Tesla Has Something Hotter Than Cars to Sell: Its Story

As Tesla shares surged past $300 this week and the company’s market value surpassed Ford’s, even its founder, Elon Musk, acknowledged on Twitter that the company was “absurdly overvalued if based on the past.”

By “the past,” he presumably means old-fashioned valuation measures like price-to-earnings or price-to-sales ratios, the traditional benchmarks for evaluating stock prices. By those measures, Tesla — a company that lost $773 million last year — is indeed off the charts.

Tesla’s market value of nearly $49 billion is not only higher than that of Ford, which earned nearly $11 billion in profit last year, but is within easy striking distance of General Motors, which earned $9.4 billion.

In contrast to Tesla, Ford and G.M. shares have dropped recently on fears that auto sales have hit a cyclical peak. Ford and G.M. executives wouldn’t comment on Tesla’s stock surge, but it’s easy to imagine they’d be tearing their hair out in frustration.
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“It’s nuts,” Bruce Greenwald, a professor at Columbia Business School and an expert in value investing, said of Tesla’s stock price. “Investors believe it’s going to dominate a market that no company has ever dominated before.”

But Tesla is not a stock, or a company, that is measured by the past, as Mr. Musk is well aware. He also wrote on Twitter that stock prices represent “risk-adjusted future cash flows” — and Tesla is about nothing if not a utopian future of safe, reliable, powerful, self-driving electric vehicles powered by solar-fed batteries that are easy on the environment.

In that regard, Tesla has ascended into a rarefied realm of so-called story stocks — companies that have so bewitched investors that their stock prices are impervious to any traditional valuation measures because their stories are simply too good not to be true.

And to the dismay of short-sellers, who believe they have ample rational reasons to bet against such stocks, their share prices can stay in the stratosphere for years, even decades.

These story stocks — the term was coined by James Montier, a value investor and a member of the asset allocation team at the investment management firm GMO — are relatively rare, but hardly new. Amazon’s stock surged for decades even without any meaningful profits. A more recent example is Snapchat’s parent, Snap, which is racking up large losses while its stock trades at an astronomical price-to-sales ratio of nearly 50, far higher than Tesla’s 7. (Ford’s, by comparison, is 0.3.)

Amazon and Snap both have stories that are compelling for many investors: Amazon has transformed retailing and is destined to dominate it. Snap is reinventing communication, at least for millennials and those even younger.

Early investors in Uber and Airbnb, though they remain private companies, have valued them at stratospheric multiples based largely on the notion that Uber will transform and dominate local transportation and Airbnb will revolutionize the hotel industry.

For story stocks, any development that lends credence to the story can cause a surge in already high valuations. This week Tesla reported quarterly sales that were modestly above expectations, and the stock surged 7 percent in a day. Tesla shares are up nearly 40 percent this year, even though many investors considered them overvalued in January.