Why Tesla stock is vastly overpriced
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Keep in mind, Tesla sold 367,500 cars in 2019, while those other companies sold over 34 million cars, or nearly 10,000% more. I realize that stock prices are based on future profits, and working capital is factored into it, but still, I just don't see the rationale in an ownership stake in Tesla being that much more valuable.
Many of the companies mentioned are quite far behind, and will face severe challenges in the coming years trying to adjust with little marging for error.
But most importantly Tesla is also a battery company! Who knows, most of the other players might even have to buy batteries from Tesla.
Gut feeling tells me that Tesla will still grow significantly, especially if they start selling batteries to other markets at scale, but also the car business itself will experience a tremendous growth.
- Sincerely, a TSLA hodler since summer 2019, when I bought my first car, a Tesla.
I'll be holding the stock I have, but I don't think traditional car companies are going away any time soon. On the contrary, I'm thinking of getting a Taycan, a BMW or some other EV car.
Tesla isn't overpriced per se, but once the spigot of cheap debt and printed money stops, we might see a good decline from the stock market. Not that I'm going to bet against the market either.
NKLA (seems like a scam), NIO (seems really good), and with a huge amount of SPACs buying EV companies, they are going to have lots of room to grow. Also many of these companies have been operating for a decade trying to create a product like KNDI, PLUG and they are getting closer with their products. I didn't jump into TSLA early as it wasn't profitable, but now they are making money so it fits my investment principles.
Take a look and do some research here at the competitors to the traditional car dealers [1].
[1] https://docs.google.com/spreadsheets/d/1sKMfBZNkHdvaVKmweuv3...
Comparisons that try to make Tesla seem like an ordinary car manufacturer are probably quite a bit off.
They are ahead of the field, their chargers are faster, but there's already thousands of other places with relatively high power chargers that can likely be upgraded as demand materializes (at a minimum, the competition is not starting from 0).
There won’t be mass shift without these companies driving the shift, simply because there won’t be enough cars for the demand.
There are already a dozen other electric models on the streets. Why should they have to license from Tesla? The electric engine part of the vehicles is actually not that hard - it's the battery that is complicated and Tesla doesn't even produce the batteries in their cars. That's done by Panasonic.
VW, Toyota, Nissan have supply chain management under control, they don't need to learn it from Tesla.
Patents last 20 years, and it's not unusual for 5 of those to past between filing and the invention being turned into a usable product that hits the market.
Supposedly GM's Ultium battery platform will equal or exceed Tesla's batteries, but that remains to be seen as the first Ultium-based cars don't come out until 2H 2021 and all we have to go on right now are press releases.
VW holds some patents and exclusive licenses on solid state batteries, and is planning to go all EV within the next few years, though the SSB autos aren't expected until 2025 at the earliest, assuming VW is able to commercialize the technology.
Multiple other manufacturers already make and sell EVs, in some cases outselling Tesla in their home territories.
Moreover, while Tesla assembles their own batteries, the underlying battery cells are made for them by Panasonic, which owns the IP to the chemistry. (Tesla's IP relates to the assembly, referring both to the process and the finished battery product.)
And that IP is only valuable until the inevitable switch to solid-state batteries, which have significantly more capacity and durability than anything on the market today. And other automotive companies have already acquired exclusive licenses to the most (commercially) promising research.
Note that Panasonic, which will actually be making the batteries, has indicated in its own investor releases that it is working on developing the batteries but they aren't anywhere close to production-ready yet.
The other announcements relate to making the batteries cheaper, but would not otherwise extend performance (and in some cases would reduce performance, but due to the reduced costs would come out ahead on a $/kWh basis).
This appears to have a lot of similarities with the dot-com bubble where the new internet companies were thought to quickly overrun the old, "uncool" companies. It just doesn't happen like that. Plus there is a vested interest in the home countries of these car companies to see that these companies survive. Sure some of them might be ripe for losing a lot of market share, but they still have time to catch up as the world is slowly turning to mostly EVs. It's not the same as with internet companies where people can switch their search engine the next day if they so desire.
What's the market cap of a gas station chain comparable in scale to the Tesla charging network?
What's the market cap for however many Ford dealerships it would take to match Tesla's sales capacity?
Rinse repeat for every industry Tesla is in.
Total Debt:
VW. $237B
GM. $192B
Toyota. $190B
Ford. $155B
Daimler.$108B
Nissan. $42B
BMW. $80B
Honda. $42B
Simply put, the stock market cap is the total company value minus the debt.
Tesla debt by comparison is $14 billion.
All those companies together being worth only about 3x Tesla is perhaps surprising, but the market is weighting for the possibility that their entire current product lines will be virtually unsellable if not illegal to sell in a decade or so.
Tesla scaling electric vehicle and battery production by 60% CAGR for a decade doesn't seem too ridiculous when you put it that way. And that doesn't factor in new products. Look at Apple in 2007.
