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Exactly this. While valueing companies on future growth makes sense, Tesla's current evaluation is bigger than the 10 largest car manufacturers by market cap after combined [1]. That kind of implies that people think Tesla alone will be as profitable as these other ten combined, which just seems like a totally crazy bet to take. Tesla would have to take over huge parts of their market share while keeping high margins on expensive cars. There isn't so much population that is able to spend 50k or 100k on a car.

[1] https://companiesmarketcap.com/automakers/largest-automakers...

Most of the people holding the stock at this valuation do not see Tesla as only a car company.

Their Powerwall is quickly becoming the leading home energy storage solution. It will be interesting to see if they can also deliver on solar roof, beat NVidia with project Dojo, beat Waymo with self-driving, and beat Panasonic with battery manufacturing.

> Tesla's revenue growth is not much bigger than Alphabet's or Apple's - and these are companies with orders of magnitude more revenue and profit.

I'm not that big of a Tesla bull, but you have to remember that stocks trade on forward expectations. The trillion $+ market cap companies basically have saturated their primary markets. Microsoft is not likely to find another billion desktop PCs onto which to sell a US-priced Windows/Office suite anytime soon. By contrast, if you buy the Tesla story, they are really just getting started.

> Auto manufacturing is not suddenly going to become the most profitable business in the world.

I tend to agree with this. However, it's worth noting that Tesla's margin profile is significantly different than all legacy automakers. Their gross margin is ~30%, which is within striking distance of AMD's. And Tesla is still sub-scale for the auto industry. EVs are a different beast than traditional ICE vehicles, so margins will initially be better on EVs for all EV manufacturers.

> EVs are a different beast than traditional ICE vehicles, so margins will initially be better on EVs for all EV manufacturers.

Please explain. This runs counter to the common understanding that unless a manufacturer scales up their battery production significantly, their profit margins on EVs are lower due to the high cost of the batteries. The California compliance EVs were sold at a per-unit loss. Tesla shook this up by targeting and marketing to the luxury market, where they could charge a premium.

Many smaller scale non-luxury manufacturers have pretty lackluster EV offerings (looking at you, Subaru).

Margins will initially be better on EVs for all EV manufacturers.

Right now, where there's an electric and a gasoline powered version of a comparable model, the electric version seems to cost about US$10K more. See Ford F-150, Chevy Bolt, BMW iX.

That needs to stop.

> the electric version seems to cost about US$10K more

Disagree. F-150 Lightning XLT is ~$5k more than the ICE equivalent, which means it costs less after the tax credit. (I'm not sure the baseline model is the same as the baseline ICE F-150.)

The Bolt and iX are essentially compliance/concept vehicles that don't have ICE editions, so you can't say they cost more than their comparable models. Once those two get real EV strategies, we will be able to make direct comparisons between e.g. the Chevy Tahoe and the Chevy Tahoe EV.

They are consistently 10k more, see the id.4 or Mach E for better comparisons.

Neither of those have ICE versions (and did not have ICE versions in any recent years), so you can make up any number and say the EV versions are $X more expensive.

There may be some premium, but arguably some of that is the manufacturers targeting a consumer price net of tax subsidy ($7,500+).

EVs have fewer parts overall, and therefore should require fewer manufacturing hours, among other efficiencies. But more straightforwardly, look at Tesla's margins as an object proof. Their gross margin is 50% higher than Toyota's, and Tesla is still sub-scale for an auto manufacturer. I would expect any EVs shipped in any meaningful volume to realize similar margin gains versus ICE vehicles.

> The California compliance EVs were sold at a per-unit loss.

Those cars were never intended to be a real line of business. My measure of when a legacy automaker decides to make a "real" EV is when they attach their existing brand equity to an EV. The Chevy Bolt fails this test, as do the BMW EVs. I think this distinction is important because automakers have the capability to sell vehicles that they do not intend to be part of their strategy or scale to meet demand. The California compliance EVs also obviously fail this test.

