DETROIT: The record pace of auto sales in the United States is slowing down, leaving investors increasingly bearish on auto stocks.
But there is one exception. Tesla, the electric-vehicle upstart, continues to surge.
On Monday, Tesla surpassed Ford Motor Co. in market value for the first time and moved within striking distance of General Motors, starkly illustrating the growing gap in investors' optimism over its future versus the prospects for the traditional carmakers from Detroit.
While GM and Ford may have strong profits and healthy balance sheets, Tesla offers something Wall Street loves much more: the potential for dramatic growth.
“Investors want something that is going to go up in orders of magnitude in six months to six years, and Tesla is that story,” said Karl Brauer, a senior editor at Kelley Blue Book. "Nobody thinks Ford or GM is going to do that."
Tesla’s chief executive, Elon Musk, has shattered the conventional wisdom that automakers should be viewed as a stable, reliable investment.
Instead, he promotes his California-based company as a dynamic vehicle for growth, despite the risks and challenges ahead of it.
In his vision, Tesla is going to change the world, and is primed to cash in on the two transformative trends in the industry: the shift to electric vehicles as part of a broader societal move to cleaner energy, and the advent of automated driving.
Shift
“Tesla is very vocal in talking about how they are positioned as we move from humans driving cars powered by gasoline to computers driving cars powered by batteries,” Brauer said.
At the end of Monday's trading, Tesla reached a market capitalization of $48.7 billion compared with Ford's $45.6 billion, according to Bloomberg.
General Motors was at $51.2 billion.
Tesla’s market milestone came at the intersection of two countervailing trends.
On Sunday, Tesla said its first-quarter sales were up 69 percent from the same period a year ago.
On Monday, monthly sales figures for the conventional automakers showed them struggling to meet last March’s performance.
That sent stocks in the Detroit automakers down for the day — GM was off 3.4 percent and Ford 1.7 percent — while Tesla's stock soared more than 7 percent.
Despite the recent boom years for the US motor industry, in which GM and Ford have been the biggest beneficiaries, executives are working overtime just to convince Wall Street that their business model can produce incremental improvements.
Brauer said that reception was unfortunate for GM and Ford because “the reality is, they’re as financially healthy as they’ve ever been, and they’re in very good position for the future.”
Both companies have rebounded steadily since the recession, although GM needed a bankruptcy filing and $49 billion government bailout to recover.
And both have taken advantage of the pent-up consumer demand for new vehicles in recent years, especially for pickup trucks and sport utility vehicles.
But neither automaker has convinced Wall Street that it has shed its boom-or-bust reputation tied to broader economic cycles, or is at the forefront of new technology being developed for self-driving vehicles and electric cars.
The Detroit automakers are hardly sitting still in their efforts to improve current results and future prospects.
Electric, autonomous cars
GM made the momentous decision recently to sell its money-losing European division, and Ford is adding jobs to accelerate its shift toward electric and autonomous vehicles.
Both automakers have bought technology companies to bolster their in-house engineering expertise, and their executives have embraced the chance to work with the Trump administration on scaling back government regulations.
All the same, both companies are ranked near the bottom in price-to-earnings ratios for the companies that make up the Standard & Poor's 500 index.
Last week, one of GM's large investors, the hedge fund Greenlight Capital, proposed the creation of two classes of stock — one that strictly pays dividends, and a second tied directly to earnings and future growth in areas like self-driving cars and ride-hailing services.
GM directors flatly rejected the idea as too risky, and the chief executive, Mary Barra, said there was no need to deviate from "executing a plan that is delivering record financial and operation results." Yet while industry analysts generally supported the decision, GM's share price barely budged on the news that it was staying the course.
And Monday's data, showing total industry sales off 1.6 percent, underscored that overall demand for new vehicles is slipping despite a bevy of discounts and incentives.
GM showed a slight gain from the prior March, while Ford sales fell sharply. Several other automakers, such as Toyota, Fiat Chrysler and Hyundai, also reported declines.
