Tesla’s shareholders seem to be assuming that its chief executive, Elon Musk, is infallible. Tesla, the electric carmaker, is on a roll. Last week, it recorded its first quarterly profit and received the best score that Consumer Reports has bestowed on a car for six years. The company’s stock has since surged as much as 70 percent, leaving Tesla worth more than Fiat and Peugeot combined. Its stock is also trading at a whopping 27 times estimates for earnings in 2016.
Both top and bottom lines look set for rapid expansion now that production of the award-winning Model S is in full swing. Tesla’s revenue for the first three months of the year jumped 83 percent from the previous quarter as sales hit 400 vehicles a week. Consensus estimates for 2014 put sales at $2.5 billion, six times last year’s showing. By 2016, that’s expected to almost double again to $4.3 billion.
And Tesla’s gross margin is improving, reaching 17 percent in the three months to March. Mr. Musk predicts that it will reach 25 percent in the fourth quarter. This measure does not, however, take research and development or general and administrative costs into account. Factor those in and Tesla’s pretax margin in 2016 is estimated at 12 percent.
That’s impressive for a car company - Ford’s North America division, for example, tops out at 11 percent in a good quarter. But it’s hardly in the same league as Silicon Valley fellows like Google, whose pretax margin was 28 percent last quarter.
To justify Tesla’s high 2016 valuation multiple, revenue would need to keep growing at a fast clip. Mr. Musk has plans to introduce a crossover S.U.V. followed by cars that may sell for around $45,000 - not far off half the price of some versions of the Model S. He may even develop vehicles in the $30,000 price range to attract more buyers. But that will take time and shift the company into a more cutthroat market segment where margins could suffer.
Mr. Musk has battled everything from skepticism about a manufacturing start-up to tight cash flow. Most recently, traditional car dealers in Texas and Virginia tried to stop him from selling vehicles directly to the public. His record so far is impressive. But Tesla’s stock price suggests investors are pulling ahead of themselves.
Antony Currie is an associate editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
