Tesla Exposes Blind Spots in Market Sentiment

Equity investors know they must incorporate the risk of innovative disruption into everything from individual stock valuations to the attractiveness of initial public offerings. Historical growth in revenue and earnings with a rosy near-term outlook isn’t enough anymore. Companies must demonstrate their ability to withstand competition from disruptive new entrants, even when they currently possess clear advantages of scale and scope.

A great case study is Tesla’s competition against traditional automakers such as Ford and General Motors. Even though it loses money and produces far fewer vehicles, Tesla’s market capitalization is equal to or larger than either of the other U.S. automakers. Why? Equity markets believe the upstart has the right template for future growth in electric and self-driving cars and trucks, and the old-line carmakers do not.