Sep. 16, 2021 7:15 AM ET Tesla, Inc. (TSLA) Source: www.Seekingalpha.com
- Tesla is the EV leader and generates solid growth. But its car business is not worth $700+ billion.
- Energy is a relatively small, money-losing franchise, which limits its value.
- Markets are pricing in massive success in Tesla’s AV franchise, but that is far from certain, and it looks like others are pulling ahead of Tesla.
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Tesla (NASDAQ:TSLA) is the leader in the EV space for now, but that alone doesn’t justify the current market capitalization, I believe. Instead, the market prices in massive success in autonomous driving, before it has materialized. It does look like Tesla is not the leader in that space, and commercial success with robo-taxis is far from guaranteed and might be many years away.
EV Leadership – How Much Is It Worth?
Tesla has sold about 500,000 EVs in 2020, and the company seems to be on track for something in the ballpark of 850,000 EVs in 2021. This is a major feat for the company for sure, and the company undoubtedly deserves respect for coming close to selling a million cars in a single year.
Considering that Tesla was founded not too long ago, selling half as many cars as Mercedes-Benz (OTCPK:DDAIF), BMW (OTCPK:BAMXF), or Ford (F), which all have been around for many decades, is an accomplishment for sure. It is, however, not an accomplishment that justifies a market capitalization of $700+ billion, I believe, especially when we consider how other car companies are valued.
Let’s look at Tesla’s valuation relative to both major legacy car companies as well as a couple of other EV players:
Tesla trades at 11x next year’s expected revenue, while legacy players such as Ford, Daimler, and General Motors (GM) trade for 0.3x to 0.5x next year’s expected revenue. In other words, Tesla’s valuation is roughly 20x to 30x as high as that of legacy players in the premium segment, where Tesla is active today, and in the mass-market segment, where Tesla seeks to become a major player. To some degree, the valuation difference seems justified due to Tesla’s higher growth, but a 2,000% premium seems irrationally high to me.
When we compare Tesla’s valuation to that of some other EV pureplays, the company does, again, look quite pricy:
At 11x forward revenue, Tesla trades at roughly twice the valuation its peers NIO (NIO), Li Auto (LI), and XPeng (XPEV) trade at – despite the fact that these are growing faster than Tesla, which should theoretically justify a higher valuation for NIO, LI, and XPEV. According to YCharts data, NIO, LI, and XPEV are forecasted to grow their sales by 141%, 123%, and 140%, respectively, between 2021 and 2023. The growth forecast for Tesla, meanwhile, is 70% for those two years combined, these other three EV pureplays do thus grow at roughly twice the rate Tesla grows at, and yet Tesla is the much more expensive stock.
Looking at BYD (OTCPK:BYDDY), the comparison is even more unfavorable for Tesla. BYD trades at just ~2.5x next year’s expected revenue, which means that this EV pureplay trades at less than one-fourth of Tesla’s valuation. One can argue that the EV industry as a whole is trading above fair value, but even if one does not agree with that statement, Tesla surely does look expensive relative to other EV pureplays on top of looking expensive relative to legacy car manufacturers.
This also holds true when we look at the next comparison, i.e. market cap versus EV vehicle sales. The following statistic shows the EV market share of the major players in H1 2021:
If we value the EV business units of Volkswagen (OTCPK:VWAGY), GM, and Stellantis (STLA) like Tesla is valued, then the values of these units would be $610 billion, $420 billion, and $320 billion, respectively. These amounts are way higher than the current market capitalizations of these three companies ($170 billion, $70 billion, and $60 billion, respectively).
Even if the value of the legacy businesses of these companies was zero, which would not make a lot of sense, as these companies still earn billions of dollars with gas-powered vehicles, these companies would have to trade at massive premiums relative to their current valuations based on the value of their EV businesses alone – if Tesla was valued correctly, which I believe is not true.
The comparison to other, higher-growth EV players and the comparison to the theoretical values of the EV franchises of legacy car companies shows that Tesla trades well ahead of the value of its EV business right now, I believe. The largest car company in the world, Toyota (NYSE:TM), is valued at around $250 billion today while selling around 10 million cars a year. Tesla trades at a market capitalization roughly three times that high, which implies annual sales in the 30 million range, all else equal. Sales this high will, in all likelihood, not be achievable for Tesla in the foreseeable future. Tesla undoubtedly has a healthy track record when it comes to growing its sales volumes in recent years, but at less than 1 million vehicles sold annually, it is still very far from reaching a size comparable to VW or Toyota, and yet it trades at a massively higher market cap.
So if the car business does not really justify the current valuation, where is the value coming from? Tesla’s energy business remains comparatively small, with H1 revenue of ~$3 billion, and, importantly, the energy business remains unprofitable even on a gross profit basis, as company-wide gross profit in H1 was less than the company’s automotive gross profit. When we further account for operating expenses related to the energy business, it can be reasonably concluded that this part of Tesla is deeply unprofitable for now, which means that it can’t hold a lot of value.
Tesla’s Autonomous Driving Business
With the car business not justifying the current market cap, and with the energy business not holding a lot of value, it looks like a lot of the market-ascribed value stems from Tesla’s autonomous driving plans. The company surely has been marketing its ventures in that area very effectively, and Tesla’s CEO has made huge promises for years, including the following ones:
More than five years later, Tesla is still not offering this feature, which, according to Elon Musk, should have been rolled out in early 2018. Musk’s famous claim of having 1 million robo-taxis on the road in 2020 has not materialized, either, and it looks like it will also not materialize in the foreseeable future. With regulators increasing their investigations into self-driving claims, with Musk himself admitting that self-driving is a hard-to-solve problem, and with Tesla personnel admitting that Musk’s claims seem overly positive, it seems like bulls may have to wait a long time for AV tech to have a huge impact on profits. For now, promises have turned out to be relatively empty words, and profits from a proposed robo-taxi business are not in sight.
