Perhaps Analysts’ Traditional Metrics Are Outdated For Tesla

3 months ago by EVANNEX 26

Tesla Model 3

Tesla Model 3

SHOULD ANALYSTS USE DIFFERENT METRICS TO UNDERSTAND TESLA?

Traditional stock market analysts have never known what to make of Tesla. As a recent article in the Harvard Business Review notes, forecasts for Tesla stock continue to be all over the map – there is roughly the same number of buy, hold, and sell ratings out there. Could it be that the metrics analysts are using to assess a company’s business prospects are outdated?

Tesla

Tesla Model S (Instagram: teslacommunity)

“Classic metrics like market penetration and market share, which many leaders are measured on, are the very things causing us to miss market opportunities and threats,” writes Eddie Yoon.

“I consider someone like Musk to be a category creator – someone who doesn’t rely on incremental innovation but instead changes the rules of the road entirely by creating a new category. In that landscape, our established modes of measurement just don’t work.”

*This article comes to us courtesy of EVANNEX (which also makes aftermarket Tesla accessories). Authored by Charles Morris.

Tesla

Tesla’s has risen to become the fourth-largest automaker worldwide by value (Image: Visual Capitalist)

Detractors of Tesla (and of electric vehicles in general) are fond of pointing out what a small share of the auto market it commands.

A recent piece in Forbes noted that Tesla isn’t even the market share leader in the comparatively tiny EV market – in the first quarter of 2017, that title belonged to Renault-Nissan. However, Mr. Yoon believes that in this case, gross margin (the amount a company earns on each unit sold) is more important than market share, and Tesla’s margins have consistently been high – the company expects to earn around 25% on Model 3 once production cranks up – nearly twice as high as gross margins at Ford and GM.

Tesla

Model 3 parked in front of a Model S at the Tesla Factory (Reddit: mhathaway1)

Here’s a bigger question: How do you define Tesla’s market in the first place? Is it just electric vehicles, or is it all vehicles? The legacy automakers really want to believe that EV buyers are a separate group, like vegans, and that “mainstream” car buyers will never consider EVs, anymore than they would consider a tofu-burger.

But sales figures tell a different story. Tesla dominates the large luxury sedan segment, outselling Mercedes, BMW, and Porsche combined. There are good reasons to believe that Model 3 will wreak similar havoc in the small sedan realm.

Tesla

Tesla has become the most valuable US automaker ranked by market cap (Image: Visual Capitalist)

Yoon suggests that analysts look beyond market share and market penetration to what he calls “problem penetration.”

What is the problem that potential consumers want to solve, and how many are satisfied with their existing solution? Tesla understands that consumers are unhappy with certain aspects of the car ownership experience (smarmy dealers and high repair bills come to mind), and is offering solutions.

Tesla Model X

Tesla Model X

On the other hand, sometimes a new category of products solves a problem consumers didn’t know they had. Millions of coffee drinkers didn’t see anything wrong with their morning cuppa until the likes of Starbucks and Nespresso came along and offered then something better. Most drivers of sedans from Audi, Lexus et al probably love their cars. But once they experience electric driving, and realize that it’s available at a lower total cost of ownership, they may think again.

*Editor’s Note: EVANNEX, which also sells aftermarket gear for Teslas, has kindly allowed us to share some of its content with our readers. Our thanks go out to EVANNEX, Check out the site here.

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26 responses to "Perhaps Analysts’ Traditional Metrics Are Outdated For Tesla"

  1. CDAVIS says:

    Also… traditional automotive metrics don’t capture the value of “Tesla Energy”:

    https://www.tesla.com/energy

    1. Cavaron says:

      …and the future Tesla Network for ride sharing.

  2. Another Euro point of view says:

    As long as Tesla is in “start up mode” there is no real valid metrics. And it could go on like this for a few years still.

    1. Don Zenga says:

      Every analyst said that Model 3 will go on sale in 2018.

      It went on sale in 2018-07 although just 30 units were sold.
      Next challenge is whether they sell 100 units in August, if that’s met, another is covered.
      Next challenge is whether they sell 1,500 units in September.

      So it’s only months to go from “start up mode” to “high volume mode”, not years.

      1. Paul Smith says:

        No, it went on sale this year, 2017.

    2. speculawyer says:

      Yep…I’ve been saying it for years. As long as Tesla continues to make forward progress in reducing prices, improving the products, growing the charging network, providing a good roadmap for the future….they have access to billions of dollars in the capital markets from rich fans.

      And despite a few stumbles here & there (Roadster transmission, milling-sound motors, Model X debacle,etc.), Tesla has done a great job of moving things forward by designing great cars, building that Supercharger network, building a factory to push down battery costs, designing an elegant yet simple Model 3, etc.

