Promise of Tesla Piques Investor Interest More than GM Profit

Dissecting why Tesla is at the top of the list for investors, while traditional automakers like General Motors still lag behind.

Timothy Healey
    Jun 13, 2017 8:15 AM  PT
Promise of Tesla Piques Investor Interest More than GM Profit
author: Timothy Healey    

Solid, steady profits from one of the world's best-known companies have been no match for the promises of a much buzzed-about startup in recent weeks.

Despite a sales slump in recent months – one that might be indicative of a post-recession sales streak wearing off than a long-term trend – General Motors has set recent earnings records and appears to be as stable as ever, less than 10 years after a controversial bankruptcy and restructuring that was backed by the federal government. It also has over 100 years in business, making it a household name for generations.

Meanwhile, Tesla is only 14 years old – it wouldn't even be old enough for a driver's license in most places if it were human. It sells just two models at present, with a third on the way sometime this year. That third model, the Model 3, will be the first Tesla that will be affordable for the mass market – the Model S sedan and Model X SUV are priced solidly in luxury-car territory. Tesla has yet to turn an annual profit.

Why Is Tesla's Stock Trading At A Higher Price?

Yet Wall Street is favoring the California-based upstart over one of the titans of modern American industry. Why?

Why, indeed, is Tesla stock trading at over $300 a share while GM's hovers around $33 a share, which is not far from where it was when the company re-entered the public markets in 2010. Why is Tesla valued at $55 billion by Wall Street, whereas GM is valued at $50 billion? Why is Tesla not only ahead of GM, but why have Ford, Honda, and Hyundai all also lost value? Why have only Fiat Chrysler and Toyota seen value growth over the past seven years?

Is a perceived notion of California cool helping Tesla? Is it a function of Silicon Valley buzz over Midwestern staidness? Is it Musk's rock-star status relative to more traditional business executives, such as GM's Mary Barra? Or are there deeper business reasons driving investors?

For sure, Musk has big ideas, such as the Hyperloop, and he's had plenty of success with PayPal. Barra, meanwhile, speaks and acts more like a traditional CEO and has spent her entire career at GM. Musk is probably more well-known to the casual consumer than Barra is.

Tesla's tech is certainly intriguing, and it goes beyond its all-EV lineup. For one, Tesla's available Autopilot feature hints at the future of autonomous driving. But GM isn't exactly behind the times. It offers a competitive range-extended compact EV called the Volt, and it has already launched its Model 3 fighter, the Bolt EV.

The Bolt EV offers over 230 miles of driving range and a price tag in the mid-$30Ks. Not to mention that Chevrolet has a lot more dealers to service the Bolt than Tesla does service centers – around 3,000 versus 69, to be exact. Meanwhile, Tesla is even struggling to get some states to allow it to sell cars within their borders – the company's direct-to-customers sales model has upset franchise dealerships and their trade groups.

If the Model 3 is late to market and/or flops, that could drive down the share price and result in less access to cheap capital for Tesla.

It's not just about the Bolt versus the Model 3 – GM has also invested in autonomous-driving research, as has every other automaker, and it has acquired self-driving startup Cruise Automation as part of that effort. It's even partnered with Lyft to get more involved in ride-shares that use autonomous vehicles. And it claims its upcoming SuperCruise semi-autonomous driving system will be safer than Tesla's Autopilot.

Automaker VS Tech Company

Perhaps the biggest difference between the two companies in the eyes of investors is one of kind. Meaning, what kind of company is each one? General Motors is still seen as a traditional automaker, no matter what it does to anticipate the changes that will hit the industry in the future. Meanwhile, Tesla may be a small automaker, but it's seen as a tech company.

That makes for a big difference. Building cars is a capital-intensive business, thanks to its large global-scale manufacturing aspect. It's also an enterprise with low profit margins – GM's was under six percent in 2016.

On the other hand, tech companies are seen as more nimble, with higher profit margins. And despite being an automaker, Tesla is still looked at it through that lens. It probably doesn't hurt that the company makes just three models and doesn't have the same complex supply and manufacturing chain as other automakers.

It definitely helps that Tesla owns its own assembly factory, which it claims will soon be one of the most efficient in the world, as well as its under-construction gigafactory, which will supply it with plenty of batteries for EVs.

Tesla is also planning to branch out into other industries in ways that automakers aren't. While GM is keeping up with the times in terms of autonomous driving and ride-sharing (it even has its own car-sharing service, Maven), it's not moving into solar panels or energy storage like Tesla is. Tesla is even moving into trucking.

Investing, of course, is as much about the future as it is the present – which could explain the disparity.

"Investors and the financial markets are much more interested in investing in the potential of what might be huge than in the reality of what's already profitable and likely to remain so for years to come," Sam Abuelsamid, a senior analyst with Navigant Research, told Top Tech News.

Investing can also be about hype at times, and Abuelsamid notes that Tesla has generated more of that than GM.

He notes that Bolt EV marketing has been lackluster so far, despite what the car might mean for Chevy and GM – and despite how it might stack up against the Model 3. Meanwhile, Musk builds up his brand with parties and engages potential customers on Twitter.

"The only way you can get people to perceive you in the same light as a company like Tesla is to demonstrate it," Abuelsamid said.