Electric-car maker Tesla (NASDAQ:TSLA) is worth about $700 billion following an incredible rally in 2020. The stock was recently added to the S&P 500 index as its fifth largest constituent. Tesla is worth more than Berkshire Hathaway, Johnson & Johnson, Visa, and Mastercard. It’s worth more than Disney and Netflix combined.
Tesla now sells around half a million cars annually, while 64 million passenger cars were sold globally in 2019, according to the International Organization of Motor Vehicle Manufacturers. Tesla accounts for less than 1% of the global auto market in terms of volume, yet the stock is worth far more than any other automaker.
Yes, if you assume that Tesla eventually captures a huge percentage of the global auto market, launches a self-driving taxi service, puts a solar roof on every house, cures cancer, and invents time travel, that $700 billion market cap starts to look like a bargain. But without assuming Tesla enters and dominates a bunch of new markets, the valuation is impossible to justify.
Just how insane is Tesla’s stock price? Here’s a chart that sums it up.
Tesla uses 2020 figure, all others use 2019 figures. Data source: Tesla, GM, Ford, Toyota, Volkswagen. Chart by author.
One of these doesn’t belong
Tesla delivered just under 500,000 vehicles in 2020. It’s an impressive number for a company that was on the brink of failure as it was ramping up production of its Model 3 sedan: CEO Elon Musk confirmed in a Tweet that Tesla was “about a month” away from bankruptcy.. However, it’s a drop in the bucket compared to other automakers.
Toyota (NYSE:TM) and Volkswagen (OTC:VWAGY) sold over 10 million cars each in 2019. General Motors (NYSE:GM) and Ford (NYSE:F) topped 7 million and 5 million, respectively. Cars aren’t iPhones — mass-market auto manufacturing is generally a low-margin affair. GM managed a gross margin of about 18% for its automotive business in 2019. Tesla’s overall gross margin in the third quarter of 2020 wasn’t much better at 23.5%, and that includes the benefit of regulatory credit sales.
Given the nature of the business and the limited amount of profit that can be squeezed out of each vehicle, it shouldn’t be surprising that the market tends to value the big automakers in the vicinity of $5,000 to $20,000 per vehicle sold annually. Tesla is a very different story.
Image source: Tesla.
While Toyota enjoys a fairly rich valuation compared with its peers, Tesla is not even on the same planet. Investors are valuing every car that Tesla built last year at more than $1.4 million. Yes, Tesla has better growth prospects than the already big automakers. But if something close to the best-case scenario is becoming Toyota, and Toyota is valued at around $200 billion today selling 10 million cars each year, I’m just not seeing how the math works out here.
Even if Tesla eventually reaches a Toyota level of volume, something that would take many years, the stock is already worth around 3.5 times what Toyota is worth today. Investors buying Tesla stock today are betting that the stock will continue to rise as Tesla scales up. In other words, they’re betting that the Tesla of the future will be worth many times what Toyota is worth right now.
Speculation that Tesla will eventually use its self-driving car technology to launch an Uber-esque ride-hailing service is no doubt providing some of the fuel for this crazy valuation. But given that the ride-hailing business is pretty miserable with or without self-driving cars, that doesn’t seem like a very strong argument for paying a ludicrous premium for the stock.
Uber dominates the market for ride hailing in the U.S. and is worth just under $100 billion. It also loses a tremendous amount of money. Even if Tesla were to build a major ride hailing business, it can’t possibly add enough value to make the current stock price make sense.
If you benefited from Tesla’s epic rally in 2020, congratulations. Watching a stock you own go parabolic is fun. What isn’t as much fun, though, is when reality and arithmetic replace story and narrative. The party may seem like it’s never going to end, but it will. It always does.
