It was supposed to be Teslaâ€™s coronation. After narrowly escaping bankruptcy, the Silicon Valley automakerâ€”profitable and dominant in an industry that once dismissed itâ€”was to enter the S&P 500 index on Sept. 4. To sweeten the symbolism, the oil and gas giant ExxonMobil had just been ejected from the Dow Jones index, marking the fossil fuel industryâ€™s ignominious decline during the energy transition.Â Â
Only Tesla didnâ€™t make the cut. Despite four profitable quarters and a market cap exceeding $400 billion, it wasnâ€™t enough for the index. The companyâ€™s share price plummeted by a third following the bad news. Teslaâ€™s unexpected slight may have had something to do with the composition of its earnings: Its $368 million in profits over the last four quarters were eclipsed by $1.05 billion in sales of regulatory credits to other carmakers for zero-emission vehicles.Â Â Â Â
True to form, however, Teslaâ€™s exclusion from the S&P 500 barely dented the carmakerâ€™s momentum. Tesla has since regained more than half its losses since being passed over for the index, and has lined up plenty of good news to keep investors interested. A pickup, a heavy-duty semi, a Roadster sports car, and battle-ready Cybertruck are on the way. Tesla is making plans to enter the German energy market. Its vehiclesâ€”the Models S, 3, X, Y lineupâ€”are selling well despite the coronavirus pandemic. And the companyâ€™s â€śBattery Dayâ€ť Sept. 22 added more fuel to the fire as Tesla committed to striking out on its own to become the worldâ€™s best battery manufacturer.Â Â Â
In fact, theÂ coronavirus crisis has changed little about its plans,Â Musk said on an earnings call earlier this year: â€śWe came to the conclusion that the right [path] was actually to continue to expand rapidly, continue to invest in the future in new technologies, even though it is risky.â€ť
Hereâ€™s what else you need to know about the worldâ€™s most valuable automaker:Â
Tesla keeps baffling Wall Street. The stock quadrupled this yearâ€”as of Sept 24, shares were trading at $387 after a stock splitâ€”allowing the company to raise an astounding $7.3 billion in 2020. In August, the investment bank RBC told investors Tesla is â€śfundamentally overvalued,â€ť echoing widespread sentiment on Wall Street.Â
For Teslaâ€™s stratospheric share price to make sense, it argued, the carmaker must grow more than 30% per year for the next decade. And the comparable companies to pull off such a featâ€”Apple, Amazon, and Googleâ€”donâ€™t operate under the auto industryâ€™s razor-thin margins.
Yet nothing seems to dent investorsâ€™ faith in Musk, whose (mis)behavior as head of the companyâ€™s board has made him â€śeffectively uninsurable.â€ť And the showman always has more pyrotechnics for his fans: new autopilot features, expanding factories in Berlin and Shanghai, and who knows whatâ€™s next.Â
Maybe thatâ€™s the point. Musk has never disputed todayâ€™s valuation makes little sense given Teslaâ€™s track record. â€śTesla is absurdly overvalued if based on the past, but thatâ€™s irrelevant,â€ť Musk tweeted in 2017 when its valuation was a mere $70 billion. â€śA stock price represents risk-adjusted future cash flows.â€ť And he knows investors are betting on a very, very bright future.Â
The batteries of electric vehicles are a minefield of environmental and human rights problems. They rely on a variety of metals and mineralsâ€”cobalt, nickel, lithium, and moreâ€”most often sourced from mines in developing countries that are rife with instances of child labor, corruption, toxic pollution, and deforestation.Â
Tesla is no exception. On Sept. 22, Musk said Tesla would be redesigning its batteries to drop cobalt and other expensive metals.Â In the meantime, heâ€™s shopping for better sources: Last week the company joined an alliance to support improved cobalt mining practices in the Democratic Republic of the Congo. Itâ€™s also in talks to buy low-carbon-footprint nickel from a specialized mine in Canada.
Since Henry Fordâ€™s first black Model T rolled off the assembly line in 1908, automakers have been building gasoline cars and trucks roughly along the same lines. Tesla was the first and only auto firm to envision itself as an energy company. As Musk wrote in his â€śSecret Tesla Motors Master Planâ€ť in 2006, Tesla would â€śhelp expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy.â€ť
Since then, Tesla has ventured into batteries, solar panels, self-driving software, photovoltaic roof tiles, underground transportation (via The Boring Company),Â and even interplanetary travel. Musk hurled a Model 3 toward Mars aboard his SpaceX Falcon Heavy rocket in 2018.Â
Some of those ambitions nearly bankrupted the company more than once. But they might also pay off. For Tesla, after having strong-armed the entire industry to commit to electric batteries, it now faces unprecedented competition. Despite all the detours and delay, Tesla has never wavered much from the â€śmaster planâ€ť Musk laid out more than a decade ago:
To spread the word, Tesla relies on super fans like Will Fealey. President of the Tesla Owners Club UK, Fealey and his fellow club members spend their spare weekends at car shows, offering â€ś10,000 test drivesâ€ť to prospective Tesla owners. â€śStaff from companies like Pagani, Aston Martin, BMW, and Porsche had to pick up their jaws from the floor once they realized we were volunteers from the official UK owners club and not employed by Tesla,â€ť he tweetedÂ
No other car company can claim this. Tesla just isnâ€™t like other car companies. It spends virtually nothing on paid advertisements. Ford must spend roughly $2,000 per sale advertising its Lincoln sedan. Even luxury heavyweights like BMW pony up about $200 a piece to move cars off the lot.Â
Thatâ€™s a durable competitive advantage, but Tesla still faces huge headwinds. Itâ€™s a new, relatively small automaker in a cutthroat market where EVs make up just 2.6% of global sales. Teslaâ€™s zero-emission credit sales, rather than margins on vehicle sales, represent all of its profits and more. Next year, more than 30 new EV models from rival carmakers will hit the market, a â€śwatershed yearâ€ť for EVs, says Herbert Diess, Volkswagenâ€™s CEO.
But when you have an army of customers ready to sell your car, maybe youâ€™re doing something right.Â