Tesla Hits Cruise Control

Electric car maker Tesla had results out late last night, after the market close. They were good, delivering a profit of 50c a share, versus consensus expectations of an 11c loss. The stock price rallied by another 4% to $1,660 per share. Lovely!

This has been an incredible year for the company, its shareholders and its CEO Elon Musk. They have produced a record number of cars, opened new plants around the world and hit a new market capitalisation high. The stock price is up 290% this year. As a result, Elon Musk has just qualified for a $2.1 billion payday. Wowsers!

By now you will have heard that the market capitalisation of Tesla has blasted past all of its automotive sector peers, including Toyota. They are the only significant electric vehicle company. No other car maker has been able to bring anything to the market that has generated much excitement. As the New York Times said yesterday, In Electric Car Market, It's Tesla and a Jumbled Field of Also-Rans.

More asset managers are buying the shares. Tesla is about to be included in the S&P 500, because it has now had four profitable quarters in a row.

Vitaly Katsenelson describes Tesla's unique position. "In the past I have made the analogy that the transition from internal combustion engine cars to electric motors is akin to the transition from dumbphones to smartphones. It's a domain shift. So maybe another domain shift will bring higher margins to Tesla, as happened for Apple with the iPhone. Unlike other car makers, Tesla is vertically integrated: It manufactures most of the components that go into its cars (including seats); thus gains from the economies of scale that used to accrue to its suppliers will accrue to Tesla."

The stock valuation is certainly very high. According to Morgan Stanley, at a $300 billion market cap, Tesla trades at roughly 61 times their forward year EBITDA estimate. Apple's valuation when it crossed $300 billion in early 2011 was just 11 times forward year EBITDA.

Some estimate that Tesla's relative valuation implies that the market believes that its production will go up more than 20-fold from the 400,000 cars a year it produces today to. . . ten million cars.

There's been some hype recently about autonomous driving technology. Tesla, Uber, Google and Amazon are all pursuing this goal. The main takeaway is no-one is close to that yet. So, no Uber robotaxis for now. But Tesla's autopilot feature can take over on the highways, if you like? Trucking is a good application to focus on for now.

The stock price of Tesla has become a little detached from reality. Fans are buying Tesla stock because they believe in Musk's vision for electric cars and his ability to add more projects to the business, while short-sellers write long blog posts about its weak balance sheet and high debt.

Those that own them should consider themselves lucky, and hold on for the ride. Those who do not might want to buy a few, as a trophy holding to see how it goes?