Over the past few years the price of Tesla’s stock has been as mercurial as its founder, Elon Musk. Over the past 12 months its shares have run from from a high of $945 to a low of $177.
The volatility in Tesla’s share price reflects a divide between two schools of thought on the future prospects of the pioneering electric car maker: It is a pioneer that will soon profit handsomely, or a disaster in the making?
Since its founding, the company has suffered numerous financial setbacks, which include failing to meet its delivery objectives, a rapid cash-burn rate and until recently, failing to turn a profit. The stock of most other car companies with a similar dismal track record would be punished mercilessly by Wall Street.
Yet, not so Tesla.
Despite the company’s lackluster revenue growth, one underlying factor helps buttress the price of its shares. Many securities analysts have an unswerving belief that Tesla is the wave of the future, and that the change from gas-powered to an all-electric vehicle future is certain.
Typical of this view is that of fund manager Ron Baron, founder of Baron Capital. In support of Tesla’s bullish price, Baron argues that Tesla enjoys numerous advantages over traditional car companies in the coming electric vehicle world.
“Car companies have a couple of challenges. They spend research money on motors, not batteries. We believe $200 billion to $300 billion has been invested in their internal combustion-engine plants. Those are stranded assets,” Baron says.
Baron also believes that the business model of old auto companies makes it difficult for them to sell electric cars. “Challenge two, how will they sell them? Dealers make money not from selling, but from servicing. Electric cars have a fraction of the parts. The guys selling your cars aren’t incentivized to sell electric cars.”
Baron, like many other analysts, believes this is what will give Tesla a significant advantage over the auto giants looking to compete in the electric vehicle market.
Many who are less enthralled with the company’s prospects believe there is no rational relationship between the company’s sky-high share price and its underlying fundamentals. They see a stock price driven by pure speculation.
Barron’s columnist Alex Eule contends that while Tesla’s stock price can’t be justified it is sheer folly to try in light of the legion of analysts who continue to bid up its price regardless of its poor financials.
“Tesla is an object of fascination, and the higher the stock goes, the more fascinating it gets. The cars are lust-worthy — yes, I want one. The electric- vehicle mission is praiseworthy. And the market opportunity is tremendous. But the business is cutthroat, and the CEO is mercurial,” he writes.
The only thing for sure is that one of these two beliefs will turn out to be wrong — eventually.