    3. mx says:

      You should look at asset growth.
      That’s the brick and mortar of the business. It’s growing at a near exponential rate.

      When you’re buying stock in Tesla, you’re buying a piece of that growing infrastructure base, that’s rapidly expanding.

      When you hear “business news” talk about debt and not any mention of assets, you know you’re being fed FAKE NEWS.

  3. Don Zenga says:

    All these plugins are not a threat for traditional ICE automakers because they can switch over to plugins.

    But it’s certainly a threat for OPEC and Big Oil and the entire stock market is controlled by them, that’s why all metrics are loaded against Tesla.

    1. William says:

      “The entire stock market is controlled by them”, “OPEC and Big Oil”. By using Wall Street valuation mertrics, major energy producers do weild significant global power, especially among many of the 535 House and Senate Congressional members. Their power (Money), and control (Military), is an intimidating and prevalent force, like no other.

      It is up to us consumers not to continue to enable the big energy extraction businesses, and their self perpetuating Faustian bargain, with additional revenue. Until there is a better established Wall Street business profit model, the capital intensive energy players have little recourse, but to continue to satisfy their willing consumers, and wanton shareholders.

    2. speculawyer says:

      “All these plugins are not a threat for traditional ICE automakers because they can switch over to plugins.”

      I used to think this…and I largely still do. But now having watched them try for 5+ years now, I’ve come to the conclusion that it will be a long and painful process for them. Most of the cars they’ve come up with have been pretty crappy. They have allowed Tesla to establish a huge lead in design, software, charging infrastructure, brand, etc.

    3. speculawyer says:

      “But it’s certainly a threat for OPEC and Big Oil and the entire stock market is controlled by them, that’s why all metrics are loaded against Tesla.”

      This is hyperbole. OPEC is a paper tiger and has been so for 30+ years. They all cheat on their quotas and they are literally in proxy wars with each other. And since Russia, Norway, USA, and other non-OPEC states have so much production, OPEC’s power is quite limited. They are really not a factor other than Saudi Arabia having a lot of power on their own.

      And no, they do NOT control the stock market. If they did, there is no way Tesla would not have a market cap larger than GM or Ford!

      The oil biz will fight back HARD. But its not in the financial markets where they have strength. Their strength is in politics and corruption. Oil & Gas owns a LOT of politicians all over the planet.

      EVs are fighting hard. And if Tesla really can profitably deliver that base Model 3 for $35K, we are at a tipping point. Even bought-off politicians can’t stop a $35K car that you can effectively fuel up for less than $1/gallon.

      1. Roy_H says:

        +1

        The oil companies have convinced the politicians that Fuel Cell powered cars are the future so they can sell H2 and keep customers coming to their gas stations. Far more taxpayer money has been spent promoting FCVs and H2 infrastructure than on BEVs and I think that the beneficiaries (the oil companies) should pay for the H2 distribution (we are talking ultimately over $1 Trillion here) not the taxpayer.

    4. Pushmi-Pullyu says:

      “All these plugins are not a threat for traditional ICE automakers because they can switch over to plugins.”

      All these gasmobiles are not a threat to the Stanley Steamer because the Stanley Motor Carriage Co. can switch over to making gasmobiles.

      All these digital cameras are not a threat to Kodak because it can switch over to making digital cameras.

      All these iPhones are not a threat to BlackBerry because it can switch over to making touchscreen-driven smartphones.

      How did those work out, again? /snark

      The thing about disruptive tech revolutions, Don Zenga, is that they really are disruptive to the market leaders who are heavily invested in the old tech.

      We can’t say which of the current market leaders in selling gasmobiles will fail over the next 15 years or so. But we can be sure that some of them will. And Tesla won’t be the only one stealing the gasmobile market share, either. Other “young Turk” companies will arise to take the same path to success as Tesla.

    5. Paul Smith says:

      So… don’t you think the fossil cartel would have made a move by now?

  4. Dan says:

    Tesla is not the first or last start up to claim that traditional metrics and other laws of physics don’t apply to them. The laws (especially the ones around basic math) do apply. They can be out of whack in the short term. If a large number of people are fervent enough in their belief of something external to the facts, that can extend to the medium term. Invariably, these inconsistencies tend to resolve themselves in the long run (either the company pulls out of it, or flatlines)

    1. Dave says:

      It is not Tesla that claim traditional metrics don’t apply to them. You did read more of the article than just the title, right?!

