Is Tesla more valuable than Toyota?
calpaterson.com
calpaterson.com
"enterprise value = market cap + borrowings - cash"
It's neat and not too long.
- Imagine a company with 0 market cap and 0 cash, but 100M in debt. That company would be "enterprise valued" at 100M.
- How can you compare that to a different company, let's say at 100M market value, with 0 debt and 0 cash and say they are the same for "enterprise value"?
- Or to go even funnier, an arbitrary high market value, let's say X + 100M, with an arbitrary large amount of cash, let's say X, and say that both of those companies have the same "enterprise value" as one company that has 0 market cap and 0 cash but 100M in debt?
When trying to get a "peasant estimation" of how big a company is (not in a "how much it'd cost for me to buy it" way), which is what the article is trying to argue, I'd say that it should be "market cap + cash - borrowings". Or maybe not even include the cash and borrowings, or do some more advanced calculations I don't know about, since the market probably accounts for those indirectly on the market cap!
For your company A, you need to pay 0 to buy all its share, and also pay 100M to the lender to have full-control of the company.
For your company B, you need to pay 100M to buy all its share, and also pay 0 for the debt.
So they are both going to cost 100M for you as potential buyer.
To expand a little bit, actually the "cost to buy" should exactly be how "valuable" it is. But why does it feel counterintuitive? Because when we're thinking about buying something, we usually don't really logically.
Say you want to buy a car at $10000. But it also has a broken AC and you have to fix, which costs you $1000. At the end of the day, to buy a "car with a working AC" you paid $11000. That's the value of the car.
But most people will think they "spent $10000 to buy car that actually only worth $9000". Is that true? For a totally fair market, you CANNOT buy the same car with working AC for $10000. It would be priced as $11000. Same goes for the company -- a company the has exactly "same" inherent value", whatever that means, but no debt, would have higher market value than the one with. So the market value, at least in theory, already reflected that difference. Hence you can add it together with the debt to get its "true value".
I think we might be missing "assets" here? This is what still doesn't make sense for me:
- A company just created (market cap 0) goes 100M into debt, and so has 100M cash, so it balances out to be 0.
- However if that company uses those 100M cash to buy e.g. a factory, in this example what would happen? The Market Cap jumping to 100M doesn't make sense (since then the company would be "valued" at 200M), should we count the "assets" in the same way as "cash"?
The market cap would not change.
Enterprise value (which includes asset) = Market cap + debt (borrowings) - Cash.
Therefore, market cap = enterprise value + cash - debt.
So the company now would have EV of 100M and 0 cash and 100M debt. Its market cap stays at zero.
The fallacy here is assuming that market cap is an independent variable, whereas in real life it's dependent on cash/debt. This makes sense, because a company loaded with debt would be less valuable to shareholders, since the debt has to be serviced which eats into future profits. If you set all 3 values arbitrarily, of course you're going to get absurd results. It's not any different than setting the side lengths of a right angle triangle to arbitrary values, then complaining that the Pythagorean theorem is broken.
If they are not independent variables, then it's also not fair to plainly add variables that depend on each other, since they will give a skewed value given that simple addition would assume they are independent.
But that is still counter-intuitive if we use an intuitive understanding of "value" (i.e. worth preserving/having/acquiring). The company in this example would have no worth but EV of 100M. If you buy it, you would have gained nothing and spent 100M. Realistically with (near) zero market cap the company is likely defunct or worthless, with zero cash and massive debt it's likely bankrupt.
Realistically it's just a base "buying price". To fully buy out and own a company you would need to buy all the stock (market cap) and then pay off all the debt but you could use the cash for that. That's "value" in the modern economical "market price" sense, not in any intuitive sense. And it doesn't even mean paying that price would be a good investment because two different companies may have the same price but be hugely different in terms of potential ROI. Notably it only accounts for assets in the sense that the market cap might consider them - but we all know (do we?) that the stock market is not rational even when it can be rationalized otherwise we would be better at predicting it (notably a lot of "experts" perform worse than chance when trying to predict it).
I guess if you wanted to account for value in the sense of "worth" the formula would have to be a multiplier of the share price as a share price of zero would presumably mean the market sees no use in it and the other factors don't matter (but then again there's no good reason why debt would factor into it positively because it's merely a proxy for capital based on the assumption that it's used for investments rather than cashflow).
The way to think about the enterprise value is: How much should I pay in order to gain exclusive control over the company and all its assets.
> Imagine a company with 0 market cap and 0 cash, but 100M in debt. That company would be "enterprise valued" at 100M.
