When Tesla Inc.’s market capitalization surpassed General Motors (gm) Monday and Ford Motor Co. (f) last week, it became the most valuable U.S. automaker. The story of Tesla’s valuation is a tale of four narratives—two positive and two negative. Each set is plausible, even compelling, but the stories they tell are dramatically different. To better understand what Tesla may be worth, investors need to understand these narratives and decide which ones they choose to bet on.
The first narrative is the visionary story. This is the narrative of Tesla as a disruptor and its CEO Elon Musk as a visionary entrepreneur. Tesla has disrupted the well-established U.S. automotive industry long dominated by GM and Ford. Free from constraints of legacy, Tesla decided to eschew dealers and sell directly to customers. It made bold moves like launching the Autopilot feature in all of its cars while other automakers still test and refine the self-driving technology. It has announced aggressive plans to offer full autonomous driving capabilities well ahead of competitors. This is the narrative of a founder-led company that will run faster, be nimbler, take more risks, and defy investors the way that Amazon (amzn) CEO Jeff Bezos famously did. In this narrative, GM, Ford, Volkswagen (vlkay), and BMW (bmwyy) will plod along slowly and will be outrun and outmaneuvered by Tesla at every turn.
This plays into the second narrative: the growth story. Tesla has said it is on schedule to deliver the first Model 3 by the end of 2017 and has ambitious plans to build a half-million units by 2018—and pledges to produce 1 million cars a year by the end of 2020. Musk’s plans also include launching at least one completely new car and conquering self-driving vehicles by 2020. But that’s not all: Tesla is building a “Gigafactory” to manufacture batteries using advanced robotics and other manufacturing innovations, which, combined, could reduce the cost of batteries by as much as 30% once the plant is fully operational in 2020. In this narrative, Tesla is much more than an automobile company—evidenced by the fact that it dropped “Motors” from its name. Tesla is a clean energy company, a data and analytics company, and a logistics and mobility company. It acquired solar energy company SolarCity to create end-to-end solutions for generating, consuming, and reselling solar power. It has powerful driver and car data because all Tesla cars are connected to the Internet. It is creating the Tesla Network to allow Tesla car owners to rent out their vehicles when they don’t need them—essentially “uber-izing” them.
The vision and growth stories combined tell a quintessential entrepreneur’s tale, starring the leader, Musk, a charismatic entrepreneur in the mold of Bezos and Steve Jobs with the power to disrupt entire industries. As compelling as the first two narratives are, however, there are diametrically opposed narratives that tell a very different story that does not end well.
The third narrative for assessing Telsa’s future is the execution story. In this narrative, Tesla is long on vision and short on execution, with a history of making audacious promises only to repeatedly miss deadlines. While there is strong anticipation from consumers for Tesla’s Model 3, hitting the production milestones to meet that demand could prove challenging. Another negative in Tesla’s execution story is a low reliability rating from Consumer Reports, which ranked it at 25 out of 29 brands. Cited were problems with the Model X’s upward-opening doors. These disappointments cast a pessimistic light on Tesla’s promises. Tesla’s bold promises to build a “lights-out factory” with robots driving the assembly line at unheard-of speeds also sound like a bridge too far.
The fourth narrative is the fundamentals story. This story is simple: Tesla’s fundamentals simply do not justify its lofty valuation even under the most optimistic assumptions about its future. The company produced a total of 83,922 vehicles in 2016—making its plans to ramp up to 1 million cars by 2020 an uphill climb. It loses money on every car it makes, and its margins are only going to shrink when it produces the cheaper Model 3. Add to this the massive capital expenses of the Gigafactory and Solar City, and Tesla’s financial future looks very uncertain. If fundamentals mattered, investors are delusional about valuing Tesla at over $50 billion.
Which narratives will win out in the end?
Growth-minded investors tend to be forward-looking. These investors point to the story of Amazon, which struggled with hundreds of millions of dollars in losses for many years, but ended up handsomely rewarding investors who believed in Bezos. The same goes for Apple, a company on the brink of bankruptcy before Jobs staged a dramatic comeback that made it the most valuable company in the world. Through the windshield, especially when listening to Musk, Tesla is only getting started in its quest for domination.
In contrast, hard-nosed investors rely more on facts and less on faith. According to these investors, Tesla will never turn a profit and runs the risk of running out of cash. These pragmatic investors point to the dot-com boom and bust, when Internet companies boasted nosebleed valuations before they crashed and burned.
Will Tesla follow in the footsteps of Amazon and Apple (aapl), fulfilling its promises with execution that meets targets and fundamentals that provide proof? This remains to be seen, and could take 10 years or even more for Tesla investors to know whether the road ahead more than offsets the bumps behind.
Mohanbir Sawhney is the McCormick Foundation Professor of Technology at Kellogg School of Management at Northwestern University. He is the author of six books, including Fewer Bigger Bolder – From Mindless Expansion to Focused Growth.