2014 16,689
2015 25,416
2016 47,644
2017 50,140
2018 191,627
2019 192,250
2020 500,000 estQuarterly profits for the most recent quarter (Q3 for most companies, Q2 for Honda): Toyota: $4.6 billion. Honda: $4 billion. GM: $4 billion. VW: $3.8 billion. Ford: $2.4 billion. Fiat: $1.4 million (not a typo, that is an m there.). In all cases, these profits were below their 2019 quarterly profits for the same quarter. Total of approximately 18.8 billion.
Tesla: $331 million, or approximately 1.5% of the Q3 profit share.
(Note that Hyundai had a loss and so is excluded from the profit share calculation. In all cases, these are global numbers. https://www.caranddriver.com/news/a34602700/auto-sales-profi.... For all automakers except Tesla and Fiat, profits are related to the sale of automobiles. Fiat's profit is related to a special one-time accounting event, and Tesla's profit, as with all of its previous quarterly profits, relates to the sale of credits to other automakers; Tesla has yet to have a profitable quarter based on the sale of vehicles.)
WOW. I knew their stock price has been like a rocket but I dont follow them closely. ( They were over priced ages ago ).
But $660B! Shouldn't that make Elon Musk the richest person on earth? I remember he owns 20% of Tesla?
Edit: Turns out Jeff Bezos [1], even after the divorce settlement , has a net worth of ~$187B. Elon is at $146B. Until SpaceX's IPO at ~$100B [2], which will add roughly $54B to his net worth... he will be the richest on Earth.
I mean I dont know how Tesla is a $600B company, but I sure as hell think SpaceX is worth a lot more than $100B.
[1] https://www.forbes.com/sites/sergeiklebnikov/2020/12/19/elon...
[2] https://www.forbes.com/sites/daviddawkins/2020/10/23/elon-mu...
https://www.forbes.com/real-time-billionaires/ (I had to disable essentially all content blockers to get this site to load.)
Think of it like a house. If you pay me $200K for my house plus assume my $300K mortgage, then you say that the value of my house was $500K.
When comparing values of companies, use the "enterprise value" metric, not the "market cap" metric. Enterprise value metrics will still show an overpriced Tesla, just slightly less overpriced.
Unless you are one if the few and nearly extinct economists who believe the stock market is perfectly efficient, comparing by market price often leads to justifying one mis-pricing by another mis-pricing.
For example, Yahoos ridiculous pricing during the bubble could always be justified by even more ridiculous prices for companies with near zero revenues by pointing out Yahoo had revenues and was growing them incredibly fast.
The only question you need to ask about Tesla is how can a $30B revenue company be worth a $680B valuation? How long before Tesla’s earnings catch up to the risk free returns on $680B (roughly $32B/year)?
Assuming an optimistic 15% after tax profit margin for the rest of its life, Tesla would have to grow revenues seven times. At 15% a year, revenues double ever 5 years. So in roughly 14 years Tesla would be reach an annual after tax profit of $32B. And it would still be $200B behind in total net profits, it takes nearly 20 years for Tesla to generate more total net profit than the risk free investment.
Is that reasonable? It all depends on the risk Tesla falls short, and whatever assumptions are in your DCF analysis. That’s a long time to catch up, I’m gonna go out on a limb and say far from a slam dunk.
I have no idea if history will repeat itself, but I find the parallel interesting
Really, the big problem here was that it wasn't already included on the S&P 500 years ago, so that all of the gains leading up to this point could have been shared with passive investors. It's satisfied the market cap requirement for awhile, but not the profitability requirement, which clearly didn't work well in this case.
"Like other indices managed by S&P Dow Jones Indices, but unlike indices such as the Russell 1000 which are strictly rule-based, the components of the S&P 500 index are selected by a committee. When considering the eligibility of a new addition, the committee assesses the company's merit using eight primary criteria: market capitalization, liquidity, domicile, public float, Global Industry Classification Standard and representation of the industries in the economy of the United States, financial viability, length of time publicly traded, and stock exchange."
https://en.wikipedia.org/wiki/S%26P_500_Index#Selection_crit...
If you're convinced Tesla is vastly overpriced, you should prove it by shorting the stock or buying put options.
Betting against Elon Musk has been a terrible move up until now, but if you really think the stock is overvalued, you're probably better off simply not owning it. If you're still concerned about its inclusion in the S&P 500, you can buy an S&P 500 index fund and short just enough Tesla stock to exclude it, or buy a different index fund that doesn't include it.
Yahoo failed, because a new competitor popped up, Google. Yahoo at one point in time was the market leading search engine, which was a pretty big deal. But then when Google popped up, not only did it take users from Yahoo, it took its market cap as well. If you had invested in Yahoo, gotten out when its customers started moving to Google, and then invested in Google when it went IPO you'd be quite rich today. Value investing wins again.
