October 22, 2020

Breakingviews: The world can safely love the Tesla bubble

by Breakingviews.

Tesla’s stock price is at nosebleed levels. Elon Musk’s $400 billion electric-vehicle maker’s market value has rocketed fivefold this year. At well over 10 times this year’s estimated revenue, according to Refinitiv data, and dizzying multiples of profit, it’s probably an EV bubble. But past technology-stock excesses suggest investor zeal can fuel innovation – with shareholders, not the economy as a whole, suffering when the bubble bursts.

Tesla should post solid third-quarter results on Wednesday. It delivered around 139,000 vehicles in the period, a more than 40% year-over-year increase. But the valuation remains a headscratcher. Tesla – which should represent less than 1% of global auto sales this year, according to ValuAnalysis – is worth almost twice as much as Toyota Motor, a traditional manufacturer with over 10% market share.

But overvaluation may have positive side effects. The fervor is in part behind blank-check companies wanting to buy and inject fresh investment into EV startups including Nikola and Fisker, which both have near-zero revenue. True, the $7.8 billion Nikola has stumbled after fraud allegations, but the share price of the acquisition vehicle that acquired it has still doubled since the deal was agreed.

Tesla’s share-price rise has also coincided with established automakers upping commitments to new technologies. In July, General Motors said it would allocate over $20 billion to electric and autonomous vehicles by 2025, and Volkswagen recently pledged to boost EV sales nearly 30-fold by the same year.

There are lessons from history. The 1890s boom in British bicycle-related shares fueled innovation that made bikes cheaper, improved automated machine tools, and helped speed the car’s development. And the national economy posted bumper growth after the bicycle bubble deflated. The end of the bubble in technology stocks in the late 1990s cost shareholders in some companies a lot, but it was only associated with a mild recession. And all the speculative investment helped put in place the bones of today’s digital economy.

Tesla isn’t even in the S&P 500 Index, and Musk owns over three times as many shares as the next-largest holder. Even if EV stock ownership expands, a massive slump in valuations wouldn’t cause banks to close or credit markets to seize up. Shareholders would lose money. But in return for accelerating the larger economy’s shift to electric cars, that’s not a bad trade.

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BREAKINGVIEWS

Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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