In this case you would pay 100M to not have any liability to bond holders.
Example:
- Company Stock is worth market cap of 2 billion.
- Company has 2 billion in debt.
- Company has 1 billion in cash.
2B (acquiring all the stock) + 2B (paying off all the debt) - 1B (cash in the bank) = 3B (enterprise value, aka the effective price to buy the company w/ no debt).
Some people call the enterprise value the true price of the company.
If company 2 has the same market cap with zero debt as company 1 has with huge amount of debt, then that implicitly means that the market values what company 2 does less. Perhaps they're in a market with lower growth or have a smaller market share or have a product with less upside potential or have huge lawsuit hanging over them.
If company 1 and company 2 did the same thing and had the same profits and sales, but the only difference is that company 1 had a lot more debt, then the market cap of company 2 would almost certainly be higher than the market cap of company 1. In fact you could then use the Enterprise Value formula to work out what the market cap of company 2 'should' be.
Imagine this example. I'm CEO of Company2 and I take out a 1B loan. Enterprise value is still 2B, because 1B debt is cancelled by the 1B I now have in cash. I then waste all the cash on whatever. My company's enterprise value is now 3B, because the debt has increased it without being cancelled by the cash.
Equally if you are able to take on a lot of debt without it lowering your stock price then that means that the market thinks you're going to use that new money in a smart way to grow your companies value and thus your company is more valuable. If the market didn't believe you would use the debt wisely, taking on debt will lower your stock price.
In the real world you effectively cannot change the amount of cash or debt you have without it affecting your market cap in some way, as all three are tied together in complex ways and this model doesn't offer any insight into how changing one value will affect the others or the overall value going forwards. Think of Enterprise Value just as the price tag of a company at any given moment in time.
enterprise price = market cap + borrowings - cash equivalents
As I understand it, the majority of debt of car companies is used to provide leases.
So e.g. GM borrows money at X% interest rate and gives credit to customers at X+Y%.
Y% is their profit. So the bigger the debt, the more additional profit they make.
This is also a ticking bomb because leverage generates more profit when times are good but increase losses when times are bad.
That Y% finances the risk that a customer will stop paying.
It also comes from GM being able to re-sell the car after the lease for more that it's worth ($PriceOfCar - $TotalLeasePayments).
When bad times come, like in 2008, those companies are hit with double whammy: people have less money, so more people abandon the lease. And also buy less cars so car prices drop so re-sell value drops.
So suddenly GM has losses and cannot afford the debt payments and that's how they go bankrupt.
Debt is negative cash, so instead of subtracting it from market cap, you add it in.
If the market values a firm's stock at zero dollars because it isn't expected to increase in value nor to pay any dividends at any time in the future, then it wouldn't be expected to pay back any of its debt either, and so the market value of its debt would also be zero.
Hope this makes things clearer.
[0]: https://en.wikipedia.org/wiki/Enterprise_value#EV_equation
I'm surprised TSLA is in such a good shape, debt-wise.
> I'm surprised TSLA is in such a good shape, debt-wise.
As the post also notes, "a high share price relative to your true value constitutes the ability to finance cheaply."
Though of course he mentions it differently: how much would you have to pay to acquire all of the surplus from the company? You'd have to buy the company and it's debt.
It's a way to look at it, of course.
My point being that the market cap already includes (partially) the debt and cash priced in, while this whole debt is positive, cash is negative is "if you wanted to buy the company". We do not use "country debt" to measure how "valuable" a country is, we use GDP for a reason.
This is exactly out of the scope of the article. So if the question is what you should invest in this is probably not a good metric.
The question the article answers is how to most efficiently finance your own company. It would seem like Tesla has financed selling its own stock, indicating that they think they are overvalued, where Toyota has financed selling their own bonds, indicating that they think they are undervalued.
If you trust their own assessments and want a good deal, then you should probably invest in Toyota over Tesla.
From the company's perspective, it has a queue of claimants who expect to be paid and the company will pay them with its profits. The queue order is roughly determined by whether the claimant holds a bond or a share (and further determined by legalities and complications within those two broad classifications. It's complicated™).
If you could walk up to anyone in the queue and ask to take their place in line, in exchange for cash, "enterprise value" is an estimate of how much it would cost to buy everyone's place in line. Or, the sum of how much everyone in line values their place in that line.
Thus, in this metaphor, Toyota could decide to sell new places in line to finance the construction of a $1T factory. But, only if people believe the factory will actually produce > $1T in new value.
