Tesla makes a great car, but is the stock worth paying for?

US electric car maker Tesla on July 1, 2020 became the world's most valuable auto company by market value, surpassing Japan's Toyota after earlier overtaking conventional Detroit giants. Picture: AFP

A test drive in a Tesla Model 3 is an eye-opening experience that reveals some of the reasons Tesla stock continues to climb.

Before a vehicle is available to the public, test drives are typically done by experts interested in acceleration, torque, and handling as well as fit and finish. These pros compare those statistics to similar models, which are important to the driving public, the automotive industry and investors.

For buyers, comparisons facilitate car purchases. For the industry, it facilitates improvements in design and manufacturing. For investors, product quality ultimately manifests itself in stock prices.

The problem for Tesla — depending on one’s perspective — is that the Model 3 test drive defies comparison.

For starters, it doesn’t have a traditional dashboard. Unlike many Model S sedans that still have a more traditional dashboard, there’s no petrol gauge, no tachometer, and no speed dial. In the Model 3, there is only a large, iPad-like touch screen with an interface that works a lot like an iPhone. That analogy is apt. The entire car functions, to some extent, like a smartphone.

“When I got it, there were no apps. Now there are a ton,” Tesla owner Jason Moroff said. He pays a monthly fee for LTE Wi-Fi connectivity that keeps the car’s operating system and software applications regularly updated.

Model 3 sedans come with basic autopilot that functions on highways. Full self-driving mode is available as an upgrade.

Barron’s tested the basic autopilot version on Connecticut’s Merritt parkway. To ensure people were still paying attention while riding, the car requires the driver to put pressure on the wheel every minute or so. The experience feels like advanced cruise control.

Paying $US3000 ($4300) or more for a feature not included in the original purchase and having that feature — a software upgrade — delivered wirelessly is very un-car like. Morgan Stanley analyst Adam Jonas looked at Tesla’s software opportunity in a May research report, writing that if Tesla could get its customers to buy software upgrades — like full self-driving mode — margins could be higher than automotive peers for a long time. His “blue-sky” scenario puts Tesla stock’s value at $US2000 by 2025.

Jonas isn’t willing to go all the way down the software rabbit hold yet. He still rates shares the equivalent of “sell” and has a price target of $US650 — they currently trade near $US1516.

The iPhone analogy goes a ­little deeper. For Tesla drivers like Moroff, their phones are the car keys. What’s more, drivers can summon the car, put it in valet mode — which limits screen apps — or set a max speed if the kids are taking the Tesla out for a spin.

The one thing that wasn’t, essentially perfect, during the test was summon mode. Moroff tried to summon the car while standing at the bottom of a driveway. The driveway was steep, lined by stone walls common in New England, and two other vehicles were parked in the driveway.

After a couple of minutes, the driverless car gave up trying to navigate the challenging topography and parked itself no worse for wear.

Tesla has sold almost 600,000 Model 3 sedans over the past nine quarters and close to 300,000 units over the past 12 months.

The Model 3 is an impressive car — it’s one of the nicest cars this reporter has ever driven. But one test drive, of course, doesn’t make an investment thesis. A great car might not make a great stock.

Barron’s