As shares of Tesla Inc. (NASDAQ: TSLA) reached an all-time high, its market cap soared to $77 billion, about 49% higher than that of General Motors Co. (NYSE: GM). Just as remarkably, Tesla’s shares are up 75% in the past three months, while GM’s are down by 3%.
In terms of manufacturing volume, GM is the world’s fourth large car company, just behind Mercedes, Volkswagen and Toyota. GM’s revenue in the third quarter was $36 billion, relatively flat with the same period a year ago. Tesla had revenue of $6.3 billion, down almost 8% from the same period in 2018. This makes the market cap comparison more surprising. However, Tesla apparently has more demand for its cars than its manufacturing can supply, a problem any competitor would envy.
There are several reasons for the market value disparity. However, many investors still question them. Tesla will start major manufacturing in China, the world’s largest car market. Tesla assumes sales there will skyrocket in the next two years. However, the overall market in China is shrinking. Tesla also will enter the European market more aggressively. That market is shrinking as well. Tesla has done well in the United States, a market that is flat overall. With the global car market in a dip, investors have to believe Tesla will gain market share for several years into the future.
Part of the optimism about Tesla is its new Model 3, with its base price of $40,000. The company has made the electric car available to the high-volume part of the market that its Model S, with a price of $80,000, could not do. There is also a belief that its new Cybertruck will compete effectively within the largest part of the U.S. market: full-sized pickups. Ford, Chevy and Ram own this part of the industry and have for decades.
The broader argument for Tesla’s high market value is that the future of the car world is electric vehicles and autonomous cars. Despite growing competition in the first of these, Tesla can still claim a lead. Car companies like Ford say they have to launch large numbers of models, both electric and self-driving, to be successful in the future. They cannot show they can do so yet.
When it comes down to it, the assumption Tesla can do well in China, coupled with the strength of its brand and lead in electric cars in the world’s large market, is what has driven its market value so high. Then there is, obviously, a good deal of belief that future expectations about its success are colossal.
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