This evening at dinner our half of table had a long talk about Tesla. Everyone agreed Elon Musk’s innovative car brand definitely represents luxury, simplicity, as well as the application of cutting edge technology. However, do soaring stock prices lead us to believe Tesla is the next big bubble stock? And furthermore, is Tesla capable of expanding and truly becoming profitable off of solely its cars?
A bubble doesn’t occur when entrepreneurs are confident about their product, but occurs when Wall Street analysts begin to get excited about a stock after it’s already experienced a huge rise in price. Morgan Stanley analyst, Adams Jonas, released a report that he expects Tesla to rise as high as $320. This is after Tesla’s stock has experienced a 600% increase in one year. Jonas’ last prediction priced Tesla’s stock at $153 a share, however they blew through that mark last August and now he is predicting even higher increases. Jonas’ report also included predictions on Tesla’s core business, “Production could rise to 370,000 cars annually by 2020, and to 1.1 million in 2028. What’s more, Tesla could help usher in a new golden age in which every car drives itself.” These lofty predictions are what will lead to the bubble popping, “To get to 370,000 cars by 2020, Tesla would have to enjoy a 50 percent compounded annual growth for seven straight years. And in 12 years, we’d have a system in which all cars drive themselves and we’ll live in a utopian society. Keep in mind, the U.S. can barely keep its government open, fix a pothole, or move a train 45 miles in an hour in this country.” The production numbers are very unrealistic, and in order to also bring about cars that drive themselves Musk is going to have to dump a huge amount of capital into research, capital which Tesla does not currently have.
Tesla has a long ways to go before they can really transform the automobile industry to the degree that Jonas predicts. Tesla has to mass produce its cars, establish super charger stations throughout the country, and also make its prices more consumer friendly. By not mass producing, Tesla is unable to make any profits off of the sale of their cars. Right now they are only making money by selling CAFE related credits to other automobile manufacturers. The Teslas are also not considered much more of a toy since they are so expensive and not easily driven long distances. If Tesla could make cheaper cars, as well as make it more feasible to be an everyday automobile, it could really change the industry. As CAFE standards begin to become stricter, electronic cars definitely represent a leading solution to combustion engines. Another new innovative strategy Musk has implemented in the sale of Teslas is how they’re purchased. By allowing the consumer to order their car online as well as customize it to their liking online is a much easier way of purchasing an automobile without going to through the hassle of haggling with a car dealer. Lastly, many consumers like the fact they don’t have to spend any money on gas or waste any time fueling up their car at a gas pump. Although it represents a very small task, there is a little added convenience when purchasing a Tesla.
All in all, Tesla is currently a great idea with an innovative sales strategy. However it is being very aggressive in attempting to establish themselves and gain a foothold in the market. This could end up backfiring and leading to serious consequences.
Source- http://www.thedailybeast.com/articles/2014/03/01/tesla-looks-like-a-bubble-will-it-pop.html
I do agree that Tesla’s aggressive plan of massive investment on infrastructure, development of technologies, and expansion could be risky, and if combined with a big recession it could end up bad for the firm established in Silicon Valley. On the other hand, this is the only way they could succeed when trying to introduce a product different to anything else in the market. If they did not show that much investment, it would be hard to convince customers that they are a solvent company and that they will not get stuck with an expensive car from a company that has no customer support.
So I agree with you that Tesla is now a bubble in the sense that they are just building up (at a huge expenditure), and the bubble might pop if they get hit by an economic crisis, other than that I think they will consolidate in the industry as the leaders in the fully electric cars market.
When talking about pricing, I think unlike printers and VCR’s, electric cars, obviously, will advance but at no where near the rate of electronics. Motors, power trains, batteries are fundamentally different things. I think Tesla will come down dramatically but entering the lower cost section of the market will be a real challenge for Tesla. Right now what they need to do is to reduce the cost of production, and improve the range issues that have been a great concern among potential customers.
Exactly Jier. They must bring down cost of production if they even want to think about having a volume like 370,000. This is why Elon Musk is planning a network of “Gigafactories”, large factories that will be able to pump out Telsas in the thousands a week. If the company can do that and expand their customer base downwards…they just might be able to do it.