Disruption vs. Incrementalism: Why Tesla Thrives While Legacy Automakers Struggle for Investor Attention
Disruption vs. Incrementalism: Why Tesla Thrives While Legacy Automakers Struggle for Investor Attention
On a cold, rainy Monday last year, I drafted a TaaSMaster Newsletter update that I eventually published on my Substack site. It was on November 20, 2023. I was with my wife in Kansas City, sitting in a rental car in the enormous parking lot at GEHA Field at Arrowhead Stadium. We were waiting to attend the Monday Night NFL football game between the Kansas City Chiefs and the Philadelphia Eagles.
Anyone familiar with KC Chiefs home games knows that it’s one of the best tailgating experiences in the NFL. However, on this particular day, the rain put a damper on our tailgating activities. So I sat in the rental car, eating Gates barbecue with red wine (KC is my wife’s hometown; Gates is her favorite BBQ restaurant; she’s the Chiefs fan), and composed a draft about how incrementalism is killing investor returns for shareholders of legacy automotive companies—unless they’ve invested in Tesla.
Since that time in KC, much in the automotive sector has changed. However, an important question deserving of a reasonable answer is still useful for investors in legacy automakers.
“Why do investors reward Tesla shares far above the level of any volume legacy car company?”
Tesla is valued at nearly $730 billion, while legacy auto companies essentially have irrelevant market valuations in comparison. General Motors is valued at $52 billion; Ford at $43 billion; Mercedes-Benz at $67 billion; BMW at $52 billion; and Volkswagen, the second largest automaker in the world, sits at only $51 billion. Even Toyota, the largest automaker globally, is valued at less than half of Tesla’s market capitalization, at $277 billion. In 2023, Toyota sold nearly seven times more vehicles globally than Tesla and had nearly three times the revenue, yet Tesla’s valuation is $450 billion higher.
Why? Because investors reward Tesla for being a disruptor, a role legacy automakers are unwilling to embrace.
Tesla operates under a Move Fast and Break Things mantra
Tesla shattered the old model of automotive incrementalism. I define automotive incrementalism as a strategy of gradual improvements to vehicles, processes, or systems over time. Legacy automotive investors stuck with stagnant share prices can point to Toyota and its doctrine of Kaizen as the reason why. Kaizen is a philosophy of continuous, incremental improvement. It has long been implemented by every global legacy automaker as a means of gradually becoming more efficient. While this approach has been great for improving productivity over time, it’s underwhelming for investors who increasingly believe that disruption will ultimately win the day in the automotive category.
Tesla, on the other hand, operates under a “Move Fast and Break Things” mantra, a phrase credited to Mark Zuckerberg of Meta (formerly Facebook). It’s become a symbol of Silicon Valley’s view that speed and disruption should take priority over caution and stability. Tesla’s CEO, Elon Musk, runs Tesla with this mindset. No one would ever accuse him of being cautious - or stable - when it comes to running Tesla.
Since the launch of the company’s first volume electric vehicle (EV), the Model 3, in July 2017, Tesla shares have increased nearly 950%. The Model 3 proved Tesla could scale production, a step where most new automakers fail. This was the turning point when investors started aggressively buying Tesla stock.
But it wasn’t just Tesla’s ability to conquer volume production that excited investors. After all, every legacy automaker has mastered production. It was Tesla’s ability to convince investors that it was deploying disruptive innovation that drove its stock price. Examples of Tesla’s disruptive innovations include:
A commitment to producing only full EVs
An EV portfolio that offers exciting vehicles, not cars that feel like appliances
Online vehicle sales, eliminating the traditional dealership network
Regular over-the-air vehicle updates, offering continuous improvement
The buildout of a global, Tesla-specific charging network, reducing customer charging anxiety
Advanced driver-assistance systems (ADAS) like Autopilot and the still “feature incomplete” Full Self-Driving (FSD) feature
To many investors, Tesla is a technology company, which places it in an entirely different league. While I see Tesla as primarily an automaker, that view is largely irrelevant. Wall Street analysts and many investors group Tesla with the Magnificent Seven - companies that dominate the tech landscape:
Apple
Microsoft
Alphabet (Google)
Amazon
Nvidia
Meta (Facebook)
Tesla
Imagine any automaker being included in this group of the most valuable technology companies. This is where many investors believe Tesla belongs. In spite of growing controversies around Tesla CEO Elon Musk, investors shrug and continue to value the firm like it’s among the most important tech companies in the world.
Legacy automakers like Toyota continue to sell far more vehicles and actually have better profit margins today than Tesla. However, investors aren’t rewarding these types of legacy car companies. As we look ahead, the contrast between Tesla and legacy car companies isn’t a simple matter of most sales, best profits or superior margins. Investors just don’t value the future business of legacy car makers like they value the future of Tesla. In this era where disruption and bold innovation capture the imagination of Wall Street, legacy car companies face the challenge of maintaining their profitable business models while convincing investors they can also lead in a fast-evolving industry. Until they find a way to break free from what investors view as a incrementalism mindset, their stock valuations will likely continue to trail behind Tesla, even as their operational success remains strong.
Disclosure: I have owned Tesla, GM and Ford shares in the past. I do not own shares in either company today. I do own shares Stellantis shares.
Disclaimer
TaaSMaster, LLC is not a registered investment advisor or broker/dealer. All investment opinions expressed by TaaSMaster, LLC are from personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors may occur.