, producing electric cars is too expensive and unprofitable without green, government sponsored subsidies.

Yes, Tesla is trying do develop electric batteries and is trying to build self-driving cars. Recently, however, news sources reported that Tesla's allegedly fully autonomous vehicles are actually Level 2 automation capable, which means a driver is required to hold the wheel at all times. Translation: Tesla's allegedly self-driving cars are not autonomous at all. Fully autonomous vehicles are long way further into the future, if feasible at all.

So Tesla's future outcome as a company remains binary. If Tesla becomes profitable, Tesla will survive. If Tesla goes on loosing money and stock markets crash or Tesla's stock price falls a lot, Tesla will go out of business.  I do not see a middle scenario.

Tesla has to live up to its namesake Nikola Tesla and hire or produce brilliant engineers who can make a technological breakthrough and start producing electric automobiles profitably at scale. Tesla seems to have underestimated how hard is to produce cars. Tesla is still lacking the production know how of Toyota, Volkswagen or Ford. Yes, driven by the narrative Tesla is worth more than most large automobile manufacturers combined.

This means the market is discounting that Tesla will enter successfully new market verticals of growth. If people think this is easily done, they should just look at Microsoft, which has been trying to produce a successful hardware product for decades .Unsuccessfully.

In short, the market is grossly overvaluing Tesla. Tesla is simply not worth anywhere close its current market capitalization.

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn, Facebook etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed on the blog are Petar Posledovich's. Petar Posledovich does not guarantee the accuracy of the information presented on this blog and social networks. The information presented is "as is".

Petar Vladimirov Posledovich is not liable for any investment losses incurred by reading and interpreting blogposts on this blog and posts on social networks.

Conflicts of interest: I may possess some of the securities, currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Respectfully yours,

Petar Posledovich