That also means for instance convincing the US gov to let you have Tesla, and vice versa convincing the Japanese government and all Toyota's debt holders to not intervene in case of a Toyota buyout.
And that becomes a completely different story with undefinable numbers and so much more politics.
That doesn't make any sense. The "actual value" of something must include what people are willing to pay for it, not what the existing owners are willing to sell at. If I have a trinket that I'm not willing to let go for less than $1M, the "actual value" isn't suddenly $1M.
A value should be an objective amount and the real amount paid varies depending on what you bring to the table.
The same way you posit the vendor price can't be taken at face value, the buyer's price can't be the measure either (my wife's totally willing to buy my trinket for the sum of all of our possessions. That makes it quite a valuable thing right ?)
https://www.linkedin.com/pulse/hydrogen-ladder-version-50-mi...
You can say that the total value of a house is the mortgage + equity.
When you take out a loan on a house, the value of the house does not change. Just the proportion of mortgage vs. equity.
It’s more about market cap and equity than forward-looking statements about hydrogen and self-driving.
From the public information I know about Toyota, they are about 15 years behind Tesla.
Comparatively VW is probably only about 5 years behind now. GM/Ford are about 7 years.
So is tesla more valuable? It's practically infinite money more valuable. GM could spend $100 billion to try to catch up and could not. Its not about money, it's about the people who work for them.
When I think about value and price, price is what I pay, value is what I get.
Enterprise value is not what you get - it's what you pay...
Why is that a bad term?
I do appreciate that this does not ring will with a layman's interpretation of stocks on bonds. But think about it.
If you have a house that is worth 1M and take out a loan of that house at 500k, is it now only worth 500k? No, it is still worth 1M. And prospect buyers will need to buy that bond (unless you want to keep paying it off even though you don't own the house)
It's just that in my book, value = what I get, not what I pay.
Since this metric include the market cap, a Chinese OTC shell company can have an 'enterprise value' of several hundreds millions, even though everybody knows it's worth nothing.
Maybe it's just me though - I like value investing.
This is btw. exactly what the article talks about. You should use the most favorable way to finance your company: Stocks when the market thinks you are worth more than you think and bonds when you think you are worth more than the market thinks.
I have yet to hear a solid argument against Tesla achieving full self-driving within the next ten years.
Self-driving will automate billions of daily man hours.
Capturing even just a very small fraction of that value results in enough earnings to justify Tesla's current market cap. Even if you have to discount the earnings for another ten years, in case it takes so long to start selling FSD software.
Talking rationally about FSD always results in reflexive downvoting here on HN. Which I take as a sign, that the thinking about Tesla's future is muddied by emotions among many people. Maybe because people can't imagine fundamental change and also fear change.
You haven't heard a solid argument against me personally achieving full self-driving either, but that doesn't make it realistic
You are also assuming they are able to sell their FSD for a profit, and aren't out-competed by e.g. Waymo. Maybe Tesla does make full self driving a reality, but only after Waymo has licensed a better version of self driving to Toyota who sell millions of automated cars before Tesla
https://www.theverge.com/2023/1/27/23572942/mercedes-drive-p...
But yes _if_ it's possible and inevitable then it will also soon be a commodity.
Please.
The fact that they didn't, tells me it's not that bad.
The latter seems much harder to game, to me.
Also, since you've put the goalposts here, I just looked for these videos and other reviews of the MB-system. What do you know, they do exist.
MB being allowed to keep the lane in certain situations is not much evidence of them progressing towards FSD.
IDK, this is pretty much what I said above already, just in slightly different words. But whatever, you put your full trust and faith in youtube instead if you want.
A video on Youtube is not a "better indicator" for anything serious or requiring certification. It is an entertainment platform at best, spammed full of disinformation and bias. Preferring it over anything else that has legal weight is some kind of credulous joke. But this just restates my above comment on which is easier to game, edit or cherry-pick.
Then it's odd that the people with the cool videos didn't
manage to get the "easier" regulatory approval.
entertainment platform
2) says who? They seem quite close in my view. Certainly beyond ehere waymo was when they started test rides with safety drivers in Phoenix
I'm talking about the scenario where Waymo achieves full self driving at a cheaper per vehicle cost than Tesla (once their self-driving is good enough they will pivot to reducing the sensor costs)
Let's assume that you're correct: Tesla achieves FSD in the next decade, and it automates billions of daily man hours. That's only really relevant to Tesla's current market cap if you also assume that other car makers don't achieve FSD in the next decade.
