$1,000 invested in Tesla at the beginning of lockdown would now be worth more than $4,000. Fast growing stocks, especially fashionable ones, are nothing noteworthy but with a value of $277bn Tesla’s relative value is completely absurd.
Before we look into some of the reasons why, this article is not to criticise Tesla and nor will it be loaded with heavy financial analysis to justify or undermine its valuation, it will just step back and present some perspectives that make a $277bn value just look silly.
Tesla vs. Toyota:
In June this year Tesla, a 17 year old company, overtook Toyota as the world’s most valuable automotive company; this just seems daft for so many reasons. The 82 year old Japanese giant sells 23 times more vehicles, generates 11 times more revenues and 19 times more profit — yet investors think Tesla is nearly twice as valuable.
Tesla has a leading position within the global electric vehicle market (which we will cover later), and its expansion continues rapidly. New production lines are currently in construction in China and Germany, and new US factories are being planned for the upcoming Cybertruck, Roadster and Semi. Company valuations are heavily driven by anticipated future earnings, and investors evidently rate Tesla’s future potential enormously. Growth is essential to Tesla’s valuation because at its current output nobody in their right mind, and especially not an MBA-wielding 90 hour week financial analyst, would value a Tesla Model 3 (starting from $37,990) at $710,000; oh wait…
Tesla vs the market:
This is where things get even more bonkers, so let’s cut to the chase.
Tesla accounts for a quarter of total market capitalisation, yet it generated less than 0.5% of total global production, a fifty-fold difference.
Even if you assume a greatly reduced global production in 2020 due to COVID and also vastly increase Tesla’s production, the picture is still incredibly imbalanced.
What is most remarkable about Tesla’s relative value is that investors value it more greatly than Volkswagen, Daimler, Honda, BMW and General Motors combined. These five groups are home to more than 20 brands including VW, Audi, Porsche, Mercedes-Benz, Honda, BMW, Mini, Rolls-Royce, GMC, Buick, Cadillac and Chevrolet to name but a few. Companies that collectively sell in excess of 25 million vehicles a year, with huge numbers of loyal customers, completely global sales networks, with electric cars already on the roads and huge development programmes for many more electric cars to come; yet Tesla with its relatively anemic sales totals (388,000 over the last 12 months) is more valuable than them all on account of its potential.
Tesla is however due an enormous amount of credit. Unrestricted by governance procedures of the established global automotive OEMs, it risked vast sums of cash for dozens of years to establish itself as the clear leader in the electric vehicle market, a market that governments worldwide are now encouraging their populations to spend money in. Its valuation versus the traditional manufacturers may appear imbalanced, but its dominance in the electric market is undeniable. In the first half of 2020, the Tesla Model 3 was the highest selling electric vehicle in the world and had sales greater than the second, third, fourth, fifth and sixth best selling EVs combined.
Dominance however, rarely continues especially once markets mature. Looking forward, the electric vehicle offerings of other manufacturers will improve, become more extensive and become more comparable to Tesla. Dare it even be said, but they may even get better than Tesla and in some areas this is already the case. This may take 5–10 years but at such a point Tesla’s relative valuation premium will not be sustainable which will mean one of two things will have to happen. Either the valuations and share prices of all other manufacturers will have to increase strongly, or Tesla’s will have to come down. The former seems unlikely since the manufacturing of solely electric vehicles doesn’t dramatically transform the economics of being a vehicle manufacturer, especially with much of the value in the engineering of the engine and transmission now being lost to the major battery manufacturers (such as CATL, LG Chem and Panasonic). Global volumes may increase, but they will have to counter major trends in sustainability, shared mobility and the remote working. Furthermore, the premium prices that electric vehicles command today are not amenable to mass adoption; the general public hasn’t suddenly got more money to spend on a car just because they have batteries in them, prices will have to come down.
So without a dramatic change in the economics of being an automotive manufacturer and without extreme volume or price growth, it is unclear how any automotive manufacturer (other than some other trendy EV brands like BYD, NIO or Nikola) could revolutionise its financial performance and bridge the gulf in valuation to Tesla. As a reminder, Toyota generated 19 times more profit than Tesla last year, yet Tesla is apparently worth 60% more.
Surely other market forces are at play here, the combination of a short squeeze and individual investor mania is likely a driving force, but rather than discussing bubbles to wrap things up it is worth remembering that even Mr Musk thought Tesla’s valuation was “too high” at the lowly heights of $130bn; now at $275bn Tesla’s biggest fanboy really must concede that its value has now entered ludicrous mode.
