By Narmin Jamalova

Welcome Tesla – the vehicle that will soon populate the already-crowded roads and America’s most valuable automaker as of April 2017. The good old days of General Motors and Ford being on top of the car-making industry are past now and if you still believe that petrol-driven autos are the “it” of today’s world, you will reconsider in no time as they hit the road.

On April 10, Tesla’s shares rose far above those of GM and Ford, valuing the company at $64 million more than the former two, according to Bloomberg. A number of critics spoke out against investors’ surging optimism, stating that Tesla is overvalued. More specifically, Tesla expects to lose more than $950 million by the end of this year, in contrast to GM and Ford which are expected to generate billions of dollars in earnings. (Welch, 2017) So, where is the optimism coming from?

Here’s a bit of finance: even though Tesla’s net income from 2016 is at -$670,000 (Yahoo! Finance, 2017), its change in cash flow is largely positive ($2mn) – which is the key thing investors pay attention to. True, net income (or retained earnings) is what dividends are paid out of and a negative number may indicate that no current dividends will be paid to stockholders. But at the end of the day, what matters to investors are the future growth opportunities of Tesla and its ability to pay future dividends. Net income is negative but that is all due to Tesla’s huge investment projects, such as the unveiling of its Model 3 sedan later this year. Model 3 sedan, believed to become a success, will bring in a lot of profit (especially considering its unique affordability for most American people), increasing sales and the already positive cash flow.

Tesla Model 3 Sedan

Source: i.ytimg.com/vi/z5t43Be1fo0/maxresdefault.jpg

In other words, investors do not care as much about dividends as one might expect. What they care more about is how much their stock is increasing in value, plus whether the company they’re investing in will generate some positive cash flow in the future (and pay future dividends). It’s analogous to owning a 2-year old mobile phone, the selling price of which continues increasing, instead of declining. Would a reasonable person want to get rid of a property that could sell for a higher price tomorrow? And an even much higher price the day after tomorrow?

Tesla’s stock is increasing in value because of two main reasons: a) the likely success of its Model 3 sedan and other growth opportunities; b) investors perceiving it as a tech company as opposed to a simple car-manufacturing company. (Welch, 2017) Moreover, investors are gradually coming to realize that electric-powered cars are the vehicles of the future – autos that will become a norm in ten years or so.

That being said, there is no surprise that at some point “tech” giants, such as Tesla, would come to dominate many different industries of our – already tech-driven – the world.

ADA University, BBA 2019

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REFERENCES:

Welch, D. (2017). Tesla Just Passed GM to Become America’s Most Valuable Carmaker. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2017-04-10/tesla-passes-gm-as-musk-s-carmaker-becomes-america-s-top-valued

Yahoo! Finance. (2017). Tesla, Inc (TSLA). Retrieved from https://finance.yahoo.com/quote/TSLA/history?p=TSLA

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