The Ford F-150 Lightning is a real EV, as is the Mustang Mach-E and the Volvo XC40. I don't believe Subaru has even announced a real EV yet, as the Solterra does not count. We will know Subaru is serious when they deliver an Impreza EV; until then, I consider all their EV offerings as compliance vehicles.

> EVs have fewer parts overall, and therefore should require fewer manufacturing hours, among other efficiencies

I agree with all of this, but how can we be so sure that is the reason for:

> Their gross margin is 50% higher than Toyota's

vs Toyota being an older and larger company with far more overhead due to an older and larger workforce.

> Those cars were never intended to be a real line of business. My measure of when a legacy automaker decides to make a "real" EV

Agreed, and I think deciding to make a real EV comes down to investing in battery production at this point. Subaru in particular is really losing the crown in its key markets like CA and CO to the new AWD EVs entering the market.

> Their gross margin is 50% higher than Toyota's

> vs Toyota being an older and larger company with far more overhead due to an older and larger workforce.

Gross margin is net sales minus the cost of goods sold, hence doesn't include workforce cost.

Exactly. In fact, Toyota has better economies of scale on its side, so their raw materials costs will be lower than Tesla's all things being equal.

> Gross margin ... doesn't include workforce cost.

I don't think that's right. From https://www.investopedia.com/terms/g/grossmargin.asp

"The Formula for Gross Margin Is

Gross Margin=Net Sales−COGS where:

Net Sales=Equivalent to revenue, or the total amount of money generated from sales for the period...

COGS=Cost of goods sold. The direct costs associated with producing goods. Includes both direct labor costs, and any costs of materials used in producing or manufacturing a company’s products."

It wouldn't surprise me if a lot of Tesla employees are compensated in large part via equity, therefore lowering their apparent labor costs. Also, they probably have lower health insurance costs for their relatively young workforce (they are more like a young tech company in this way).

Of course, battery prices will continue to decline, so in the long run, yes, EVs will be cheaper to buy, but I'm not convinced we are there quite yet. They are already far cheaper to operate, though.

stocks like tesla trade on dealer gamma. fundamentals don't matter at all. if you're an investor, stay away. if you're a trader, go with the flow.

> Microsoft is not likely to find another billion desktop PCs onto which to sell a US-priced Windows/Office suite anytime soon.

Which is why Microsoft pivoted to additional revenue streams years ago. XBox, Azure, GitHub, SQL Server, LinkedIn, the Surface line, and more.

What's great about this reply is that the pivot to (in particular) Azure is exactly what has changed the narrative and thereby driven the most recent growth in the stock.

MS valuation to some extent is basis their ability to sell more Azure. Cloud is still growing very very fast.

It is also noteworthy that MS is getting good growth in Windows license revenues too as they have opened up a subscription model, lot piracy in the consumer/SMB markets have reduced especially in developing economies. They are not getting billion new users, but a lot of newly paying users with consistent recurring subscription revenue stream they are now generating .

> but you have to remember that stock trade on forward expectations.

Great insight, except that you are just repeating the start of the whole discussion, literally from the first line of this thread:

> I want to point out that companies are valued based on their future and projected growth, not how much they are worth today.

What did you hope to add to the discussion with this comment?

> Microsoft is not likely to find another billion desktop PCs onto which to sell a US-priced Windows/Office suite anytime soon.

Microsoft is already heavily diversified. Big difference.

Not material since they have saturated there initial markets, per the narrative. But sub in Apple of you prefer.

I mean the money Apple makes on wearables (AirPods + watch), iPads, and possibly growing Mac sales because of the M chip are all huge. Their services segment keeps growing at a massive pace too. Sure none of these are as big as the iPhone. But if Apple only did the iPhone as hardware, they would be no where close to their current valuation.

None of the big 5 tech companies are close to tapping out. Any or all of them could be worth another $1T in a couple years and it wouldn’t be that crazy.

I agree that none of the biggest tech companies are in danger of tapping out anytime soon. But in terms of narrative, Microsoft was the PC company and Apple is the iPhone company (it took years for them to shake off the funk of being the iPod company in the face of saturating that market) and so forth.

