Is Losing Money the Best Strategy for Tesla?

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When it comes to Tesla Inc. (NASDAQ: TSLA), the question for investors has long been why anyone would buy into a company that loses money. Earlier this month the company reported its most recent quarterly results, which were underwhelming and sent shares lower, but since then the stock has recovered and is actually up about 45% so far this year.

How is it possible that a company known for losing money is making gains like this? CEO Elon Musk is actually on board with this strategy and it seems to be working.

Musk recently commented to The Guardian:

We’re a money-losing company. This is not some situation where, for example, we are just greedy capitalists who decided to skimp on safety in order to have more profits and dividends and that kind of thing. It’s just a question of how much money we lose. And how do we survive? How do we not die and have everyone lose their jobs?

In this sense he believes that Tesla should not be compared to other major U.S. car manufacturers. He also pointed out that Tesla’s market capitalization of roughly $50 billion is “unwarranted.” There seems to be more of a focus on sinking money into developing more tech as opposed to turning a profit like other car companies are focused on.

Merrill Lynch recently commented on Tesla and where it stands in the market:

We view Tesla as a trailblazer in the electric vehicle market, and believe it could ultimately be successful as demand for EVs increases. However, Tesla continues to burn accelerating levels of cash, while failing to turn a corner on profits and returns. Despite being a growing business in need of capital to fund its ambitious growth plans, we think investors may grow tired of supplying Tesla with incremental low-cost capital in perpetuity if investments fail to generate returns.

Although Tesla is losing money now, this might not last forever. Keep in mind that Amazon.com Inc. (NASDAQ: AMZN) was notorious for not turning a profit for years. But in just the two years, Jeff Bezos has flipped the script and Amazon is booming. Tesla could be the next biggest loser in the sense that Amazon was.

Shares of Tesla were last seen up 2% at $312.23 on Thursday, with a consensus analyst price target of $275.50 and a 52-week trading range of $178.19 to $327.66.