17 Sep

Tesla: Hard to Ignore for Both Bulls and Bears

WRITTEN BY Mohit Oberoi, CFA
  • Tesla is probably one of the most polarizing companies in recent times. There are hardcore bulls and bears when it comes to Tesla.
  • The company receives outsized attention compared to any other business of its size. In this article, we’ll discuss what makes Tesla such a polarizing company.

Tesla

Any discussion related to Tesla (TSLA) often invites a lot of attention. For some, Tesla is on a world-saving mission. Bulls see the company’s electric vehicles (or EVs) and other sustainable energy solutions as the answer to global environmental problems.

Hardcore TSLA bulls don’t see the company as an automaker but as a technology company. We’ll set aside TSLA’s bullish thesis for another day. In this article, we’ll discuss what makes some observers bearish on Tesla and whether the bearish argument holds up.

Tesla: The bearish argument

Basically, we can divide TSLA bears into three categories. The first category comprises people who are cynical about electric vehicles. Simply put, while electric vehicle bulls see the world going all-electric as soon as 2026, others see the electric vehicle story as overhyped.

In the second category are those who are bullish on electric vehicles, but they doubt that Tesla could be successful in the domain. Proponents of this theory point to TSLA’s frequent losses, and some even wonder whether the company might go bankrupt amid perennial losses.

In the third category are those who don’t think Elon Musk is the right man to lead Tesla. People holding this point of view include Musk’s controversies to bolster their argument. So, where does the truth lie? Is there really merit in the bearish thesis? Let’s discuss this in perspective.

Point 1: The EV story is overhyped

Some Tesla bears don’t buy into the whole electric vehicle story, pointing out that electric cars are too expensive to become mainstream. Even with government subsidies, electric cars are costly to own and operate compared to vehicles powered by internal combustion engines.

However, when we talk about vehicle costs, we should look at the entire picture. Vehicle ownership costs include purchase price, maintenance expenses, and operating costs. While an electric vehicle is definitely costly upfront, it has lower maintenance and operating costs.

In our view, the EV story is a work in progress. Plus, established automakers aren’t investing in electric vehicles for no reason.

Tesla bears have a point

However, TSLA bears also have a point, as there are concerns over Tesla’s US demand plateauing. Plus, China’s electric vehicle sales have fallen for two consecutive months. The common link here is reduced government subsidies.

The bearish argument, which holds that electric vehicle sales depend on generous government subsidies, certainly has merit. Electric vehicle makers would have to look at innovations and technological advancements to generate some price parity between gasoline and electric cars. In the absence of price parity, electric vehicles might remain a niche segment of the auto industry.

What about coal?

Some electric vehicle cynics note that coal is also used in electricity generation, raising questions about whether electric cars are really zero-emission vehicles. After all, coal is among the most pollution-generating sources of energy.

However, what bears are missing is that coal’s contribution to electricity production is decreasing gradually. Tesla also makes solar panels to power homes, and the company uses solar-powered Superchargers.

Point 2: Tesla cannot make it

So, let’s come to the second category of Tesla bears. These include people who, while they believe in the EV story, don’t see Tesla winning the electric vehicle game. Some believe that if EV sales spike upward, established automakers have plenty of resources to take on TSLA.

Legacy carmakers, including General Motors (GM) and Ford (F), have raised their game and are investing heavily in electric vehicles. Tesla bears also point to Tesla’s perennial losses and production hiccups. Here again, TSLA hasn’t given bulls much to applaud in this regard. The company has made a profit in only four quarters over the last decade.

Making profits in electric vehicles

Let’s drill down into these bearish arguments now. It’s worth noting that making profits in electric vehicles is an enigma for even established automakers. Fiat Chrysler (FCAU) openly admitted that it loses money on each electric car that it sells.

With respect to any bankruptcy fears, Volkswagen ruled out the possibility and praised the company for its software. As for established automakers taking on TSLA, in reality, they haven’t been able to do so despite several launches. Tesla cars are increasing in popularity and taking on even best-selling gasoline cars in some cases.

The final argument: Elon Musk

Finally, there is a category of bears who are skeptical of Tesla CEO Elon Musk. Admittedly, Musk has provided some fodder to bears on multiple occasions. However, since the SEC episode, Musk has visibly settled down.

We’ll leave Musk’s considerable contributions to Tesla for another day. However, we consider him Tesla’s marketer in chief, and Tesla owes its popularity to its CEO. While Musk does make controversial statements at times, it is tough to imagine Tesla without him. To sum it up, while Tesla bears have some valid arguments, others appear to be insubstantial.

However, this doesn’t mean that Tesla bulls are totally correct in their viewpoints. Looking at the last five years’ returns, it’s tough to ignore the fact that the stock has traded in the negative. Even in 2019, TSLA stock is in the red. However, so is NIO (NIO), the Chinese electric vehicle hailed as the “Tesla-killer.” While it may not be much solace to EV bulls, NIO’s 2019 price action has been even more dismal than Tesla’s price action.

Correction: An earlier version of this article suggested that Tesla had recorded a profit in only three quarters over the last decade. The company has recorded four quarters of profits.

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