Is electric car maker Tesla, Inc. (TSLA) a technology company or an automobile company? For investors, this question is of special importance. While the Palo Alto, California-based company clearly makes and sells cars, its stock movement in recent years has resembled that of an automobile company.
The idea that Tesla is a technology company gained credibility in 2013, when its stock price shot up by 382.5% within a single year. Publications scrambled to find similarities between companies from the technology sector, which had similar growth rates, and Tesla. Online publication Slate even ran a piece that compared Tesla to Apple Inc. (AAPL) and Alphabet Inc. (GOOG) subsidiary Google. Back then, Morgan Stanley analyst Adam Jonas, who has been a Tesla bull since the company's earlier days, gave the stock a price target of $103 "at full maturation." Tesla's shares raced past that figure in May 2013 and as of this writing are trading at $362. (See also: Tesla IPO: 7 Years On.)
There are several points of similarity between Tesla and the tech sector. For starters, Tesla's valuation in the markets has increased despite its history of reporting losses. Several tech companies, such as Workday, Inc. (WDAY), sport high valuations despite generating losses. Tesla has also adopted the disruption credo of the tech sector. Much like other tech companies, Tesla is intent on changing existing business models within the stodgy automotive industry by selling directly to consumers. Its product pipeline and founder evoke loyalty and frenzy similar to those for iconic tech companies such as Apple. (See also: I'm Going to Bet on Tesla: Apple Co-Founder Wozniak.)
Even the company's financial ratios are similar to those from the tech sector. For example, Tesla has a high negative P/E ratio, reflecting investors' faith in its future earnings despite its current losses.
Source: Yahoo Finance
That negative P/E ratio, however, is balanced by it's revenue growth, which has ballooned by a higher percentage in recent years compared to the conservative to low revenue growth at traditional auto behemoths. (See also: Tesla Shorts Burn a Further $400 Million.)
Source: Company annual reports
However, Tesla's product reflects its roots in the capital-intensive automobile industry. In that respect, the company is unlike technology companies, which have high margins and low scaling costs. Tesla requires massive capital infusions to finance its production costs and will need to invest significant amounts to scale its operations. According to NYU professor Aswath Damodaran, the company's recent debt offering in the markets (as opposed to diluting its equity stake) was motivated by conservative bankers who wanted to mimic the auto industry's modus operandi. (See also: Tesla's Debt Offering Is a Relief for the Stock.)
So what does this mean for those looking to put their money into Tesla's stock? It means that the company currently does not fit into an established sector. This is because Tesla is among the pioneers of the electric car industry, and its success is tightly coupled with the success of that industry. The industry's future prospects are bright, and Tesla has a strong brand among car enthusiasts.
However, much depends on execution. Over the years, several electric car companies with promising technologies have fallen by the wayside despite favorable incentives and massive funding. So far, Tesla has avoided that fate despite a plethora of problems. (See also: Can Tesla Do the Impossible?)