What if we look at TSLA from a value investing lense as a way to compare and contrast: Tesla is currently leading the market when it comes to electric cars and self driving cars. However, Cruise (GM's baby) filed with the CA DMW two weeks ago to have commercial fully self driving cars on the road in the near future. It looks like in the coming years GM will take a large chunk out of Tesla's self driving technology. However, unlike Yahoo to Google, do you really want to buy a GM car? Will GM steal customers from Tesla? GM's rapport is ruined. Their cars go 80,000 to 120,000 thousand miles, fall apart, are a maintenance burden, are not amazing in any way, and let us not forget: They filed for bankruptcy only 10 years (or so) ago, and haven't exactly improved since then. So, yes they may be able to take some market share from Tesla, but until Toyota, BMW, or similar gets fully autonomous self driving tech, I imagine Tesla is still going to be the most desirable car on the road, which will keep its stock strong.
Here is a good example of Elon Musk talking about how robotaxis are going to push up the price[0]. So far nobody has talked about Tesla operating their own robotaxi service.
[0]: https://www.cnbc.com/2019/07/08/elon-musk-self-driving-robot...
EVs may cost less to maintain their ICEs, but they still have moving parts that need to be replaced.
And taxi insurance is quite expensive; it's one of the reasons that driving for Uber/Lyft is a losing proposition for most of their drivers even before they take vehicle wear-and-tear into account. For autonomous driving, for a company with the worst safety record for AI-driving in the industry, that insurance may cost more than their combined insurance costs for everything else combined (i.e., house, healthcare, other cars, etc.).
https://twitter.com/EricBalchunas/status/1340073777573539840...
That's a lot of shares trading hands and its got alot of optionality coming due.
Remember that stocks usually drop right after they are added to the index as the arbs tend to over shoot and then get out quick once their even has happened.
we are in a completely different financial environment.
https://www.macrotrends.net/stocks/charts/AAPL/apple/pe-rati...
Everything in Economics/Business/Transactions can be thought of as having two separate dimensions:
1) Intrinsic Value
2) Perceptual Value (that is, all value that is not intrinsic)
We might call #2 "Speculative Value" or value that can change relative to outside circumstances or conditions, and #1 value that cannot so easily change, perhaps "Fixed Value" or "Constant Value".
Now, if your idea that Tesla stock is overpriced -- well, I would politely submit that "the market thinks otherwise".
The market, at the time a measurement is taken, represents the exact parity value of the Intrinsic and Perceptual (at that point in time) values, or the constant (underlying) and varying (speculative) values combined.
The market is always exactly correct when it makes a price determination, at the exact point in time when that price determination was made.
In other words, if you know the fixed value of something (e.g., company earnings and projected profits over the next 20 years), you can figure out the varying, speculative value of something by simple subtraction of that from the market price.
Thus you can determine that Tesla, at this point in time, has a huge amount of speculative value.
Maybe your bet is that Tesla is going to go down in the future, that some of that speculative value will be lost, and maybe that's true, but to advance a personal opinion against a market in terms of determinating the speculative value of something at the present point in time is foolhardy, because by definition the market is always right, because it's always the best measure of that speculative value.
Now, there are other factors.
One important factor is how much money is being injected or taken out of the money supply. When a lot of money is put in -- then stock prices naturally rise. That's because in addition to the intrinsic and speculative values of a stock, one must also consider a stock's value relative to the money supply.
A positive earning stock should (if all other economic factors were equal, but they aren't) rise naturally when more money enters the money supply (it isn't rising, it's keeping pace with inflation minimally, and maximally, it's outstripping the inflation curve.)
Opinion: Tesla may rise for a few years to come... but watch out(!) when when there's less money in the money supply...
...Although, when that happens, Tesla's (and other similarly high-performing stock) might be the equivalent of the proverbial "canary in a coal mine" -- that is, a marker or warning of things to come...
"2) Perceptual Value (that is not intrinsic)" i.e. extrinsic value. This is the part that most stock investors don't factor into their equations but is something that has a huge impact on how the stock is valued and priced.
In general accepted accounting practices there is something called "good will" that is similar. And it's how companies account for the value that is in addition to the economic value of an acquired company. It's completely legal and correct accounting. I think financial analysts need to have something similar so they can at least try to price a stock correctly.
Eventually all stocks find their true value. Right now people are thinking of a future where Tesla will dominate the car industry plus a few other industries. True or not that's where we are.
In reality Tesla is no different than many growth stocks of the past. The difference is that it has a CEO that can promote his dreams to a very large audience on a very short time. People are then compelled to buy the stock and drive it up.
I'm sure we'll see similar rising stocks like Tesla in the future.
All this to say that this article is not taking all variables into account when pricing the stock.
Also, I didn't think about the GAAP / "good will" link -- that's an important additional connection!