Narrative-wise the comparison looks like this: Apple gets >50% of its direct sales from the iPhone, and likely a meaningful percentage of its wearables and services revenue is levered to iPhone sales (AirPods and Fitness+ being examples). Probably 60%+ of Apple sales is tied to iPhone at this point. The mobile market is essentially saturated, so growth will taper there going forward. All the other products are nice, but they are a minority of revenue. To sustainably grow at 20%, Apple has to find a brand new category that is worth $40B, and they have to do that every year. (By way of comparison, that's about as big as Tesla. Apple needs to find a new Tesla worth of revenue every year.) So that's the narrative on Apple.

By comparison, the shift to EVs is at the very beginning of its ramp, with ~7% of global sales being EVs. So Tesla has many years to grow at very large rates (40%, 50%, etc.) before it arrives at saturation. They don't have to find any new categories (adding a truck doesn't count as a new category for narrative purposes), they can basically keep doing what they are doing and add SKUs in their existing line of business and grow along with the market, which is growing really fast. They don't have to find giant new categories every year, so in some ways the business problem in front of them is more straightforward. That's the Tesla narrative.

Tesla has a great narrative for the future, and that helps drive the stock price.

> So Tesla has many years to grow at very large rates (40%, 50%, etc.) before it arrives at saturation.

You missed the GP's point - even if they take 100% of the car market, it's not like the car market is growing exponentially. So this car market growth is "already priced in" and it's TAM is the combination of all of their car companies (even assuming they were to get 100% market share which is unrealistic), which Tesla is already valued at higher than all of those companies combined.

The narrative is that Tesla becomes a "battery company" (which is basically just their JV with Panasonic anyway). But they haven't proven anything in that market yet. So the point is this -> Microsoft may not just be a PC computing company anymore (selling Windows OS) but it already has proven cloud revenue for example, so you can speculate that those revenues will grow by X% with its own TAM.

I didn't miss the point, I promise! One narrative is indeed that their core market is EVs (or call it Auto 2.0 if you include software, advanced driver assist, etc.), and that this market is indeed growing rapidly. This part of the narrative assumes the legacy makers will not pivot fast enough, so the EV market will be divided among the newcomers. Under this view, Tesla is not competing against BMW any more than the iPhone was competing against the Nokia feature phones. Thus, the EV market is essentially a new market (goes the narrative). Investors clearly buy into this narrative at some level.

You do make a good point that Tesla has multiple narratives working in its favor. At one point, it was the self-driving company. When necessary, it can push the solar roofs angle. It has a couple of narratives it can use to goose the stock.

> Thus, the EV market is essentially a new market (goes the narrative). Investors clearly buy into this narrative at some level.

Huh? Again, you're missing the point - there is total addressable market of vehicles that all of the major automakers currently capture and have forward looking valuations based on future expectations. It doesn't matter whether that vehicle uses diesel, gasoline, electric, nuclear, hydrogen, whatever...

> Under this view, Tesla is not competing against BMW any more than the iPhone was competing against the Nokia feature phones.

Literally no. People aren't going to magically buy more vehicles because they run using a battery. A car gets you from point A to point B. A smartphone and dumbphone both make a call from point a to point B, but one also has an internet connect computer which opens thousands of new opportunities of communication (video, images, spreadsheets, word processing, etc.). Also iPhones cost substantially more than Nokias for a reason. This is a bad analogy.

There is a total amount of money every year the population is willing to pay for for transportation. Let's say that number is $1T (idk what is for sure, just using that as an example). Tesla is fighting to gain that market share of $1T - its zero sum (sans overall increases in demand for vehicles every year).

The only way this changes is if Tesla reaches level 5 autonomous navigation which is (1) not even built in the cars today and (2) Tesla still has Level 3~4 that is not fully productive. So this is like saying "yup but their dumbphone can access the internet...but only when they are in this one building in NYC...think of the future!"

