Two facts regarding a transition to renewable energy are indisputable. First, unlike fossil fuels renewables can rarely be used directly. You can’t power your car from the sun or cook your dinner with wind. Effective use of renewable energy requires electrification. Second, electrification of transportation requires electric cars. This has generated a lot of wind (hot air) regarding electric cars but little else so far. A successful electric car must check four boxes: design (modern tech look), price, range and availability in quantity. Only the Tesla Model 3 checks all four boxes. The Bolt is boring. The Leaf is ugly. The Polestar is not available in quantity. The i3 is getting long in the tooth and still lacks the range. The Taycan is way too expensive. Is it any surprise that in the United States the Tesla Model 3 outsells all other electric cars combined?
What is equally surprising is that all of this is true more than seven years after the Model S was introduced on June 22, 2012. The failure of the German car manufacturers to produce new, sexy, electric cars in large numbers at reasonable prices during the last seven years is particularly disappointing. Germany is a world leader in the push for renewable energy and electrification. With their respected auto industry, one might have expected them to be a world leader in automotive electrification.
That brings us back to Tesla and the Q3 earnings announcement. Given Tesla’s slowing revenue growth, we still think Tesla is overvalued, more so after the 29% jump in the stock price. After all, expected future profitability must have been impounded in its $46 billion market value prior to the announcement. But the failure of competition to deliver gives us heartburn. Until we see deliveries of new, reasonably priced, and creatively designed electric cars from traditional manufacturers, we will worry that Tesla’s valuation may not be as excessive as our valuation models suggest. Those models are premised on the entrance of real competition. That real competition has yet to arrive.
In addition, the failure of competitors to get into the electric game runs afoul of what economists call learning by doing. To make better electric cars you have to start making electric cars. The more cars you make, the more you learn, and the better and less expensive future cars become. By not being more actively in the game for the last seven years, competitors have let Tesla improve at their expense. It may be that building electric cars is more difficult and less profitable than we understand, but that is not a reason to dilly-dally. The electrification of the vehicles is inevitable, and the more traditional producers delay the larger Tesla’s gap becomes.
There is a joke about professors that goes, “Those who can do, do. Those who can’t do, teach.” Perhaps there ought a similar adage for the car business that goes, “Those who can make electric cars, produce them. Those who can’t make electric cars, talk about producing them.” The market is pricing Tesla stock as if it will dominate the future electric car market. We don’t agree but given the state of competition to date we are worried about our conclusion.