Is it absurd that Tesla became the most valuable US car company this week?

Tesla Offers Charging Stations On German Highways
Tesla overtook GM as the most valuable US car company this week (Source: Getty)

Ana Nicholls, managing editor of Industry Briefing at the Economist Intelligence Unit, says Yes.

Tesla has always grabbed headlines, but Elon Musk has upped his PR efforts as he raises funds for (among other things) the upcoming Model 3 launch. One result has been a soaring share price that fails to take into account the reality: Tesla is loss-making, whereas GM made a net profit of $9.4bn last year.

Tesla’s revenues last year were around $7bn, against GM’s $166bn. Moreover, future returns at Tesla are very uncertain. The Model 3 launch is exciting, and demand for electric cars is rising rapidly worldwide, but the company’s risks will multiply as it ramps up production. Severe delays or product defects could try its customers’ patience.

Even if Tesla succeeds in its aim of selling 500,000 cars a year, it will be far short of GM’s 10m – or the 5m that carmakers see as a viable minimum to get the money they need for future models. To get there, Tesla will need to hold off dozens of global competitors, all of which are also pumping money into expanding their EV product ranges.

Bill Blain, a strategist at Mint Partners, says No.

If Tesla were simply a car company, then it does seem absurd that a firm that delivered 75,000 cars in 2016 is now worth as much as GM – which sold over 10m last year. But that’s comparing apples to microchips.

GM sells perfectly good autos, but its technology is essentially 100 plus years old. While electric cars aren’t new, Tesla is selling the promise of future-tech. It’s a battery company. Solve the problem of energy capacitance and those solutions will become far more valuable than the business is in its current incarnation.

The auto business is evolving and is likely to see enormous change. I’m staggered by how many millennials aren’t bothering to learn to drive, while driverless cars mean current big auto sales models become less relevant. They will have to re-invent themselves and that discounts them.

I don’t doubt Tesla will face many problems as it develops. For instance, the issue of what happens to Teslas when their batteries stop working will be a fascinating moment in the second hand market.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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