My take on why Tesla Motors is not going anywhere medium / long term and thus on why its current market capitalization is unsustainable.
- Designing / manufacturing an electric vehicle is not that difficult. Thus, the barriers to entry from current high volume manufacturers are not high. Actually many are already joining the fray.
- What is difficult respecting electric vehicles is to sell them above cost. Currently governments all over the place are subsidizing their purchase but this is an unsustainable policy and thus won't last forever.
- High volume vehicle manufacturers can subsidize losses on their EV line with the profits from the internal combustion engine vehicles. "Pure" EV players obviously cannot. Once government subsidies are removed they will have a difficult time.
- If Tesla tries to move down market to produce cheaper, higher volume cars, it would be eaten alive by the high volume car companies that enjoy substantial economies of scale.
- So, essentially, the only option for Tesla is to remain a type of Ferrari for EVs. However, let's underline that Ferrari is not an independent company anymore: it is mostly owned by FIAT.
- Bringing a new car to market is very expensive. Being a low volume producer, Tesla would essentially have to maintain a "perfect" batting average over the long run. This is hardly a low risk strategy.
- Once the novelty of EVs wears off, people will be more critical of the whole category and make more rational decisions.
Based on the above, I predict that in 12 years or so Tesla either won't be an independent company or, if it remains independent, its market capitalization will be less than half what it is today.
For the record, its market capitalization today is $28.2 billion dollars.
If my prediction turns out to be wrong, I'll donate $100 to @FeedTheChildren
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