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NEW YORK (Reuters Breakingviews) - Tesla is demonstrating how its electric cars can generate valuation staying power. Chief Executive Elon Musk oversaw a loss that missed Wall Street expectations by a country mile, even as the top line clocked in ahead of forecasts. More importantly, he's vowing that annual Model 3 production alone can meet the company’s full target by the end of next year.
Musk has made a habit of missing goals in the past. Good executives do learn from their mistakes and Tesla has taken several steps to try to bulk up its facilities, including buying automated manufacturing firm Grohmann Engineering six months ago. Deliveries of 25,000 Model S and Model X vehicles in the first three months of the year were 69 percent higher than a year ago.
Growing from the 76,000 that rolled off the line last year to a run rate of half a million in 2018 would be a big shift, however. There are already signs of internal friction: Klaus Grohmann, who founded the eponymous firm Tesla acquired, was ousted last month after clashing with Musk over strategy, Reuters reported, citing an unnamed source.
Taking the Model 3 from scratch – the first customer-ready cars are due this summer – to a run rate of half a million within 18 months would mark an astounding feat. Even if Musk can pull it off, there are potential problems.
First, the margins on a car with a base price of $35,000 will be much lower than ones on the Models S and X, which fetch at least $80,000 apiece. Even with mass production, Tesla is unlikely to achieve pre-tax margins much better than the 10 percent to 12 percent to which the likes of Daimler and BMW typically aspire.
Second, competition is heating up. At the luxury end, Jaguar is set to start selling its I-Pace next year, while GM’s Chevy Bolt, a Model 3 competitor, hit the market last November. Plenty of others are joining the fray, too. That could very well crimp Tesla’s sales or profitability – or both.
At almost 26 times 2020 estimates, Tesla’s stock is trading at a level implying Silicon Valley-style margins of 30 percent and near-perpetual vehicle-sales growth. Despite Musk's undeniable kinetic energy, that's simply unjustifiable.