Of course, based on the number of cars actually being made, they are in a different league from Tesla. GM sold 256,000 vehicles in the United States last month, and Ford 234,000.
Tesla's sales for the same period: 4,000.
But it was the growth and the outlook, not the raw numbers, that moved the markets. Investors tend to look at Tesla as a technology startup rather than an automaker.
“It's almost like Tesla is positioned in people's minds as an energy storage company that happens to put most of its batteries on wheels," said Andrew Stewart, chief investment officer at Exchange Capital Management, an investment firm in Ann Arbor, Michigan.
Volatile
Tesla is also prone to more volatile stock movements because Musk and other board members and top executives own a large chunk of shares, leaving a relative few that change hands frequently, he said.
"Whenever there's interesting news, the people trying to buy are buying from a limited number of people who are willing to sell," Stewart said. "While you have Ford and GM, and they're these decades-old, more-institutional industrial companies."
Because of Tesla's acclaim and the limited number of shares being traded, the company draws more individual investors, and its share price tends to spike whenever Tesla or Musk makes news.
This week's jump in its stock price was set off by a brief news release Sunday that said Tesla had delivered more than 25,000 cars in the first quarter, exceeding analysts' estimates.
While Tesla may enjoy the favour of investors, it still faces some daunting hurdles to reach its goals.
This summer, the company is supposed to start making the Model 3, a compact electric model that Tesla plans to sell for $35,000 and produce in significantly higher volumes.
It currently offers two vehicles, the Model S luxury sedan and the Model X SUV, both of which sell for $90,000 or more when options are added in. People who buy its cars benefit from a $7,500 federal tax credit on environmentally friendly-cars in the US, a selling point with an uncertain future.
Once Tesla begins producing the Model 3, Musk expects production to ramp up quickly, with a goal of making 500,000 cars a year by next year.
Achieving that target will not be easy, Brauer said.
“That’s five times growth in volume,” he said. “I don’t know of any car company that’s ever done that in a two-year period.”
Setback for Tesla in Utah
In Utah, however, Tesla's push to sell its all-electric vehicles in the state hit a roadblock Monday when the state Supreme Court upheld a decision by Utah licensing officials to deny the automaker a license to sell new cars.
Tesla had argued that a state law barring car manufacturers from owning dealerships didn't apply to the company.
Tesla sells its cars directly to customers rather than using independent dealerships, something Tesla attorneys argued is vital to their business.
Tesla must sell its own cars because a sale depends on convincing customers that electric cars are better than those with a gas engine.
The company also argued that Utah law doesn’t block car makers from selling directly — it only blocks car makers from owning a dealership that's set up as a franchise.
In the decision Monday, Supreme Court justices didn't address whether Utah law blocks a car maker from selling its vehicles directly or whether it’s vital for the car maker to sell its own product.
Subsidiary
The justices instead focused on a subsidiary company that Tesla set up to sell cars in the state, called Tesla UT. Tesla UT applied for an auto dealer license, and because Tesla UT is wholly-owned by Tesla, state licensing officials were correct in a 2015 decision denying the license, the justices wrote.
In a statement, Tesla said the ruling was "disappointing for Tesla and all Utah consumers interested in consumer choice, free markets, and sustainable energy." The company said it will pursue all options in Utah and will continue offering service in Utah for Tesla cars.
The Utah Automobile Dealers Association has argued that Tesla is required by to comply with the franchise law, which is designed to keep large car makers like GM from pushing out independent dealers selling the same cars.
Tesla has said that law protects a monopoly by locally powerful car dealerships and violates free-market economic policies in Utah's constitution.
An effort to try to change the law earlier and accommodate Tesla failed in Utah's Legislature earlier last year after the company pulled its support, saying the fix wouldn't allow it to keep any inventory in the state.
Unable to sell cars through its $3 million showroom in Salt Lake City, Tesla instead decided to take its fight to Utah's Supreme Court.
The company has a used-car license for its Salt Lake City showroom, which allows people to test-drive and buy used cars but not new cars.
The company has run into similar legal problems in other states.