      In Europe small cars like the Zoe and i3 are hot selling items. But how many Ford Fiesta’s have you seen in the US? Compare that to the European market. Fact is that the Tesla model Sis by far the best selling large luxery sedan. I think it is reasonably far to assume Tesla can create the same havoc I the Audi A4, BMW 3 and Mercedes C-class category..

      1. Dan says:

        More like you didn’t understand my comment.

        There is nothing completely “unique” about what Tesla has done so far. The Roadster and Model S/X trajectory is very similar to the market segment that Porsche is in. Analysts know what the margins and profitability of a Porsche should be. What Tesla claim to want to do with the Model 3 is enter the niche that BMW is in. Again, we know what those margins should be. A Tesla that competes against BMW should be less profitable than a Tesla that competes against a Porsche. Even though they have talked mass market, none of their plans include a truly mass market car – so we don’t need to calculate how much less profitable a Tesla that competes in that cut throat segment against Chevy or Toyota would be. One thing is quite clear – a Tesla that tries to go cheaper than a BMW cannot justify the amount of money it has been burning. If that ever came to pass, the stock is toast.

        The above cannot be answered by analysts alone. Tesla needs to figure out who it wants to be when it grows up. At the moment, those statements from Musk are all over the place. Hence, the diverging recommendations.

  5. speculawyer says:

    Tesla clearly cannot be compared using the same metrics as the stalwart 100 year old car companies. They are just not the same.

    Tesla is more than a car company since they have Tesla Energy & Solar City.

    And they are a rapidly growing company. They have a great product with huge demand and they have a multi-year advantage on their competitors.

    The Bolt is a nice car. But despite its long range, it is not very good for really long trips due to its reliance on a unreliable patchwork of relatively-slow 50KW SAE-CCS fast-chargers. And that is the only car is competitive with Tesla’s offerings.

  6. Pushmi-Pullyu says:

    This article seems like flailing a deceased equine** to me. But I suppose we’ll continue to see similar articles for a few more years, until Tesla — like Amazon.com — grows to a size sufficiently large enough to satisfy its top execs, and then changes from being a growth company to one that consistently makes a net profit every quarter.

    I suppose not everyone reading this article has followed the “story” of Tesla for years, so perhaps there are newbies who need to be brought up to speed on why trying to evaluate Tesla according to traditional financial analyst methods simply does not work.

    But I’d far rather see Tesla get evaluated on the arguably more solidly based “enterprise value”, instead of the “market cap” value which values only the stock price. Tesla’s stock price has been consistently inflated by much speculative investments, and that apparently isn’t going to end anytime soon.

    Yes, Tesla is by now quite a valuable company. But it’s not more valuable than the entirety of General Motors, or Ford, or Toyota, or Honda, or several other large auto makers.

    At least not yet! 🙂

    **Beating a dead horse

    1. mx says:

      You can look at “Book Value”, it’s in a better asset position than AMAZON. So, yes, they’re not using the right metric.

  7. Nix says:

    Until there is an ICE car company with similar grow rates to compare to, there isn’t actually any way to make a valid comparison.

  8. millet says:

    First, the article is focused on market value and not real production, which should be noted since market car be divided by 2,3.. if any company fails to produce what is expected (products, service etc…). That being said, market value only means that there is a lot of hope for Tesla’s future.
    Secondly, to split Renault-Nissan-Mitsubishi car be argued. Even if it’s not merged as VW-Skoda-Seat… There is still a lot os synergy at work in a huge industrial group, this one in particular.
    So in my opinion this infographic is biased. But don’t hear me wrong the test of the article present true arguments. I also note the number of EV sold from Renault and Nissan is seen as a whole. Like Carlos Ghosn once said :”we don’t see tesla as a competitor” True because there are not selling EV at the same price so they truly are not direct competitors :).

  9. Aaron says:

    The hexagon graph will change significantly (or should have already been changed) when Nissan and Mitsubishi finalize their merger. Given that both companies are electrified, while the other non-Tesla companies at the top have half-assed attempts at best, that will bring electrification closer to the top.

  10. Someone out there says:

    Oh boy, haven’t we heard that one before? Oh yes, around 2000 the “new economy” supposedly needed a whole new metric to value the dot com companies.

    No, apparently the same old rules of economy applied to them as well, damn! The same rules applies for Tesla too, of course.

  11. Brave Lil' Toaster says:

    Uh oh.

    I saw this very same line of thought about the entire software industry back in the 1990s.

    That means that Tesla’s stock price is all speculation. They’re screwed.

  12. Mark.ca says:

    I heard this before many times…”fundamentals don’t apply here because “…until a recession hits and then everything is discounted back to asset value. Tesla better get read for this!

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