> People aren't going to suddenly start paying more for cars than housing. People aren't going to suddenly own 30 cars a piece. Tesla is never going to grow enough to be worth it's current market cap.

There are around 290M cars on the road in the US, of which 1.3M are electric. Over the next 20 years, the majority of those 290M will get replaced by an electric vehicle. One of the major drivers of this will be cost: it will just be significantly cheaper from a TCO perspective to drive electric.

Electric is such a shift that traditional car purchasing forces like brand loyalty are disrupted, and there will be a land rush to claim new market share. Electric also presents heretofore prohibited avenues for vertical integration: Tesla wants to sell you the car, the home battery and the solar panels to go with it. Standard Oil was broken up for similar types of vertical integration.

Electric will also present opportunities for ongoing service revenue (value-added services such as in-car infotainment) that automakers have tried for years to break into (unsuccessfully)

If you’re the early leader with a promising track record, as Tesla is, a 1T valuation is not surprising.

>If you’re the early leader with a promising track record

I wouldn't trust Musk to take the Thanksgiving turkey out of the oven on time.

> Electric will also present opportunities for ongoing service revenue (value-added services such as in-car infotainment) that automakers have tried for years to break into (unsuccessfully)

And thank God for that! It's bad enough that automakers are trying to put third-party repair shops out of business.

Currently the cheapest new ICE cost 15-20k and the cheapest new long-range EV cost 30-35k (and a Tesla costs over 40k). If people are going to switch to EVs for lower TCO, the EVs will need to get a lot cheaper. I have no doubt this will occur eventually. And when they get a lot cheaper, how is Tesla going to earn a fat margin? I feel the “lower TCO” story is not that bullish for Tesla given the enormous profits that are required to justify Tesla’s current valuation.

> If people are going to switch to EVs for lower TCO, the EVs will need to get a lot cheaper.

Or gas will need to get a lot more expensive, which is what governments are planning to do.

The Average price paid for a new car in the US is ... $35k-$40k. Almost no one in the US buys $15K Mitsubishi Mirages and more reasonable cars that start at $20K are rarely actually sold bare bones for that much.

How about the average price for a new EV?

>Over the next 20 years, the majority of those 290M will get replaced by an electric vehicle.

Let's optimistically assume that Tesla will sell 100M of new cars in the US in the next 20 years at the average price of 50K per car and profitability 10%.

100M x $50K * 10% = 500 billion which is already less than Tesla's current 1 trillion valuation.

1. There are other countries

2. What if Tesla gets $1-2k ARR along with each sale for charging or other services?

That’s $25B profit per year excluding any other profit. That can actually justify a 1T market cap.

It's 2.5% ROI, on par with inflation and well below the market. It's hard to reasonably justify it. Unless you bet on a stock with an extremely high P/E to get a much higher P/E.

> Auto manufacturing is not suddenly going to become the most profitable business in the world.

Tesla's mission statement has nothing to do with cars: "Tesla's mission is to accelerate the world's transition to sustainable energy". Transport just happens to be a very large segment that needs to be transformed to use sustainable energy so that's what they're focusing on.

Tesla has just become an energy supplier in Texas. That's another market that's been stagnant forever and is going to see a huge shakeup when tech such as virtual power plant become widespread. Tesla is already running some of the largest energy storage for the grid in the world.

Then there is AI. What other automotive manufacturer do you know that has 1000s of people working on AI, makes their own chips and has training data from millions of cars on the road? AI isn't just to make your car autonomous. There is the Robotaxi potential which in itself is an entire market. AI doesn't stop there: once Semi is out with autonomous driving, that will cut the cost of transporting goods by a large chunk - no more paying drivers and way less cost on fuel. That's another market entirely and will large fleet companies rushing to save cost by purchasing trucks from Tesla.

In case you missed it (which I believe you have), there is autonomy in general manufacturing which Tesla is planning to target. That's yet another completely different market with a huge potential.

Did you hear about the car insurance? Ye, that's another one which Tesla is targetting.

