Tesla Stock: Insider Calls Out the No. 1 Flaw in the Tesla Motors Inc Story

Tesla StockSergio Marchionne has some advice for Tesla Motors Inc

Tesla Motors Inc (NASDAQ:TSLA), more than any other company, has made electric cars desirable. Tesla stock is trading at $250.00 per share, rising on the promise of the new Tesla “Model 3” from a yearly low of $156.00. The company has achieved something few considered possible: a painless shift from hydrocarbon fuels to battery power.

Tesla’s cars have massive amounts of torque, allowing them to accelerate so quickly that only the top gasoline-powered supercars can match them. That has certainly accelerated Tesla stock as well. With such achievements, does the traditional auto industry even stand a chance against Tesla? Tesla’s boss Elon Musk and the company’s fanboys and fangirls certainly believe this and with prophetic conviction to boot.

The traditionalists still have a voice in the matter, though. Fiat Chrysler Automobiles NV (NYSE:FCAU) chief executive Sergio Marchionne told Bloomberg during a recent interview that he would sell the minimum number of the Fiat “500e,” the company’s electric vehicle (EV), required and “not one more” due to production costs. “I can’t make money building a car like Tesla,” he noted. “So for the time being I am abstaining.” (Source: “Tesla isn’t disrupting anything,” Business Insider, March 8, 2016.)

Many would dismiss Marchionne’s comments as the musings of a dying breed of dinosaurs. But investors and car buyers alike would do well to heed the comments of the CEO who saved two car companies, Fiat and Chrysler, from doom in the fallout of the 2008 subprime crisis.

Marchionne described Musk as “a greater marketer” than an industry disrupter. He also noted that when and if Fiat wants, it has all the technology needed to compete with Tesla Motors. In fact, Fiat’s fully electric 500e is on the market already. It’s popular and Edmunds has given it a rating of 4.5 out of five stars. (Source: “Edmunds Summary Review of the 2015 FIAT 500e Hatchback,” Edmunds, last accessed April 15, 2016.)

Rather than emulating Tesla, Marchionne wants to warn Musk that Tesla, like any other car company, electric or not, will not escape the intensive capital demands required to launch new models and the “shabby” shareholder returns. Marchionne described this as the car industry’s “value-destroying addiction to capital.” (Source: Ibid.) For Tesla investors, it means that the company will have difficulty competing against the auto giants once they decide that the timing is right to switch production in favor of EVs and away from internal combustion.

Tesla’s business model is no doubt atypical compared to the rest of the car industry. Tesla, to Marchionne’s analytical credit, has yet to deliver a profit (though Musk has promised some by the end of the year). Marchionne does not hide his jealousy of the fact that while FCAU stock has lost some 20% in the past year—even as his cars are selling as briskly as pizza pies on Columbus Day in New York City—Tesla stock is back in the $230.00 territory, though the company sold no more than 50,000 cars in 2015. In comparison, Fiat Chrysler sold almost five million.

But Fiat Chrysler is not the only company to be embarrassed. General Motors Company (NYSE:GM), once the largest company in the United States, if not the world, has a pigmy-sized market cap compared to Tesla’s, even though GM sold 10 million vehicles last year.

However, Musk has an undeniable magic. He is more of a guru than an entrepreneur. He also has a George W. Bush-like interpretation of the world: if you’re not with him, you’re against him. This is quite literal, as Musk once harshly reprimanded an engineer who once missed a Tesla event to witness his child’s birth. Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future, the biography by Ashlee Vance, cites an e-mail that Musk allegedly sent to the employee in question:

“That is no excuse. I am extremely disappointed. You need to figure out where your priorities are. We’re changing the world and changing history, and you either commit or you don’t.” (Source: “Elon Musk reportedly scolded a Tesla employee for missing a work event to witness the birth of his child,” Business Insider, May 11, 2015.)

For the record, Musk has denied he ever did or said anything of the sort.

Whether true or not, Musk exudes a commitment to his company and, more so, to his vision that appeals to many people, especially millennials, who are looking for a new kind of hero and role model.

General Motors, which has a fully electric car in its forthcoming product lineup, the “Bolt,” is fuming. It has gotten a fraction of Tesla’s media attention, even if the Bolt will be able to do everything the Tesla Model 3 can and more. The Bolt EV will be available through GM’s 3,100 dealers, who will sell customers interested in changing the world by driving an electric car, Bolt EVs on the spot (rather than requiring a preorder) and at least a year and a half before the first Model 3 ever reaches the nearest Tesla dealership. (Source: “Why Nissan Is Stoked Over All The Tesla Model 3 Pre-Orders,” Jalopnik, April 5, 2016.)

Now, Tesla Motors stock is hinging much more on the company’s cool factor than its finances or actual market impact. Tesla cars will have a market but it won’t be as rosy or as practical as fans of the company and its guru, Musk, would suggest. As automobile industry leaders like Marchionne have pointed out, building a car requires billions of dollars of investment over long periods.

Tesla stock could rise, but it’s fueled more by enthusiasm than earnings per share.