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On paper—and on pavement—Tesla seems like a strong contender to be the Yahoo Finance Company of the Year. The stock has soared by an unreal 573% this year. After 12 years of losses, the electric carmaker has now turned a profit five quarters in a row, earning inclusion in the S&P 500 index. Tesla (TSLA) has resolved manufacturing snags, too, and three years after it went on sale, the Model 3 sedan is the world’s best-selling electric vehicle by a comfortable margin.
Yet we chose videoconferencing firm Zoom (ZM) as our Company of the Year, given its own remarkable performance in 2020 and the newfound cultural pastime of “Zooming,” for better or worse. More than that, Tesla still causes heartburn in ways Zoom doesn’t. Both companies are here to stay, but we deem the likelihood of unwelcome news in 2021 to be considerably greater for Tesla than for Zoom.
First, however, kudos to Tesla for cementing itself as an automotive powerhouse in 2020 and changing the trajectory of the auto and energy sectors. Tesla’s automotive market share in the United States is a mere 1.4%, according to KBB.com, compared with 17% for General Motors, 14.3% for Toyota, and 14.1% for Ford. But that misses the point, many analysts say. Unlike most automakers, which mainly sell cars, Tesla is building a network of self-reinforcing businesses that include energy storage, insurance, ride-sharing, and network services. “Tesla is on the verge of a profound model shift from selling cars to generating high margin recurring software and services revenue,” Morgan Stanley analysts wrote in November. “To only value Tesla on car sales alone ignores the multiple businesses embedded within the company.”
Tesla’s service offerings, for instance, include over-the-air software updates ranging from $2,000 to $10,000 that can boost the car’s performance, expand charging availability, and bring new media offerings into the cabin. Battery performance and longevity continue to improve, and Tesla CEO Elon Musk has talked about batteries that outlast their vehicles being used to power homes or other things in a second life. Conventional car companies simply don’t think this way—though they’re starting to.
Tesla made a lot of its investors rich this year, starting with Musk, who owns 18% of the company’s shares, worth about $100 billion. In November, Musk passed Bill Gates to become the world’s second-richest man, after Amazon CEO Jeff Bezos. Tesla’s surge has led to a flurry of EV startups, with nearly a dozen new companies trying to find a niche. Virtually every big automaker is pressing the gas, too, as it begins to seem inevitable electric vehicles will eventually replace gas-powered ones.
So what’s the problem? We found at least three:
Autopilot deaths
Tesla touts its self-driving system, known as Autopilot, as one of the company’s core innovations. And it’s rolling out Autopilot much more aggressively than other automakers are marketing their own autonomous systems. Tesla is rolling out “full self-driving,” or FSD, upgrades to Tesla owners, either as a one-time purchase for up to $10,000, or as a monthly subscription. The idea is to provide Tesla owners access to the newest technology as vehicles gradually progress toward being able to pilot themselves in all conditions, at all times.
[Think we got it wrong? Should Tesla be the Company of the Year? Tweet us at @yahoofinance and @rickjnewman using the hashtag #Tesla2020.]
But Tesla’s system is misnamed, because it’s only “Level 2” autonomy. Full autonomy is Level 5, and that will require breakthroughs many experts think are still years off. Earlier this year, research firm Navigant rated Tesla’s self-driving system last among nearly two dozen it evaluated, explaining that Tesla’s promises about Autopilot don’t match its capabilities. In October, Consumer Reports rated Cadillac’s “Super Cruise” system first out of 17 self-driving systems, with Tesla’s Autopilot coming in a “distant second.” CR gave Autopilot the lowest marks for indicating to the driver when it’s safe to use the system.
At least seven people died in Tesla crashes this year involving Autopilot, according to news reports. Since 2016 there have been at least 13 crashes involving 16 fatalities in which Autopilot was engaged. That doesn’t mean an Autopilot malfunction or misuse of the system caused each of those crashes. But safety investigators have linked a number of deaths with the system, including “overreliance” by drivers who might think it’s safer than it is.
