Tesla: I Was Wrong (So Far)

My June 29, 2018 blog post on Tesla stated why I thought Tesla (TSLA) was not a good stock pick. The elimination of government tax credits combined with increased competition from new entrants in the electric car market would make it difficult for Tesla to make a profit on its electric car business and therefore make it difficult for Tesla to survive.

Weekly Chart of Tesla from Finviz.com

Stock Performance Since Then

It looked for a long time like I was right, especially when TSLA bottomed at under $200 during 2Q 2019. However, Tesla’s rally over the past several months shows me I wasn’t right. On June 29, 2018, when I posted my Tesla blog, Tesla closed at about $343 per share. It has been a rocky 18 months since then, but as I write this, TSLA is trading at almost $471, an increase of 37% in 18 months. Tesla is showing it can deliver cars, if not at the rate they would like, then at least at a rate with which investors are satisfied. The latest good news is that Tesla’s China manufacturing plant is up and running and delivering cars.

Why Is Tesla Stock Delivering?

Tesla is showing that demand for its cars is relatively price-inelastic. People still want to buy Teslas despite the run-off of the tax credit. Tesla cars are proving to be the cream of the crop among electric vehicles and there is always a demand for top of the line products in any marketplace. Moreover, we are at a time where Tesla is out there producing cars while other electric car alternatives, while promising, are not yet on the market for sale. Tesla still owns a relatively unique place in the electric car market.

Not Out Of The Woods

How long will Tesla’s unique market position last? According to the Wall Street Journal’s car columnist Dan Neil, Tesla will have a lot more competition by this time next year. This article describes, automaker by automaker, all of the new electric car options that are about to hit the market. Some are stand-alone electric car makers, such as Tesla, but most are divisions of well-financed worldwide automakers (such as Ford, Volvo, and Jaguar) who will be introducing electric cars not so much to make a profit (although profit does play a part, for sure) but to comply with company-wide fuel economy mandates. It still remains that, although Tesla needs to make a profit on electric car sales, the likes of Ford, Volvo, and Jaguar do not, as long as they can recoup any losses from electric car sales through increased profits in standard gasoline-powered cars.

IMO

Can Tesla stock continue this torrid pace and continue to rise, even above its current lofty $471 per share? It certainly helps that they are successfully delivering cars here in the US and in China. It also helps that Tesla is still perceived as the highest quality electric car available. However, the longer-term future is not clear. Let’s see how the Fords and the Volvos of the world market their electric cars. They could succeed, but they could also fail miserably, precisely because their entire existence is not predicated on selling electric cars. Tesla gets it right because they have to. I am not optimistic that Tesla stock will continue to outperform because of the competition, but Tesla does look better to me now than they did when I first wrote about them in June 2018.

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