In fact, it looks like Tesla does not even have the edge over competitors in this space, as a couple of other companies do have robo-taxi services today. Ford, Lyft (LYFT), and Argo are deploying a robo-taxi service this year, Bloomberg reports. Waymo, belonging to Alphabet (GOOG) (NASDAQ:GOOGL), has rolled out robo-taxis in several markets already, with San Francisco being the most recent one.
Mobileye, which belongs to Intel (INTC), is rolling out robo-taxis in Israel and Germany, and several companies are rolling out services in China. Among them is Baidu (BIDU) with its Apollo Go service, while Alibaba-backed (BABA) AutoX has a functioning service in China as well. All in all, quite a couple of companies have already launched robo-taxis in many different markets around the globe, and others will be launching robo-taxis in the near future. Tesla is, from what we know today, not among those. In fact, Tesla does not have a driverless testing permit in its home market California, unlike these eight other companies that do have the permit to test driverless autonomous vehicles in the state:
With Tesla not being close to a roll-out (from what we know today), and not being allowed to test advanced tech, it seems questionable whether the company should be valued like its AV tech is ahead of everyone else’s. I personally believe that AV tech could eventually have a lot of value for the leaders, but broad-based commercialization seems to be years away for all players, and it is not possible to know today what companies will prevail. Valuing Tesla’s AV franchise at several hundred billion dollars, which is implied by the company’s current market cap, seems too bullish to me – especially since others, including Waymo, Baidu, and Mobileye, seem to be ahead of Tesla tech-wise.
What Does It Mean?
To summarize, Tesla is a successful EV player, but its EV business does not justify the current market cap – Tesla trades at a massive premium to other EV players such as NIO, despite growing at a slower pace. Bulls seem to value Tesla’s AV business highly, but I think that is not justified based on what we see today – Tesla has made huge claims for many years, but it is yet to deliver on them. With others seemingly pulling ahead of Tesla in AV tech, and with regulatory pressures mounting, it seems like Tesla’s shares might have considerable downside potential from where they trade today. If Tesla was valued like other EV players, the story might be a different one, but due to its massive valuation premium, Tesla does seem like an unfavorable pick at current valuations.
Delays and issues with other presumed growth drivers, such as the Berlin factory or the Cybertruck, which will only be mass-produced in 2023 and will therefore come to the market much later than other EV trucks such as the F-150 Lightning, could further spell trouble for Tesla’s shares. At current valuations, the stock seems to be priced for perfection, and if the market concludes that the future may not be all that rosy when it comes to growth plans, due to product delays and others pulling ahead of Tesla in AV tech, there seems to be considerable downside potential. This does not mean that shorting Tesla is a great idea, however, and I personally don’t have any interest in shorting the stock. Due to its too-high valuation, the stock seems like an Avoid to me, however.
Takeaway For Shareholders
If I held a position in TSLA today, I’d think hard about locking in gains, as it seems quite possible that gains made in 2020 will be partially lost in case shares pull back. Diversifying into other EV positions, e.g. into NIO, BYD, and XPeng, could also be an idea worthy of consideration for those that hold sizeable positions in Tesla. Ultimately, everyone decides themselves what investment is most suitable for their investment approach, but I believe that the risks outweigh the potential rewards when it comes to TSLA’s stock today –two years ago, when shares were trading at a way lower valuation, that was different, but at a $700+ billion market cap, Tesla is priced for perfection, which does not seem justified.
I welcome all readers to share their opinions in the comment section, including why they choose to own or not own shares at current valuations, and what they think about Tesla’s AV tech relative to that of competitors.
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Disclosure: I/we have a beneficial long position in the shares of BABA, GOOG, INTC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.26 Likes563 CommentsCommentGet alerts onTSLA – Tesla, Inc.947.58K Followers
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cparmerleeYesterday, 12:09 PMComments (21.82K)|I generally agree with this article. However, I don’t really think the main premise is all that solid. The premise is that the fundamentals could maybe support a share price of $200, and the difference is explained by enthusiasm for autonomous driving and its derivatives (robo-taxis, etc.)
First, I disagree that the fundamentals justify even $50/share. Way over 100% of Tesla’s “earnings” come from subsidies and gains from trading on their huge pot of cash, not from making and selling cars. And that cash was never earned. It was deposited by shareholders who would have a much higher return if they simply but that money in the SP500 index. But that is beside the point.
My real dispute is what accounts for the gap between objective evaluation and the current market price. Surely there are people who do rationalize that with some nonsense about autonomous driving. But for most people, I think it is a lot more basic.
It is “the brand.” Musk has created “The Musk Brand.” which obviously includes the current SpaceEx flight. People aren’t analyzing this stock objectively. They have bought in to the brand, and have convinced themselves they have a grasp on “the big picture.”
Maybe they do, maybe they don’t. I would simply point out that this kind of brand motivation is most like Apple and Amazon, but in those two cases, there were really solid results that didn’t really require much dreaming about the future possibilities.
Steve in TNYesterday, 1:32 AMMarketplaceComments (953)|Tesla should never had labeled it’s “self-driving” feature “Autopilot”. This has encouraged many drivers to assume it compares to the safety of air travel autopilot systems. It is not the same. Hence numerous deaths have occurred to Tesla drivers who were seemingly convinced their Tesla will get them to their destination while they were completely inattentive at the wheel.
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