Tesla Motors Inc (NASDAQ:TSLA) shares may well hit a new high of over $150 on today’s market. When the stock was approaching $50 and $100 investors and analysts pulled back a little. Questions about whether the niche car maker could possibly be worth that much abounded. This time is different—$18 billion is a lot for such a small company, and one that has shown no ability to scale its operations.
Successful scaling is exactly what investors putting $150 into a single share of the company are betting on. Tesla Motors Inc (NASDAQ:TSLA) itself has, however, been unable to offer any proof that it can scale big enough, fast enough, and smoothly enough to be worth $18 billion. It’s not impossible, but it will be difficult. The myth of scale is, however, already baked into the price of the firm’s stock.
A decade ago, no one talked about tail risk hedge funds, which were a minuscule niche of the market. However, today many large investors, including pension funds and other institutions, have mandates that require the inclusion of tail risk protection. In a recent interview with ValueWalk, Kris Sidial of tail risk fund Ambrus Group, a Read More
Tesla Model S shows little Gen 3
Tesla Motors Inc (NASDAQ:TSLA) doesn’t really make money off of the Model S. The car is subsidized by the federal government and the state of California, where most of the sales are. On top of that subsidy, a large part of the company’s revenue comes from its sale of carbon credits to other firms.
This situation may not last forever. The company’s current business model does not allow for it to be worth $18 billion, unless it manages to successfully roll out its third generation cars. Right now those cars, which so many investors have their money in, are fictitious. The company that makes them doesn’t exist either. Tesla will need a complete transformation in order to enter the mass market.
Not a real car company
Over at the Globe and Mail, Jeremy Cato writes that although Tesla Motors Inc (NASDAQ:TSLA) is impressive, it’s not a real car company yet. The company hasn’t faced the challenges a car company faces. That means we have no idea about the company’s ability to survive and adapt to those challenges.
Tesla Motors Inc (NASDAQ:TSLA) has so far faced “no big warranty and service claims costs, no substantial recalls, no expensive legal defences of any sort, no real marketing costs and so on.” These are problems that it will undoubtedly face as it enters into the mass market, and they will test the company’s mettle.
Tesla Motors Inc (NASDAQ:TSLA) can grow, and it can become a mass market auto company that changes the industry. There are massive risks, however. Investors will have to decide what level of faith they have in Elon Musk.