Investors buying Tesla's 'sizzle' over General Motors' 'steak'
© Getty Images

The midwest isn't known for earthquakes, but Detroit has been rocked twice recently. The first occurred when Tesla's valuation passed that of Ford Motor Company. The second happened Monday when Tesla passed General Motors (GM) to become the highest-valued U.S. automaker.

Has hell has frozen over? Or, maybe the tone deaf Tesla investors have lost all sense of reality. 

Tesla's stock price is up 45 percent this year. It's only April. It defies all logic and common sense that a company that continues to lose money and sells a fraction of the vehicles that the competition does continues to pad Founder Elon Musk's wealth. Tesla's sales have not increased. Why does the stock continue to climb?

ADVERTISEMENT

The Model 3 development has been incinerating cash at an alarming rate. Those who think the cash burn will end with the Model 3 have forgotten that there is a Model Y planned and the Model S is going to be in need of some major investment to keep it fresh. In addition there are plans in the works for a pickup truck and to become a full-fledged manufacturer.

 

General Motors had $166 billion in revenue last year and sold more than 10 million cars. Tesla sold just 76,230 Model S and X electric vehicles (EVs). Ford sold over 820,000 F-Series pickups last year with an estimated profit margin of at least $10,000 each. General Motors' net income in 2016 was $9.7 billion, a far cry from their days of bankruptcy.

Ford and GM are arguably making the best products they have ever made. Yet, Wall Street is overlooking the fundamentals of a healthy business and buying into a company that sells more hype than substance. Every time one idea shrivels up, Musk tweets about another.

When the stock needs a bump or Tesla isn't getting enough coverage, Musk feeds the hype machine. For the time being, Tesla is just a scab to GM and Ford, albeit an annoying one. But, it has forced Detroit to examine the future and where each company wants to go. Detroit has gobbled up talent and made key investments in the future to stem Tesla's long-term prospects.

The stock market likes to look forward. I'm struggling to see what is in that pot at the end of the rainbow for Tesla investors. They lack the capacity to build the promised 500,000 vehicles for 2018. It'll take more investment to build another plant. That means revenue won't be able to hit those promised targets.

Then there are their leadership issues. If Musk gets struck by lightning, what happens to Tesla? Who would step in? Who would jump on the hype train and would his or her words carry the same weight? 

No one knows how much more hot air Elon Musk can blow into this bubble, but there is no doubt, when you look at the fundamentals, that Tesla isn't a sustainable business. Tesla uses federal and state funds to support its business through government tax incentives. It will continue to face an uphill battle opening new dealerships, improving quality and retaining top executive talent. 

It's still business as usual in Detroit. General Motors announced their new SuperCruise hands-free driving system will be out later this year and will beat Tesla's latest HW2-equipped vehicles. In addition, GM started Maven, a car-sharing business, and dropped $500 million worth of investments into Lyft. The Tesla valuation isn't going to disrupt what happens in Detroit.

Ford and GM will continue to pump out profitable crossovers and pickups and use that money to invest in new mobility solutions and powertrains. When GM went bankrupt after the financial crisis, it wiped away all of the toxic parts of the business, making it primed for success. 

Is Detroit a dinosaur that doesn't take Tesla seriously? Quite the opposite. They are amping up their investments to take on Tesla, and they promise they won't give consumers the bellyache that comes with a new manufacturer. 

Electric vehicles have a lot of hurdles they still must overcome, including cheap gas, changing political administrations, issues with cold weather, high costs and exciting entries from Porsche, Jaguar, Audi and others. Gas, hybrid, plug-in hybrid, battery electric and fuel cell vehicles are all required in order to meet consumers' needs around the world.

The auto industry isn't going to become a one-trick, EV pony in the next 10 years. It will take many different types of powertrains to meet the needs of various income brackets and global customers. 

No one wants to see a company from China come into the U.S. market and dominate the electric vehicle or solar business. I want Tesla to succeed. I want to see homegrown manufacturing prosper. It needs to be done responsibly; that includes actions by the investment community.

General Motors and Ford are not as open as Musk is about the future. Yes, Ford has a 300-mile crossover on the way. Yes, GM has a car with almost 250 miles of range that you can buy today for $35,000. Today's consumers aren't saying they aren't going to buy a GM vehicle because of Tesla's valuation.

If anything, GM is undervalued. Detroit, Japan and Germany are loading their arsenals up and, by the end of the decade, the EV landscape will look very different than it does today. 

Keep an eye on the Richter scale. The next earthquake will be coming from Palo Alto, Calif. when the Tesla bears finally get their way or everyone comes to their senses — Tesla has over-promised and will underdeliver. Detroit, Japan and Germany will eventually fill that void.

 

Dave Sullivan is the manager of product analysis at AutoPacific, an automotive marketing research and product-consulting firm.


The views expressed by contributors are their own and not the views of The Hill.