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Tesla Stock Shifts Into 'Insane Mode'

Edward Niedermeyer, an auto-industry analyst, is the co-founder of Daily Kanban and the former editor of the blog The Truth About Cars.
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The Tesla Model S P85D's "Insane Mode" has become famous in recent weeks, thanks to a viral video depicting unsuspecting passengers in the clutches of its silent, accelerative fury. Tesla's stock, on the other hand, is experiencing something far more similar to actual insanity.

The market has always been torn between the ever-increasing grandiosity of Chief Executive Officer Elon Musk's futuristic ambitions and the brutal economics that any automotive startup faces, but in the wake of the company's troubling earnings report and Musk's subsequent earnings-call antics, this split has become downright schizophrenic.

Musk took his trademark "vision" to audacious new levels, telling analysts this week that he expects revenue increases of 30 percent a year for the next 10 years, which would bring the electric-car maker's market valuation to an Apple-esque $700 billion by 2025, far from its current valuation of about $25 billion. According to Musk's numbers, Tesla would have to generate about $350 billion in annual revenue at that valuation, implying sales volume of well over 5 million vehicles per year. That would have Tesla surpassing the 2014 sales of such familiar names as Nissan, Honda and Fiat-Chrysler -- at significantly higher profit margins -- within a decade.

Musk's growth projections are feverishly optimistic compared to that of the broader auto industry, which faces flattening global demand, brutal competition and near-certain consolidation. But with less than $2 billion in cash left after burning through nearly half a billion in its fourth quarter, Tesla is also rapidly running out of runway. Though the company expects to burn through less than half its remaining cash this year, true profitability is still five years away. Musk denied any plans to raise capital "right now," but it's unclear how Tesla will make its last billion and change last until profitable volumes are reached in 2020.

Meanwhile, missed 2014 sales and revenue targets show that Tesla's motor is not quite running up to Musk's specifications. Overhyped expectations for Tesla's China sales are also plummeting back to earth, as Tesla's insistence on owning its own dealers is slowing expansion in a notoriously challenging market for newcomers. Musk admitted that Chinese speculators had been buying cars in large numbers, which "gave an inflated sense of demand" that "wasn't real," and now says Chinese sales are insignificant to Tesla's 2015 sales goals.

Though none of these disappointments pose an existential or insurmountable threat to Tesla in the short term, they definitely don't help the credibility of Musk's plans for regular 30 percent growth or alleviate concerns about dwindling cash.

With nearly every major automaker continuing to press into the electric-vehicle market -- some appearing specifically to target Tesla's plans -- none of this is about to get any easier. The industry's planned diversification into home battery systems over the next six months could synergize well with Musk's SolarCity, but it could just as well prove to be a distracting dead end. If recent history is a guide, EV makers suddenly "pivoting" into stationary storage is hardly a sign of rude health.

But then, there is little in the way of true historical precedent for Tesla's Musk, whose true "halo car" is not the P85D but SpaceX's Dragon rocket. For anyone who feels depressed about living in the post-space shuttle era, buying a Tesla or even just a share in Tesla can feel like claiming a small piece of the Space Age. Like space travel itself, buying a Tesla or a share of the company isn't something you do because you expect it to return some specific return but because it appeals to some deep human need for adventure. Which is fine, for anyone with enough financial bandwidth to be able to enjoy an adventurous investment. Just be prepared for more rational investors to call you, well, crazy.

(Corrects Elon Musk's projected revenue growth in third paragraph.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Edward Niedermeyer at edward.niedermeyer@gmail.com

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net