Eight years after its IPO, Tesla (NASDAQ:TSLA) is still not making a profit. Its share price has risen nearly 2,000 percent since then, and yet, the company is considered to be “burning cash”.
Market Value’s Can Signal Change: Nokia v Apple, Ford v Tesla
Market values can signal change.
Tesla’s market value of $56.7 billion is greater than both Ford (NYSE:F) and General Motors (NYSE:GM) values of $43.2 billion and $55.5 billion respectively. However, both Ford and GM sell a drastically higher number of vehicles per annum then Tesla. Both companies have also consistently delivered on profits over the last few years and Tesla has not.
So why is Telsa’s valuation greater than two of the biggest and long-established car manufacturers in the world?
Perhaps the answer is “evolution”.
Look at Past Trends
The fate of car manufacturers of old — Ford and GM can rightly be “unsure” if they don’t keep up with a changing technology.
Let’s look back at Nokia (NYSE:NOK) and Apple (NASDAQ:AAPL) in the cell phone industry of the late 90’s/mid-2000’s. In that period, the number of Apple iPhones sold paled in comparison to Nokia’s Nseries. However, nobody could foretell the massive shift that was around the corner; a new age of phone technology, an evolution, that would completely reconstruct the mobile phone industry making Nokia phones obsolete.
Smartphone platforms iOS and Andriod marked an unprecedented change in what was a completely dominated market. Nokia’s Symbian platform could not keep pace and what had been the leading platform in Europe and Asia was now considered “outdated and difficult for developers”.
So why is this relevant?
Well, as the planet is shifting focus to sustainability and practicality, we are watching the final act of petrol and pedal-powered vehicles. They may not bow-out completely but they will certainly need to share the stage for an amount of time that still remains to be seen.
Car manufacturers across the globe are making way for this future of motoring; electronically powered and self-driving cars, alá Tesla. And Tesla can rightly be considered the pioneer or the “Apple” of this market.
But the competition is heating up: afraid to not follow a burgeoning trend, Volkswagen recently announced it would “take over Tesla in electric cars” with a plan to build 16 new electric vehicle plants by 2025. And Ford and GM are releasing their own electric cars too – Ford has set in motion an $11 billion investment plan to add 40 electrified vehicles to its line by 2022 and GM has an “all electric” future planned.
Investors Believe
As already stated, Tesla’s share price has risen a whopping 2000 percent since its IPO. The companies massive market value is a reflection of investor faith in the credible growth and promise of Tesla; especially as we embark on the new age of automobiles. Investors are looking at the growth potential of what can be and are shrugging off the early lack of revenue. This allows the company to have a higher market value over established market rivals such as those mentioned above.
At its current standpoint, the size of Tesla’s backing will actually make it difficult for the company to deliver back to its investors in the short term. That should change of course when electric cars are sitting in front of every driveway across the globe, but for now; Tesla has had only two profitable quarters in its last 8 years. CEO Elon Musk expects all that to change in the third and fourth quarters of this year but Wall Street is still skeptical.
>> Tesla Job Cuts to Come in Restructuring Attempt
Other Major Companies
Tesla is not alone though and ironically many major companies have endured the same arduous climb to profitability. Behemoths such as Amazon (NASDAQ:AMZN), Yahoo (OTCMKTS:YAHOF), Twitter (NYSE:TWTR) and Netflix (NASDAQ:NFLX) share the stage with Tesla in this matter.
The reasons for this can vary. Purposeful reinvestment is one such reason: The company earnings are great, but it chooses to reinvest its revenue back into the business to keep the business momentum or growth going. Amazon is a good example of this. It can be argued that Tesla too is putting a great deal of revenue back into its company, eager to deliver on promises that some believe are too-far-reaching. Bulls still keep the faith.
And in this world, the old adage “You gotta spend money to make money” rings true, even if the money made comes 8 (9,10,11?) years later.
Featured Image: Tesla/Global News
