Herbert Diess, the German engineer who runs Volkswagen, is not given to hyperbole. Yet even he can’t help waxing lyrical about Tesla, the Silicon Valley upstart that recently overtook VW to become the world’s second most valuable carmaker (Simon Duke writes).
Last week Mr Diess said the electric car group was “paving the way” for established players to follow. “Tesla’s market valuation tells you about the future. It has a product that describes the future of the auto industry,” Mr Diess, 61, told Bloomberg News.
Yesterday Tesla pulled ahead of its Munich-based rival after delivering consecutive quarterly profits for the first time. Tesla shares jumped more than 10 per cent to $640.81, lifting its market cap to $115.5 billion. Volkswagen, which sells more cars in a fortnight than Tesla sells in a year, is valued at €82 billion ($90 billion). Only Toyota, worth $225 billion, stands above it.
The company’s journey to the top of an industry that has been a graveyard for new entrants is as striking as its valuation. It was founded in 2003 by the entrepreneurs Martin Eberhard and Marc Tarpenning and named after the Serbian inventor Nikola Tesla, who helped to design alternating current motor and power systems. Elon Musk, who made his first fortune as a co-founder of PayPal, was an early backer of the startup and soon took control of the board.
The South African-born tycoon, 48, has been the driving force behind the company ever since. He has established Tesla as a pioneer in high-performance electric vehicles, and has invested billions in battery and autonomous vehicle technology. Its base is in Palo Alto, California, it has opened a plant in China and is building another in Germany.
Tesla has burnt through billions of dollars since the launch of its sleek plug-in cars, but has yet to turn an annual profit. Mr Musk insisted that Tesla has turned a corner. He described last year as a “turning point”, with the company showing “strong cash generation” and a tight control over costs.
Revenues rose 2 per cent year-on-year to $6.4 billion in the three months to the end of December after ramping up production of its Model 3. Tesla delivered a profit of $105 million, down from a $143 million surplus in the third quarter. The tech billionaire was bullish about its prospects. He said deliveries of new vehicles should “comfortably exceed 500,000” this year. He pulled forward the launch date for its first SUV. The Model Y, originally slated for autumn, would roll off the production line by the end of March, he said.
We have heard these heady predictions from Mr Musk many times in the past. Twice before he has set himself a goal of producing 500,000 vehicles in a calendar year yet has failed to deliver. With Tesla’s plant in Shanghai up and running, it is reasonable to believe that this time will be different. Yet, even if he succeeds in raising production levels, there is no guarantee that Tesla will maintain its lead in the booming electric car market. The incumbents, with decades of experience in producing cars at large volume, are launching their own electric lines. Mr Diess said he was “optimistic” that VW “can keep the pace with Tesla and at some point overtake it.”
Even if Tesla gains a dominant position, it will struggle to live up to its lofty rating; its shares trade at more than 200 times this year’s estimated profit. Mr Musk believes Tesla can generate higher profit margins than rival carmakers by selling self-driving software packages to customers. Given his history of underdelivering, that cannot be guaranteed. At present levels, owners of Tesla’s notoriously volatile stock would do better to wait for the likely pullback before buying more.
ADVICE Avoid
WHY Tesla is on a roll but the shares are now overvalued
Paragon Banking Group
Nigel Terrington, the boss of Paragon Banking Group, struck a note of caution as the specialist lender issued a trading update for the three months to December 31 (Ben Martin writes).
Some surveys have pointed to a bounce in confidence in UK Plc after last month’s election. But Mr Terrington, who has led Paragon for 25 years, is not making any snap judgments. “This is very early days” and too soon to say whether “this sentiment turns into sustainable activity”, he said. Still, there were no horrors hiding in the report.
Paragon traces its roots back to 1985. While best known as a buy-to-let-lender, it has recently branched out. It was granted a banking licence six years ago and has pushed into commercial lending, including asset and development finance.
Commercial lending accounts for 12 per cent of its net loan assets and new business volumes at this division were up 19.9 per cent at £254.1 million. Deposit balances stood at £6.6 billion, compared with £5.6 billion a year earlier.
Its shift towards professional landlords and away from amateurs also continued. Professionals accounted for 92 per cent of Paragon’s £814 million buy-to-let pipeline at the end of the quarter. While this mirrors broader shifts in the buy-to-let market after a government crackdown, a focus on professionals is also helpful for Paragon as lending to these landlords is typically higher margin.
Specialist buy-to-let lending to professionals was up 1.1 per cent to £375.4 million year-on-year but other mortgage lending was down. That meant overall mortgage lending slipped 4 per cent. Its net loan book rose 1.6 per cent to £12.4 billion.
There are other reasons to be optimistic. Paragon is preparing to apply to regulators to change the way it calculates credit risks. If successful, this could mean the bank will be required to hold less capital against loans, paving the way for it to increase lending.
Paragon may also attract a suitor if industry consolidation continues. It was only last year that One Savings Bank merged with Charter Court.
Paragon’s shares, down 17p at 510p, have risen 22 per cent in the past year and are worth buying.
ADVICE Buy
WHY Solid strategy and possible bid target
