Tesla | Fundamental Analysis

The positive news from Tesla continues with the latest production numbers. In the third quarter of 2021, deliveries exceeded analysts' expectations by several thousand vehicles.

At the same time, its market value remains huge, and along with loyal fans, the company has a vast army of detractors predicting a stock price collapse. Do skeptics have reason to believe that Tesla is living on borrowed time until its share price adjusts to a more "realistic" level? Or will its value continue to rise?

Both sides have compelling arguments, but overall, the "bulls" argument may be stronger.

On Oct. 2, Tesla released third-quarter production and delivery figures, beating Wall Street's consensus forecast of 233,000 EVs. The company delivered about 241,300 vehicles, almost 3.6% more than expected, though it also notes that it has been sticking to underreporting, omitting shipments that had significant problems.

Tesla achieved these results even though ongoing chip shortages have hampered both EVs and internal combustion engines (ICEs) in the auto market in 2021. This better-than-expected performance is in line with the "massive trajectory" that investment firm Wedbush predicted just days earlier in a research note. Wedbush analyst Dan Ives predicted total shipments of between 890,000 and 900,000 Tesla vehicles in 2021.

In absolute terms, Tesla car production is only a fraction of the production of combustion engine vehicles by the major automakers. However, a closer look at the production figures reveals several important points.

Tesla will soon be producing 1 million cars a year, using just two plants. By comparison, Toyota Motor currently has 59 plants and produces 9.5 million cars a year, according to 2020 data.

The comparison highlights Tesla's production efficiency, which is further highlighted by Tesla's adjusted gross margin (AGM) of 29% compared to Toyota's approximate AGM of 24%. The latest news on production and delivery also prompted a reaction from Volkswagen AG CEO Ralf Brandstätter on Oct. 3.

According to Germany's Business Insider, Brandstätter noted that the Tesla 3 takes 10 hours to assemble, a third of the time needed to assemble the Volkswagen ID.3. He also told an emergency meeting of the German automaker's executives that Tesla's profitability and productivity are "in another dimension."

Since Tesla is already producing cars more efficiently than the world's current No. 1 automaker Toyota, production is likely to increase even more once the European "Gigafactory" is launched. Even with only existing capacity at its disposal, third-quarter deliveries are up 73% year-over-year from 139,300 vehicles produced in the third quarter of 2020.

Tesla's Q3 delivery and production figures offer a measure of the criticism levied against the company. Over the years (and today included) detractors have argued that Tesla's stock price and market value are grossly overstated compared to its current production numbers. They point out that the company produces less than a million cars a year and its market value of $776.6 billion exceeds the combined market value of Ford Motor ($56.6 billion), General Motors ($77.1 billion), Fiat Chrysler, owner of Stellantis NV ($59.7 billion), Volkswagen ($135.3 billion), BMW ($54.4 billion) and Daimler ($82.8 billion) by nearly 67 percent - facts that, in their view, show the company to be highly and unsustainably overvalued.

Given all this, why does Tesla's valuation remain stubbornly above the level that bearish commentators, analysts, and experts think it should be? The answer lies in a fundamental difference in perspective. The valuation is not based on Tesla's current sales performance or other performance against large, long-established automakers, but its potential and momentum.

Tesla's valuation is absurd to the bears and doubters in the stock market because they evaluate it solely as another standard automaker with modest production numbers, competing on a level playing field, without much historical circumstance in its favor. From this point of view, a narrow, "literal" interpretation of performance, Tesla is indeed vastly overvalued.

An alternative view sees Tesla as the frontrunner in the market revolution, with the current EV market representing only a tiny fraction of its nascent potential. If there is indeed a major historical turnaround from internal combustion engine vehicles to electric vehicles, direct competition is not now the source of Tesla's high value. Instead, it is based on the company's success in ramping up production capacity while maintaining profitable margins.

The rapid growth in production, gaining momentum over time, and exceeding expectations even in the face of chip shortages, show that Tesla is successfully positioning itself to claim a larger market share when the automotive market "turning point" is reached. At that point, if it comes, a historic shift will occur.

Electric car sales will grow exponentially, while sales of internal combustion engines will collapse, just as automobiles gave way decisively and quickly to horse-drawn carriages or horse-drawn horses in Henry Ford's time. Tesla is noticeably leading the way in actual manufacturing know-how and public acceptance, so its value likely reflects a potentially powerful first-mover advantage when electric cars begin to be used.

Time has yet to prove which point of view is ultimately correct, Tesla's detractors or its enthusiasts. However, the market for electric cars continues to evolve and grow, making the shift inevitable.

When that moment comes, Tesla will be positioned as one of the most successful electric car stocks, and perhaps its impressive bullish outlook will cause its stock price to far exceed even today's price. The share price of Ford or Toyota is based on the present, while Tesla's share price expresses confidence in the future-a confidence that perhaps looks justified.