Tesla’s Firm Performance and Competitive Advantage

It is said that visionary firms can out sustain non-visionary firms in the long run. That is acutely true of the performance of Tesla, the electric vehicle company founded by Elon Musk. Telsa previously had negative cash flows, yet investors continued to pile into the stock as a vote of confidence in the firm’s long term vision to revolutionize the auto industry. In fact, Tesla sustained annual losses each year since going public in 2010 before finally becoming profitable in 2019. If the only measure of a firm’s performance were simple accounting measures, then Tesla would have already failed. Instead, the vision of Tesla has sustained the price of shares as they have continued to increase in value, eventually leading to its inclusion in the S&P 500 on Dec. 21, 2020.

Featuring models that range from $35,000 all the way up to $124,000, Elon Musk has created a large amount of economic value for customers by being an early adopter of a desirable technology for eco-conscious (as well as status symbol seeking) customers. Tesla faced many headwinds as one of the first companies to invest heavily in electric vehicle technology research and development. They also face the challenge of producing a product that relies on large-scale adoption of infrastructure that would support charging electric vehicles. As cash flows turn positive and winds seem to be turning in favor of Tesla’s trajectory, the value of being a pioneer in this industry and the goodwill of company actions such as making their research open and available to competitors has created competitive advantage for Tesla in the auto manufacturing industry.

Event study methodology observes the stock market’s reaction to the implementation of a strategy to measure the value created (or destroyed) by that strategy. This method assumes that capital markets are efficient in the semistrong form, meaning the stock price reflects all publicly available information. This assumption, however, is a large one – what if the market takes a long time to realize the true economic value of a strategic decision? How long can it remain inefficient? There are many documented cases of market inefficiencies in the finance literature. For instance, if event study methodology were a perfect measure of the economic value of strategic management decisions, market anomalies such as surprise earnings announcements would not occur as the value would have already been reflected in the price at the time the strategy was implemented rather than when the results are reported.

In the case of Tesla, it went public at the beginning of the longest running bull market in stock market history, one that has grown increasingly bullish to the point where some analysts are beginning to call the market over-risked and speculative. This general market exuberance has helped lift Tesla shares in a risk-on atmosphere. Tesla stock also benefits from brand name recognition among novice stock traders and investors which may contribute to increased interest in the stock that extends beyond what an analysis of the company’s fundamentals might support. If the economy were to stagnate or contract, Tesla would be at risk of not being able to attract additional capital or to produce as many revenues due to lower consumer demand. In order to thoroughly consider the many risks and opportunities Tesla faces, we need to apply multiple measures of firm performance in order to identify and leverage Tesla’s strategic advantage.