Elon Musk Has Changed Investors' Views on the Electric Car

By Tim Higgins 

As longtime auto makers try to sell investors on their visions for the future, they keep hearing the same thing: What about Tesla?

Investors increasingly see the future of the car as electric -- even if most car buyers haven't yet. And lately, those investors are placing bets on Tesla Inc. to bring about that future versus auto makers with deeper pockets and generations of experience.

Tesla's stock is up 91% this year through Friday. That rise has been attributed to Chief Executive Elon Musk showing some leadership stability and executing on some promises, including two consecutive quarters of profit. And also to trader overexuberance.

But investors and analysts also say it reflects a view that the moment for electric vehicles is arriving.

Tesla, to a large extent, has become the purest proxy for betting on electric vehicles. Early on it ditched plans for a hybrid electric car -- the kind of part-gas, part-electric half-measure favored by traditional auto makers for improving fuel efficiency. More than just selling an electric car, Mr. Musk has crafted an aura around Tesla with a stated mission of accelerating the world's transition to sustainable energy.

The excitement around Tesla's stock signals the market believes the company will be "the sole winner" in the move to electric vehicles, Brian Johnson, an analyst for Barclays, told investors in a note this month. He also compared the stock run-up with the overvaluations of the tech boom of the 1990s.

When Tesla on Thursday announced it would issue new shares to raise more than $2 billion, shares rose more than 4%. The money gives Tesla more financial muscle to fund models and factories.

Meanwhile, top executives at rivals such as General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV in recent days have faced pointed questions about the Silicon Valley electric-car maker as Tesla's market value continued its meteoric rise.

When Tesla was founded 16 years ago, the idea of electric cars competing, let alone replacing gas guzzlers, seemed far fetched. But more recently, falling battery prices, pressure from governments such as China to reduce pollution through a shift to electric vehicles and an increasing focus on climate change more broadly have heightened expectations that adoption might be attainable.

Tesla wasn't the first car maker to embrace electric cars. GM seemed to be cutting a new path in the 1990s with the development of the EV1 only to be cast as a villain when it killed off the two-door car years later to the anger of loyal California customers.

As a startup, Tesla focused on more than just swapping a gasoline engine for an electric motor. It developed expertise in software and battery technology and pioneered a direct sales model (skipping franchise dealers) that once seemed largely impossible in the U.S. It made costly missteps, too: Its extreme focus on automating the assembly line and battery factory almost led to the collapse of the company in 2018 as it worked to untangle the mess.

But many investors have been willing to overlook the fits and starts, especially as 100-year-old car giants have struggled with their own existential challenges -- bankruptcies, fatal recalls and emissions-cheating scandals.

Tesla's Model 3 compact car, which fueled its 50% delivery growth last year, has helped show a market exists for fully electric cars, and analysts predict Tesla could turn its first full-year profit this year.

Tesla global deliveries last year represented a fraction of world-wide new vehicle sales but almost one in four of full-electric deliveries. Supporters believe that means there is exponential growth ahead, while others question if customers really want EVs. Fully electric vehicles represented just 1.9% of sales last year while researcher LMC Automotive predicts that share could grow to 11% in 2027.

All that has led senior executives at traditional auto makers to race to put Tesla-killers on the road in coming years. Volkswagen AG's luxury-car brands Audi and Porsche and GM's GMC brand showed off electric vehicles on Super Bowl Sunday. Ford, BMW AG and others also plan electric-vehicle model releases this year.

"If Tesla proves to be profitable...we think this removes one of the biggest impediments for why legacy [auto makers] were hesitant to go 'all in' on EVs," Adam Jonas, a Morgan Stanley analyst, wrote in a note to investors last week.

Tesla rivals first tried to compete with modest models. The Chevrolet Volt and Nissan Leaf targeted buyers who executives believed would be motivated by environmental concerns or desires for gas savings. Mr. Musk bet performance and cool would win out.

Now the industry is moving in that direction, too, offering sport-utility vehicles, high-end sedans and sports cars. Car companies have announced $225 billion in electric-vehicle investments by 2023, according to AlixPartners LLP, a consulting firm. So far, however, none of the offerings from GM and Volkswagen's Audi and Porsche have ignited the same kind of excitement or sales as Tesla's Model 3.

Even when legacy car makers embrace electric vehicles, they can stumble. Daimler AG, the maker of Mercedes-Benz, blamed part of its fourth-quarter loss on the challenges and costs of switching over to electric-powered cars. The problem for electric cars remains similar to what it was back with GM's EV1: battery cost. Tesla has found ways to reduce those costs, but it is still a battle for all.

Following another disappointing quarter earlier this month, Ford CEO Jim Hackett tried to assure skeptics that he was preparing the auto giant for the future. "Tesla's now worth over 5x the market cap of Ford," an analyst pressed him. "What's the message the market's sending Ford?"

Write to Tim Higgins at [e-mail]

(END) Dow Jones Newswires

February 17, 2020 05:44 ET (10:44 GMT)

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