As a value and often times contrarian investor I have only followed Tesla (NASDAQ:TSLA) from the sidelines since their IPO. I remember the first uproar about the incredible valuation when Tesla stock first surpassed the $40 mark shortly after going public. That was when I added them to my “curiosity watchlist” and since they’ve all but fallen since, I’ve never really looked at the valuation itself really. I’ve read the book about the ingenious founder Elon Musk about a year ago and grew very fond of him personally and especially the commitment he has for his ventures.
I’ve seen this TED interview with him the other day which is well worth watching. Since that coincided with Tesla stock skyrocketing once again I really wanted to have a look at what is going on and whether a valuation of $60 bn can in some way be justified. Or, as lots of people think, is Tesla stock still a buy?
Tesla basically consists of three business units: Car manufacturing, batteries and solar. The batteries production caters mainly to the car manufacturing and to the solar business and the numbers Tesla reports on are for the car and solar parts of the business only. The car business is responsible for 90% of the revenues and contributed $2.3bn to overall revenue in Q1 2017 the solar business, after the takeover of SolarCity, turned around $213 million in the same quarter.
This chart shows the quarterly development of Tesla’s car sales:
Source: Tesla Quarterly Reports
In order to get to a reasonable valuation, we need to get an idea of how many cars Tesla will be selling in a couple of years and what profit they can turn per unit. Let’s have a look at the profitability of the most successful car makers, especially the net profit they are able to generate per car sold:
Source: Own Calculations
Daimler (OTCPK:DDAIF), the most profitable company, BMW and Audi all make pretty much 2 million cars a year. Toyota (NYSE:TM), which sells 5 times as many in a given year, is also considerably less profitable.
Tesla trades close to $379 which gives the whole company a market capitalization of slightly more than $60bn. Let’s compare that to Audi ($34bn), BMW ($61bn) and Daimler ($80bn). That’s right, Tesla is already worth as much as BMW, close to twice as much as Audi and is nearing Daimler dimensions. Since 2012 Tesla’s market cap increased even quicker than its stock price because the company increased the number of shares from 107 million in 2012 to 162 million today (in order to raise more capital for its investments).
How can such a valuation be justified? Sure enough, the company has already achieved extraordinary things and is truly leading the way into a more sustainable future, which I personally think cannot be praised enough. If I look at investment opportunities I always ask myself, “what will the company look like in a couple of years and what is the market then ready to pay for the company?”
If Tesla would be able to maintain its break-neck growth for a couple of more years (increasing output by 50 to 60% per year), Tesla would be producing around one million cars annually in five years. That would be half of what Daimler, BMW and Audi are each producing now. I’d highly doubt that Tesla will be able to generate a profit per car close to those of BMW and Daimler, especially once they enter the mass market and start to sell cars for $35,000. We are also sure to see more serious competition coming Tesla’s way.
There is of course also other revenue streams that Tesla is working toward – power storage is a business that will most certainly become a major industry itself in the future and Tesla is already providing storage technology to Daimler for instance. Solar is a big business already, where only very few companies can maintain a decent profit but in which Tesla/Solar City has managed to built a very compelling business.
In a nutshell: Tesla trades at a valuation that, even if the company would continue with its very impressive growth rates, is already very ambitious. Compared to BMW and Daimler, Tesla is of course outrageously overvalued. The question at hand is more about how will Tesla do in many years from now and is $60bn still a price that makes sense to pay for being part of the journey? For me, the answer is, not surprisingly, a clear no.
I can, however, clearly see a very successful future for Tesla, absolutely no question about it. The point is how well the company needs to develop in order to justify the extreme valuation it already has. There will be certainly bumps in the road ahead and whoever really wants to own the stock might consider waiting for a serious one to buy at a price that might allow for a decent profit in case the company develops into the major force in the automotive industry.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.