I'm pretty sure there is a bunch of things I forgot.

Tesla is not a car manufacturer. It's a behemoth in the making which will overtake Apple, Google, Meta, Fossil fuel and some more combined, times 10.

It’s more than just cars though. Just one example (of many) - do you pay Ford extra money when you go on a road trip, or does that money go to Exxon, etc? In my Tesla when I go on a road trip, I am giving them more money to charge on the road.

Also, when we switched from horses and carriages to automobiles, I’m sure being an auto manufacturer at that time was probably insanely profitable. Maybe not the most valuable kind of company in the world at the time (or maybe it was), but definitely up there. We’re now in another transition from ICE to electric vehicles. There’s going to be another period where EV manufacturing becomes extremely valuable as demand for EVs surges over the next couple decades. After that, as the EV market matures and the competitive landscape evens out, profits will come down again.

The other car companies were never vertically integrated. Huge parts of their profit went to dealerships and suppliers. The suppliers and dealers often have better market valuations comparatively.

Current manufactures make almost no margin on cars and make decent margin on supply of parts.

Tesla own that whole chain end to end. As they scale up and build up a huge fleet of cars that need service that is not covered this will become a hugely profitable business.

Other car companies are buying batteries and that is almost 1/3 of the cars price. Tesla will make their own batteries. Most other car companies will buy their driving assistant tech, Tesla has it in-house.

Solar and utility storage are small markets now, but they will continue to grow and no other car manufactures has anything in that range.

Maybe Tesla will not be worth what they are now, but they deserve to be way higher then GM/Ford and so on.

But what if Tesla is the new BTC? It’s price solely due to stock demand and not fundamentals anymore.

If Tesla can sell 4M cars at 10K profit every year, that's an annual profit of 40B dollars. 1T valuation will be justified.

Right now they are projected to sell more than 1M cars in 12 months.

No - they'd still need to get their profit margin to be ~25% instead of ~10%.

Tesla can definitely sell more vehicles OR increase margin - but it will be substantially more challenging to do both at the same time over a short horizon (10 years).

Tesla is operating at significantly over 10% per car profit as per estimates. A report earlier this year estimated almost 30%.

https://www.teslarati.com/tesla-record-q1-2021-gross-margin-...

>Right now they are projected to sell more than 1M cars in 12 months

So after converting from Musk time to human time, this means it'll take 5 years?

They sold more than 237K last quarter. Check their earnings report.

Yes, and?

One year is composed of 4 quarters. I will the rest of the math to you.

Did you read "if Tesla can sell 4M cars at 10K profit every year"?

Did you read "IF ... "

Musk also projected Tesla owning 1M robotaxis by 2020.

We are not talking about Elon time. They made 237k cars in Q3, and will most certainly close a year with 900k(+-50k) cars produced. With two new fabs coming online in 2022 and growing capacity on existing fabs they will comfortably close 2022 with over a million cars made, and I think the final amount will be just short of 2 millions.

4M type volumes are possible at only lower price points.

I am very skeptical that battery costs are going to drop that much that Tesla can make cars for say 15-20k and retail at 25-30k to make the 10k profit you propose.

Battery chemistry is rapidly evolving of course with lesser conflict resources / better performance etc, but raw material costs for basic ingredients are fairly expensive, that puts a hard floor under which it would be hard for Tesla to go below.

A 40K tesla car is very conservatively equivalent to a 30K gas car in terms of total cost of ownership. The 3 factors are

1. Significantly reduced energy costs

2. Significantly reduced maintenance, not even oil changes

3. Significantly longer car life, because of having barely any moving parts.

Most of the car parts that go bad in the 100K-300K mile range don't even exist in a Tesla.

Tesla is production limited, not demand limited in its sales. Just the model 3, model y and cybertruck will get them to 4M per annum - no problem.

I know you touch on it, but what if all the other manufacturers start using proprietary tesla things, such as batteries or the (arguably vaporware) self-driving algorithms?

Tesla is not saying that it is a space or internet company, that is SpaceX.