The Home of Investment Banking

Tesla’s $1 Trillion Valuation and the Future of the Electric Vehicle Industry 

Toronto,,Ontario,/,Canada,-,November,22nd,2019,:,Photograph

At the end of last month, EV company Tesla surpassed a market capitalisation of $1 trillion. This is a statistical triumph for EV enthusiasts, but what does it really mean for the future of the auto industry?

Around midday on Monday 25th October, Tesla shares shot for the first time past $1000. By the end of the day, they had climbed more than 12%, with Tesla’s net capitalisation closing up at a little over $1 trillion. This lands the EV company in the elite territory currently inhabited by just five other US brands: tech giants Apple, Microsoft, Amazon, Facebook and Google-owned Alphabet.

It also posits Tesla among the fastest ever to have passed this milestone. Having crossed this threshold eleven years after becoming a publicly traded company, Tesla is second only to Facebook in terms of the rate of growth of its market value.

How did Tesla reach this exclusive milestone?

The short answer is a surge in premarket trading following reports of a sizeable order of Tesla Model 3s by auto-rental company Hertz. As announced in an official press release for Hertz, ‘this includes an initial order of 100,000 Teslas by the end of 2022’ and the installation of ‘new EV charging infrastructure across the company’s global operations’.

Tesla’s $1 trillion valuation has stayed afloat, despite CEO Elon Musk’s cautionary tweet, released a week later, which emphasised that ‘no contract has been signed yet’.

The sudden spike in Tesla’s market value must also be viewed, however, within the broader context of a year of steady financial success for the company. Tesla saw its net cap rise consistently over the first three quarters of 2021, totalling in a 67% increase, and standing in line with their very best sales figures to date. To give some perspective, the sum of 627,350 vehicles sold within this period is already greater than that of 2016, 2017, and 2018 combined.

Source: Statista 2021

In the bigger picture then, it seems that Tesla and its battery-powered fleet are reaping the rewards for predicting the future of the auto industry. Indeed, the US-owned company’s move away from gas-fuelled vehicles with heavy tailpipe emissions, is a shift backed by President Joe Biden.

In August of this year, Biden broadcast his $174 million commitment to maximise EV uptake, setting the ambitious target of achieving 50% electrification by 2030. Standing in front of the White House – flanked by two polished EVs for bodyguards – Biden projected a vision of ‘a future that is electric’ and from which there is ‘no turning back’.

The increased popularity of EVs is by no means an American phenomenon. EV sales have soared across the globe in 2021, with growth in the US bettered by its chief auto market rivals China and Europe. Global sales were up 160% in the first half of the year from 2020, amassing at 2.6 million units and representing 26% of new sales in the auto market.

What does all this mean for the future of the EV industry?

The recent surge in Tesla’s market value, and global rise in EV sales, would seem to be all good news for environmentalists. Tesla now dwarfs its gas-guzzling competitors, worth more in net cap than the combined total of the next nine largest car producers.

Yet there remain a few bumps on the road toward a greener auto industry.

Tweeting in response to Tesla’s $1 trillion valuation, Musk noted it was ‘strange’ that the Hertz order ‘moved valuation’, as ‘Tesla is very much a production ramp problem, not a demand problem’. This is not the first time Musk has voiced concerns surrounding Tesla production.

In a February interview with auto-engineer and YouTuber Sandy Munro, the CEO admitted that each time production is radically upscaled, the quality of Tesla vehicles suffers.

During ‘production ramp’, Musk explains, ‘it’s hard to be in vertical climb mode and get everything right on the little details’. While Musk here alluded only to minor paint job issues, it was a potentially sinister software malfunction that brought Tesla to headlines last month.

According to the National Highway Traffic Safety Administration, Tesla was forced to recall nearly 12,000 vehicles fitted with their ‘full self-driving’ technology after reports were received ‘of inadvertent activation of the automatic emergency braking system’. With Tesla sales increasing exponentially, the intensification of such quality issues is a major cause for concern.

Considering the EV market at large, Tesla can also be seen to play an active role in supporting gas-fuelled auto sales. In the same week as its $1 trillion valuation, news also broke of Tesla’s partnership with UK carmaker Jaguar Land Rover.

For an unspecified price, Tesla will welcome JLR into a pool with Japan’s Honda, enabling both companies to shirk fines for exceeding European emission limits. In facilitating this arrangement, Tesla is effectively shouldering out its EV rivals.

It is arming two seasoned manufacturers of gasoline engines against competition from smaller battery-powered vehicle lines offered by the likes of China’s BYD and America’s GM – companies whose net caps hover well below Tesla at around $140 billion and $80 billion respectively. In turn, not only is Tesla increasing its lead, but it is narrowing the space for its burgeoning EV competitors.

The recent surge in Tesla’s market valuation then, is not straightforwardly indicative of the future dominance of EV vehicles. What is clear, however, is that a few production ramp setbacks will not be enough to deter Tesla itself from further expansion. Having pledged to end world hunger last Sunday – albeit over Twitter – it’s clear it will take a lot more than some slight quality issues to scare off Tesla’s CEO, Elon Musk.

More Articles