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The Curious Case of Tesla's $1 Trillion Market Cap: Even Elon Musk Doesn't Get It

Market analysts are still amazed that Tesla reached a market cap of $1 trillion after Hertz announced it would purchase 100,000 vehicles from the EV maker until the end of 2022. Not only them: even Elon Musk thought that strange, as he told an investor on Twitter.
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After Ross Gerber praised Tesla for a “huge move and super smart,” Musk said he did not get how the deal made valuation increase because Tesla’s issue would be to increase production, not improve demand. Putting that another way, Tesla’s main problem would be to deliver all the EVs people currently want from it.

Musk also clarified something crucial regarding the deal: Hertz bought all these cars at no discount. According to the Tesla CEO, the rental company agreed with the same price customers pay for these vehicles. Which some people find hard to believe, possibly because of how rental car companies have operated so far.

Multiple critics saw that as proof that the demand for Tesla vehicles is decreasing. Pushing them into Hertz would be a way to avoid idle capacity and keep high production numbers. It would also devaluate the cars in the hands of regular customers. The problem with that reasoning is the way Tesla sells cars.

Hertz and its peers made direct purchases with conventional carmakers, which did not go through a dealership network. That alone helped them get a discount because the car prices did not have to include profit margins for dealers. With the high-scale orders, other discounts followed suit.

Tesla sells its cars directly to customers, or else, its prices already include the profit margins the automaker wants to have with sales. That is a good explanation for not giving Hertz any sort of discount. It then leads us to wonder why Hertz agreed to pay full price on Tesla vehicles.

Neal Boudette tweeted an interesting question about Tesla’s agreement with Hertz. The New York Times reporter imagined the following scenario: if the company rented a Model 3 every single day for a whole year for $100 a day, it would earn $36,500 from that. Considering the deal cost Hertz $4.2 billion, each Tesla has been purchased for $42,000. Boudette said Hertz would “lose their shirts,” paying that much on each EV.

The question is that renting a Model 3 will probably cost a lot more than that. Hertz charges around $220 per day for vehicles such as the Toyota Camry in Los Angeles, one with which the Model 3 is often compared. That suggests the tariff would not be lower than that for this Tesla.

Hertz does not present the prices for renting the Model 3 on its website, at least not in the locations we had time to check and the multiple dates we tried. According to the company’s page, that’s because it is already sold out. If this demand alone was not enough to drive prices up, the Teslas are not for generic renting. Listed as part of the “Group E7,” the Model 3 is one of the company’s “model guaranteed.” The reason why only the Model 3 shows up is now apparent. We’ll get to that in a bit.

What “model guaranteed” means is that Hertz makes sure you get to drive exactly that vehicle but demands that you are at least 25 to even think about it. The rental company created a Tesla category that is presented side by side three others: Adrenaline, Dream, and Prestige Collections. In practical terms, these categories read as more expensive rents.

Supposing you could drive a Hertz’s Model 3 for $250 per day, the rental car company would make $91,250 in each car per year. With 100,000 of them, Hertz could earn $9.125 billion if it could rent all of them every day in a year. Again, these rents are all sold out at this point, but that does not mean the demand will continue as strong as it currently is.

With that sort of appeal, it makes sense that Hertz chose the Model 3 instead of so many other EV options in the market. Some might even be sold at a discount, but we seriously doubt it: automakers would make more money selling them to regular buyers. Battery packs in short supply make that even more unlikely.

It may be the case that Tesla is the only EV manufacturer willing to sell that many cars all at once. Unlike other carmakers, all Tesla sells are electric cars. However, the company offers something else that nobody has: its Supercharging network.

Hertz stated that “customers who rent a Tesla Model 3 will have access to 3,000 Tesla supercharging stations throughout the U.S. and Europe.” That single sentence also reveals that Hertz bought 100,000 units of the Model 3 and nothing else. If the new market cap was due solely to the Hertz deal, it was also based on the Model 3.

The truth is that the deal seems to have been just a trigger to something else. But what, exactly? Panasonic presented a 4680 cell prototype but said it would only be manufactured in 2022. For a company that expected to deliver the Cybertruck and the European Model Y in 2021, that’s actually bad news.

Is it the $25,000 car? Lars Moravy already said that Tesla would try to improve sales of its current vehicles before it launches anything else. The Vehicle Engineering VP also believes the company still has much more demand than production capacity, corroborating Musk. That said, when the time comes for Tesla to produce a new vehicle, it will be the Cybertruck. That will make anyone willing to buy the affordable EV wait a lot more.

Was the Tesla Model 3 becoming the best-selling vehicle in September 2021 in Europe the reason for the leap? Put that under the proper perspective, and you’ll see that was merely circumstantial. Tesla was not as affected as other carmakers by the chip shortage, which allowed it to keep its delivery volumes.

Although Tesla sales have increased a bit, it was mainly its competitors that had a significant decline. In September 2019, Tesla sold 17,505 units of the Model 3. The Volkswagen Golf was the best-selling car in that month with 32,398 units, according to JATO. That was all before the international health crisis and the chip shortage.
Move one year forward, and the VW Golf was still leading the pack despite the pandemic, with 28,731 units in September 2020 – way less than in the same month in 2019. The Model 3 made it into 15,702 new homes. The numbers in September 2021 are 24,591 for Tesla and 17,507 for Volkswagen. Would the numbers be the same without the semiconductor crisis? We don’t think so.

These are the aspects we could think of, but market analysts are also searching for reasons for Tesla’s market cap. It is not based on revenue: Bloomberg published that Tesla is the company with the lowest one ever to reach the $1-trillion valuation: $31.5 billion. Before Tesla, Facebook was the company with the lowest revenue before reaching the magic market cap, but it was way higher than the EV maker presented: $85.97 billion.

All analysts interviewed by Bloomberg have higher targets for Tesla based on how dominant the company can be in the EV market in the next five to ten years. If that were enough, Volkswagen, Lucid, Rivian, BYD, and NIO would be on the same boat. All of them also want a chunk of the EV market, and some of them already have more products than Tesla, with superior characteristics.

Other analysts say that what we are seeing is a massive bubble. People are impressed with how much value Tesla stocks gained and are trying to get expensive tickets into the millionaire shuttle. The problem is that you only get rich when you buy anything cheap and sell it when it becomes costly. Nothing tangible says that this is what will happen with Tesla stock at this point.

For those investors, we sincerely hope that to be the case, even without grasping why. However, if the critics are correct and the market cap is pure hype, it will eventually get ugly. Not that Tesla may seize to exist – it is already too big to fail – but it may get a more realistic market cap, which would be much inferior to the current one. People betting life saving on a price increase would see them reduced to a fraction of what they currently are.

Tesla has already proved it could make cars, even if it lacks proper quality control. It also pleases its users with software updates, but they can also be glitchy, as the FSD 10.3 recently showed. Early adopters were charmed by the level of servicing Tesla once offered. However, lawsuits from taxi cab companies make us fear that Hertz may find out about the new servicing reality the hard way.

With all that in mind, it is excellent that Tesla found its place among the big boys, but it makes no sense that it is worth more than all of them together on its own. If it did, Warren Buffett would probably have bought shares years ago. Asked in April 2021 if he would invest in the company, the master of value investing was quick to answer. You can see his reply below.

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