Commentary on Political Economy

Wednesday 22 July 2020


Tesla: Charged Up but Going Nowhere

Electric-car maker’s shares are in speculative mania, while underlying business isn’t growing

Tesla is now eligible for inclusion into the S&P 500. PHOTO: PATRICK T. FALLON/BLOOMBERG NEWS
Tesla TSLA 1.53% shares are flying high as ever. Underlying business performance hardly suggests a smooth landing is in store.
The electric-car company reported second-quarter earnings of 50 cents a share on sales of $6.04 billion on Wednesday. That is the fourth quarter in a row of profits and makes Tesla eligible for inclusion into the S&P 500. As has become routine, the stock charged higher after hours.
That profit surprised Wall Street analysts, who mostly predicted a loss. Whether they should have been surprised is another matter: An email from Chief Executive Elon Musk to employees touting a possible break-even quarter leaked to the press on June 28.
Profits didn’t come from selling more cars, however. Total revenue actually fell 4% from a year earlier. What’s more, the company’s $6 billion top line included $428 million of regulatory credit sales to help rival manufacturers meet emissions mandates. These credit sales are essentially pure profit and accounted for more than 100% of the company’s operating income. A year ago, Tesla booked $111 million in second-quarter credit sales.
Tesla’s market value is now approaching $300 billion despite having a minimal market share in the global auto market. At those prices, fantastic growth should be observable to justify the valuation. Instead, Tesla has barely grown revenue at all since the fourth quarter of 2018. Tesla has lost hundreds of millions over this period, even including this recent streak of profitability. Research and development spending of $279 million in the quarter was down 14% from a year ago.
In the here and now, these facts are no match for market euphoria. When a stock becomes decoupled from business reality, just about anything can happen. The furious trading action has confounded none other than Mr. Musk himself, who opined in a Twitter post on May 1 that Tesla’s stock price “is too high.” Shares have more than doubled since then.
That has meant pain for bears, and there is no sign of that momentum letting up soon. But those trading the stock are relying entirely on ebullient investor sentiment to make a profit. When sentiment changes, that can be dangerous: Tesla shares have been cut in half twice in the past two years. This time, the recent sharp decline in short interest means there are far fewer investors waiting to buy at lower prices.
The farther the current rally extends, the more painful the eventual reckoning is likely to be.

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