8th April 2014
You don’t have to be a petrol head to know Ferrari, Aston Martin, Lamborghini – or the more ‘downmarket’ Jaguar or Lotus.
But if you are petrol head, you may not wish to know about Tesla, the electric sports car that even wowed Top Gear’s Jeremy Clarkson, for a time anyway. The top model does 0 to 60 in an amazing three seconds, beating the Lotus Elise, which it shares many ideas, on the straight.
And if you think that acceleration is fantastic, take a look at the Tesla share price which has soared from very little to over $200 in a year. Now there is talk of Apple either buying Tesla or taking a strategic stake. It’s just chatter but many are comparing Tesla to Apple in stock market value performance. Investment journalist Tony Levene looks at the debate.
Exactly year ago, Californian start-up Tesla was worth $41 a share. A month ago, it hit $255 although it has since retreated to $213, valuing it at $27billion. Top Gear’s 2008 “great but problems” review of an earlier version of the high performance car attracted critics, including Tesla which sued for libel in 2010 only to have its claim thrown out in the Court of Appeal last year. Equally, the current value has seen many analysts label the product wonderful but the company “overvalued”.
So is Tesla the next Apple, briefly in 2012 the most expensive company in the world by market capitalisation? Or is it a dotcom boom stock destined to fall? Or one going nowhere while reality catches up with the share price?
Investors have to, as with all technology stocks, throw normal valuation metrics out of the window. Tesla loses lots of money – $74m in 2013 – but that’s in the price. Apple lost even more on its road to stock market leadership.
Both have exceeded expectations.
Apple moved from being a niche player in a niche market to world domination. Tesla sales are generally well ahead of outside expectations – admittedly still low as electric cars have the kudos of a milk float. Both have shaken complacent industries.
Both built on technology that already existed.
Apple took the personal computer and made it work for users who had interests other than understanding the inner workings of MS-Dos. It looked at phones and decided to make them consumer friendly. The same thought process was there with its iPad tablet and before that the iPod music player. All of these gadgets existed – Apple made them accessible and attractive. You no longer had to be a geek.
Tesla did not invent the electric car. But it has refined the concept so that it is no longer the butt of jokes. The current £57,300 UK model S – dubbed by the Daily Telegraph as an “automotive game changer” and more recent than the car tested by Top Gear – has a 300 mile battery life and a 125mph top speed. It is attractive, and priced for its market.
Both have had vertiginous stock price rises.
Ten years ago, Apple shares were $14. Now they are $512 – in summer 2012, they topped $700.
The Tesla price has accelerated from $41 a year ago to $213 – and it has soared as high as $252 just a month ago. At today’s value, it’s worth about half of General Motors and three times that of Fiat. The comparison with GM has prompt many car and investment websites such as the Wall Street Journal’s Market Watch to ask could this really be the case.
Both Apple and Tesla share prices have had their gainsayers who stated that prices were so far ahead of earnings as to be a bet on unsubstantiated hope.
Yet Apple made it to maturity, paying dividends and hoarding cash. During that journey, investors learnt a lot about hot stock valuations. They discovered that just because a share price falls hugely far outside “normal valuations”, it is not wrong to buy or hold the shares. They found that the noise of the market – optimistic investor expectations – can be more powerful than traditional number crunching, leading to a stock inventing its own universe of ratios.
So the lesson was that high-quality noise plus a company with products that continue to surprise equals a higher share value than price to earnings or price to book or price to sales would justify.
Both sell on style and ethos
Tesla is not just electric, it is stylish electric. Apple is not just a computer or phone, it is desirable kit in its own right. Electric cars attract the ethical buyer – Apple attracts those who like its underdog ethos, even if it is now top dog and has been dogged by allegations of poor working conditions in the factories of its Chinese suppliers.
Most commentators like Tesla. They believe it will be successful and eventually turn a profit. The question is how successful does it need to be to justify its market value.
Tesla is not Apple
Apple entered a virtuous circle of higher sales, higher profits, higher profile leading to greater sales profits and profile when it effectively sidelined desktop and personal computers. Once the mainstay of a not very successful business, the genius was to relegate those machines to an afterthought.
The first move in the Apple formula was the iStore. The money in many fields comes in after-sales.
Apple makes people pay for content for its gadgets and then makes it hard to take that content elsewhere by locking it into an operating system. At the same time, it charges content providers a big slice – 30% of iPhone App revenue – for the privilege of a presence on its platform. It was true for the iPod and just as true for the iPhone.
Other than some spare parts and a replacement battery every eight years, it’s hard to see how Tesla can increase value via add-ons. Once you have the car, all you need is an electric supply.
Apple prices are affordable in a mass market. Yes, its products are more expensive than computers using Windows or phones powered by Android. But not so far as to be out of reach. It can convince buyers to upgrade often. Tesla is a top end product which will not be replaced many times.
Apple can manufacture at low cost in China and ship to the world for pennies. Tesla has a higher cost Californian factory.
A Tesla on every street?
Ultimately, it depends on whether Tesla can move from the performance car niche to appearing on every suburban street. Market views divide.
Last month, Goldman Sachs analyst Patrick Archambault compared the strategy of Tesla CEO Elon Musk to Apple’s Steve Jobs. He believes the Model S, the mainstay of the range, is a lot like the iPhone although it will take a lot longer to achieve noticeable market share in an area where products last well over a decade. It all depends, the analyst writes, if Tesla can produce a successful mass market non-luxury car before the end of the decade. This will take it into perhaps half a million cars a year – twenty or so times the present number – by 2022. On that basis, the present share price could be about right.
However, automotive lead times are far longer than computers and safety checks are far more rigorous than ensuring a phone or computer user does not get an electric shock.
That’s the Tesla gamble. It has both to achieve scale and add value in a way no car maker has so far in the 125 year history of the automobile.
And as for the Apple rumours which have helped power Tesla’s value? Hedge fund manager Doug Kass of US-based Seabreeze Partners Management told the Wall Street Journal that he sees Tesla stock as ripe for shorting.
“In my view, the discussions between Apple and Tesla were likely centred more around joint ventures than an acquisition,” Kass said. “Stated simply, I can’t believe that Apple would be so stupid as to acquire Tesla.”