If everyone has FSD, then in terms of relative company value it's the same as no one having it; it's just another feature, like A/C or cruise control.
Google still makes tens of billions of dollars from search every quarter. The revenue is actually still growing.
Robotaxi service has "winner takes most" dynamics, just like regular human-taxi service. Just look at how stable Uber and Lyft marketshare was over the years.
Imagine company X drops 10 thousand robotaxis in San Francisco area. Anyone who cares to can get a taxi for half the price (or less) of regular taxi.
Company Y develops self-driving technology 6 months later. There's just no way for company Y to re-take significant market share in San Francisco if their costs are similar to company X.
They can drop 10 thousand cars but most San Franciscan who want such service already have app for service X installed and a habit of using it.
Company Y might decide on (expensive) marketing campaign or price war but company X can do that as well. Company X can finance price war from profit but company Y must borrow. And there's only so much you can borrow.
In US we saw this with Uber vs Lyft vs everyone else. Early market share of Uber proved to be bullet proof regardless of what Lyft tried to do.
In China Uber was in a trench price warfare with Didi and when they didn't see a way to win, they decided to loose (and sold their business to Didi).
So the winner of robotaxi market will be the first company that has a working self-driving software AND can produce millions of cars per year to capture the market.
I think we will get to robotaxis one day, most probably. I'm not sure though about the earnings power this will give to those companies.
Their profitability relies on just how much that call center needs to get paid, so it's in their interests to drive that down, and have it be real, but that's their business. As a customer, all I know is that there's a competitor to Uber/Lyft called Waymo, and it's better and worse in specific ways.
No driver means no having to deal with a person. If I'm sending a girlfriend home late at night, she doesn't need to get into a strangers car. the driver could be drinking or hit on her or whatever. robo taxi isn't going to do that, even if it's a call center in the Philippines.
Re profitability - yes, but if there is more than one companies, they will just drive down the margins. I don't see how it will generate billions frankly.
If they're just a supplier of robotaxis then a taxi company can choose to switch vendors.
Plus, if the robotaxi business follows the Uber model where "partners" supply their own cars, there isn't even a primary vendor in the first place.
If a robotaxi does 10 rides for $15 per day, that's $15x10x365=$54,750 per year. If operating the car costs $20k per year, that's $35k profit per year.
It doesn't make sense to sell a car for $30K if it can make $35k in profit per year.
Being the first at claiming you are able to (or will be able to) do something doesn't make you a relevant contender in a space.
While there are many long unedited videos from Tesla owners in which the car does way more.
The path to complex, high value outcomes is different than the path to simple, low value outcomes.
And with all that, not a single fucking video on YouTube from an owner casually using it
If we can get the compute power, I cannot see a reason why it cannot happen but it might still be longer than 10 years away.
I think the issue with FSD and Tesla is just how many bold claims from Musk have not come to pass, it is a boy who cried wolf situation. It is my usual criticism is Musk and most of the companies he runs. They are awesome companies in what they have actually done. Anyone would be proud of even half the things Telsa or Space X have done. So why does he always how to go the snake oil sales man route and way over promise? It kind of drags down the excitement for these things.
I'm talking about valuation.
Tesla is the market leader in a market that will have room for multiple trillion dollar companies.
There is room for multiple trillion dollar companies in this space.
Something in your rationale does not add up.
No company on this area have reliable FSD.
https://twitter.com/TeslaPodcast/status/1769500530739421414
Hint: yea the headlines you saw were misleading
Computers made only small progress for many years.
That's the nature of technological progress.
You know that it will take place. But you can't predict very well when.
Nowadays, no human even stands a chance in playing chess against a computer.
Its hardly a reflexive downvote when you say you haven't heard any solid arguments, when musk has been promising it "next year" every year since 2014 (i.e. the last 10 years). What solid argument do YOU have that the next 10 years will be any different?
You've already asked the same question a few times. Here's what I posted the last time you did (you didn't respond):
Years of deliberate false statements by Tesla about their self-driving capacity should make any rational person very skeptical of their future claims.
Having a CEO who is obsessed with posting far-right-wing political statements on Xitter over managing his actual businesses is also a red flag. What rational manager goes out of their way to alienate at least half of their potential customers?
I am firmly in Tesla's target audience, but under no circumstances would I buy one, if only to avoid the social embarrassment of being associated with this pathologically mendacious malignant narcissist.
I don't see how your points change that progress. It will continue independent of what Musk claims or what political stance he takes.