Vox called Autopilot “deadly.” Axios described Tesla drivers as “guinea pigs.” Safety experts say federal rules should limit the use of Autopilot to highways without cross traffic, similar to a limitation GM imposes on its Super Cruise system. Tesla didn’t respond to our questions for this story, but it has previously insisted Autopilot is safe on a much broader set of roads.
There are no known fatalities associated with any other automaker’s self-driving system, leaving Tesla defending uncomfortable terrain. Tesla seems vulnerable to bad publicity, at a minimum, and it’s possible regulators could put new limits on self-driving systems that affect Tesla more than other carmakers that have moved more slowly on autonomy. At any rate, it’s difficult to honor a company with such safety questions swirling.
The bubble question
Is Tesla overvalued? We devoted many hours of airtime to this question in 2020, and there’s no definitive answer—except, perhaps, that Tesla’s eye-popping market cap implies investor belief that Tesla will be a goliath someday, with other dominant auto or energy firms shrinking or dead.
At around $560 billion, Tesla’s market value is 9 times GM’s and 3 times Toyota’s, even though Telsa sells a fraction of the vehicles those automakers do. If you consider Tesla an energy company, it’s equal to about 3.5 Exxon Mobils. This for a company with $556 million in profit the last 12 months, compared with $3.4 billion for GM, $13.8 billion for Toyota, and $3.3 billion for Exxon. However you slice it, Tesla’s valuation implies massive growth and the collapse of the competition.
But instead of collapsing, much of the competition is mimicking Tesla. GM says it will offer more than 30 electric vehicles by 2025, and its electric Hummer will probably hit the market next fall ahead of Tesla’s electric “cybertruck.” Virtually every big automaker has ramped up EV plans, with dozens of new electric models likely to hit the market during the next few years. Telsa’s four models hold about 82% market share in the relatively small U.S. EV market today, but that share seems certain to fall as more automakers pile in. So the market itself has to grow quickly for Telsa to remain dominant.
Maybe that will happen, but nothing occurred in 2020 to dramatically change the outlook for EVs or for Tesla. So what fueled the stock’s rocket ride this year? Stronger sales, improved manufacturing, profitability and momentum investing all probably helped. But there may also be a bubble effect as investors betting on imminent disruptive change get ahead of themselves.
The median 12-month price target for 31 Tesla analysts tracked by S&P Capital IQ is $430 – nearly 28% below current levels. Our company of the year picks have outperformed the broader market the year following our selection by an average of 21%, and we’re reluctant to choose a winner that could be a loser the following year. Of course our 2020 winner, Zoom, might be overvalued, too. We’ll report on that around this time next year.
The capricious CEO
We applaud Elon Musk’s brio and vision. It’s damn near impossible to build a profitable car company able to master the complexities of global supply chains and modern manufacturing. Plus, Musk runs another company breaking new barriers in space, and a third exploring long-range transportation tunnels. But still …
Like President Trump, Musk wrongly predicted in March that there would be “close to zero” coronavirus cases in the country by April. The virus has now killed more than 270,000 Americans. Musk went on to disseminate a variety of bogus claims about the virus, and he violated a county shutdown order in May by reopening the company’s Fremont, Calif., factory, risking arrest. Several Tesla employees reportedly came down with the virus after that.
We get it. Musk is a corporate renegade who makes his own rules and usually gets away with it. In 2018, he falsely claimed on Twitter he had secured funding to take Tesla private at $420 per share, a gambit many experts considered securities fraud. He settled a government probe with minimal damage. The same year, he also famously called a rescue diver in Thailand “pedo guy,” leading to a $190 million defamation suit—which Musk won at the end of 2019. The brashness obviously works for Musk, and for Tesla. But Musk is unique and his rambunctious style isn’t a model for anybody else. Maybe next year.