How does a 12-year-old company with exactly two profitable quarters in its history get to be worth more than General Motors?
Let’s begin this by noting that we’re not bigtime investors. Our 401ks got kicked in the teeth during the financial meltdown, too. But there’s something illogical about the news that Tesla’s market capitalization surpassed that of General Motors and Ford Motor Company last week, and had long ago cruised past Fiat Chrysler Automobiles.
The first thing to unravel in this news is what investors mean by “market capitalization.” According to Investopedia, market capitalization is the “total dollar market value of a company’s outstanding shares. Commonly referred to as ‘market cap,’ it is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to using sales or total assets.”
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So it’s a pretty simple math problem: a company with 20 million shares selling at $100 per share would have a market cap of $2 billion.
Tesla’s current market cap is $48.72 billion.
GM’s is $50.15 billion. Ford is $43.81 billion.
Whether or not one company wins this daily horse race is up to the market to determine, but one thing is clear: Wall Street is excited about Tesla, and is clearly not about boring old blue chip stocks like Ford and GM.
Looking back to 2008, you could certainly see how investors would’ve been a bit leery of GM, especially. It was a bloated mess of an organization, with a dealer network a quarter larger than it should’ve been, with a challenged product line and a looming crisis in the form of its captive finance wing, GMAC.
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According to The Detroit News columnist Daniel Howes, “Only yesterday, it seems, the CEOs of General Motors Corp., Ford Motor Co. and Chrysler Group LLC were asking Congress and the Bush administration for help to avoid uncontrolled collapse that would have devastated the industrial Midwest.”
One of the things that was completely under-reported during that dark period in GM’s history was the legal and financial nightmare of closing those brands. The average Joe on the street thought “Well, just stop making Pontiacs,” but for GM on its own, it wasn’t going to be easy.
Consider this: When GM folded the Oldsmobile brand in 2004, it cost the company $1 billion in payouts to dealers that had long-term contracts with the corporation. The legal wrangling over those stores is — in a few cases — still going on, 13 years after the last Oldsmobile left the assembly line.
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GM today is far from perfect, but it’s got a streamlined product offering and a tighter dealer network. It’s consistently making money and paying dividends. It’s doing exactly what a company of its size should at this point.
Investors, though, apparently still think GM is on the brink of insolvency. Wall Street is looking at GM exactly the way a lot of American consumers consider GM’s cars. “Well, my Uncle Jimmy had a Citation back in 1980, and boy, that car was a piece of junk,” they say, as justification for not buying a car that has nothing more in common with the 1980s products than the bowtie emblem.
A lot of water has gone under the bridge since 2008. GM is three brands lighter than it was then. At the time, GM was still supporting the Hummer, Pontiac and Saturn brands and it was killing GM’s potential.
Howe says “Chairman Elon Musk’s Tesla is a different cat. He’s selling a vision of the future largely unencumbered by a legacy past — no unions and no plant closings, no bankruptcies and no asset sales, no long history of insular management standing astride reality yelling stop.”
The trouble is, Tesla also isn’t making any money. It never has.
What it does have is a group of rabid enthusiasts that will buy whatever Elon Musk is selling, as witnessed by the hundreds of thousands of $1,000 deposits early adopters paid for the upcoming Model 3.
But those people haven’t gotten a car yet, and if Tesla is to be considered a success, it has to build 500,000 of those cars a year, which it hasn’t proven it can do.
It also has significant quality problems to overcome, despite its customers’ willingness to overlook them. Last year, Consumer Reports improved the Tesla Model S’s ratings, but the bad news was they only improved them to “average.”
Meanwhile, Buick is joining brands synonymous with top quality — Lexus and Toyota — for the first time since CR began tracking manufacturer rankings in the 1980s.
“The fear is,” according to John Voelcker at Green Car Reports, “that they will repeat the sins of their recent past, the same sins that required the U.S. government to finance restructuring of GM and Chrysler following bankruptcy—and to award Ford $5.9 billion in low-interest loans to fund development of more energy-efficient powertrains.”
It’s as if Elon Musk never took any government money. But he did, to a level within $1 billion of the loans Ford received, according to the LA Times. “Tesla Motors Inc., SolarCity Corp. and Space Exploration Technologies Corp., known as SpaceX, together have benefited from an estimated $4.9 billion in government support, according to data compiled by The Times. The figure underscores a common theme running through his emerging empire: a public-private financing model underpinning long-shot start-ups.”
The state of Nevada, alone, gave Tesla $195 million in transferrable tax credits, which it could sell for cash before it ever broke ground on a factory. The 6,000 jobs a Tesla battery plant might create seemed like a wager worth taking, but it came at the cost of killing a tax break for the insurance industry, and reducing incentives for entertainment companies to film projects in the state.
The difference, of course, is that Ford is on a payment plan to pay its loans back, just five years from now. GM, for its part, paid back the loan portion of its TARP funds five years ahead of schedule, though the government still owns 61 percent of the corporation, according to FactCheck.org.
For investors, the big idea here is that Tesla is the wave of the future, and that GM and Ford are dinosaurs that don’t know they’re dead yet. If the wave of the future is collecting incentives from the government, they may be onto something.
