Rigid company
General Motors Company (NYSE:GM) still has a heavy reliance on unionized labor, for better or worse. This makes GM a more rigid company that is not able to lay off or hire workers with the ebbs and flows of the worldwide economy. These massive fixed costs have made this company slower to react than most, and will continue to do so into the future. GM’s European units are prime examples of this rigidity.
As demand in Europe slowed, GM was not able to shed workers to stay profitable. General Motors Company (NYSE:GM)’s loss in Europe in 2011 was $294 million, while 2012 improved to a loss of $175 million. GM was not able to reduce its workforce to properly align supply with demand as the European economy slowed. The improvement in GM’s loss can be attributed to the regional economy recovering this year, and GM is hoping to break even in the region this year. If it weren’t for the strength of the US and Asian economies, General Motors Company (NYSE:GM) could have posted large losses, potentially putting the company back on the path to bankruptcy.
As a smaller company, Tesla will be able to make changes to its workforce more readily than the previously bankrupt GM. This flexibility should benefit Tesla Motors Inc (NASDAQ:TSLA) should another recession hit.
Valuation
Currently Toyota is one of the most valued car companies in the world. Toyota Motor Corporation (ADR) (NYSE:TM) is currently trading at a P/E of 25, while the number-two car company in the world, General Motors Company (NYSE:GM), is trading at a multiple of 12. Both Toyota and GM have profit margins slightly lower than 3%.
On the other hand, Tesla eked out its first positive earnings in the first quarter and is still hovering around the break-even mark for the next few quarters.
Tesla Motors Inc (NASDAQ:TSLA) went from one of the most shorted stocks traded in America to a rocket ship, shooting up more than 210% since the beginning of the year. As traders shorting the stock had to scramble and cover their positions, they were forced to purchase the stock at higher and higher prices. This is known as a “short squeeze,” and it is the main reason for Tesla’s meteoric rise.
Foolish bottom line
Tesla has a solid business model, and is capitalizing on both selling its product, and supporting the old-guard car companies by selling its zero-emission vehicle credits. These multiple revenue streams will keep cash flowing into Tesla, and keep the company producing some of the sportiest and most efficient cars on the road today. As an investment, Tesla’s stock has gotten well ahead of itself. As Tesla ramps up production, it will take years for the fundamentals to catch up to the stock price at current levels, leaving more downside risk than upside speculation.
Wes Patoka has no position in any stocks mentioned. The Motley Fool recommends General Motors Company (NYSE:GM) and Tesla Motors . The Motley Fool owns shares of Tesla Motors Inc (NASDAQ:TSLA).
The article Tesla’s Future Looks Promising, but at What Cost? originally appeared on Fool.com.
Wes is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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