Over the last couple of days, as Tesla continues on this monstrous run, the media seems to have been noting that Tesla is now more valuable than any US automaker’s market cap ever. (Tesla is currently almost exactly the market cap of Ford and GM combined, around $88 billion.)
Even though I would now plant myself firmly in the “bull” camp, this is completely untrue, and I think it paints a problematic picture of Tesla.
Let’s get right to it — Tesla is not the most valuable US automaker ever because Tesla’s market cap does not have just Tesla automobiles in it.
Currently, especially to outsiders, Tesla’s automobiles are the most visible aspect of its business. The problem is Tesla’s business is so much more diverse and will affect so many other major industries in the future that calling Tesla an automaker is akin to saying that Google is the most valuable phone company. Sure, Google makes phones, but taking just that aspect of its business into account while ignoring the rest and then claiming it’s the most valuable phone company is a mistake at best, and deceitful at worst.
I sort of get it. GM doesn’t produce HDTVs and Ford doesn’t have a wing that runs theme parks or something, so a lot of “analysts” think of Tesla in a similar, narrow-minded way and think Tesla should only be valued based on its automobile business.
Also, before I point out the rest, even if we just value Tesla on its automotive business, it’s becoming more clear every day that legacy automakers are unable to make the transition to EVs due to their razor-thin margins and millions of dollars of gas/diesel manufacturing infrastructure which they need to contend with to change. True analysts, who are looking at the long-term picture and trying to figure out what the future looks like, pretty easily spot that if electric cars are the future — and they are — then you have to price in the fact that most of the infrastructure that a Ford or GM has is at best worthless and will probably cost millions to shut down and move over.
A startup like Tesla is most definitely in a better place to not deal with worthless legacy infrastructure as it grows.
Before you go and type in the comments that transitioning over the factories will be easy, I’ll simply respond — then why haven’t we seen one automaker do it? Maybe it is easy, but they have to worry about their margins today so they don’t go out of business, and doing so has frozen everyone and made it pretty clear we’re going to see some major automakers completely going out of business in this decade.
So, what else is part of Tesla that should potentially be in this valuation?
The Tesla purchase of SolarCity was apparently very controversial, but the marriage between solar and batteries is already shaping up to be a game changer this decade. Batteries have already started to destroy demand for peaker plants. It’s hard to nail down exactly what the value is for a company that creates power plants, but I found that GE noted that its power division reported revenues of $35 billion and operating profit of $1.9 billion in 2017.
(Hint: the turbine business, which is the majority of what GE does, doesn’t stand to have massive drops in installation costs this decade. Batteries do.)
Based on revenue, GE Power is about 29.6% of the overall businesses revenue. GE is currently valued at just over $104 billion. It’s totally unfair to use that at a ratio to compare to Tesla, as GE’s power business has been facing incredible headwinds because it completely mistimed the renewable revolution, and that, like internal combustion engine (ICE) technology, is probably a drag on the stock price instead of a benefit to valuation. Nonetheless, I don’t feel that off saying that I value Tesla’s industrial potential solar and battery divisions more than $30 billion.
If we remove that market cap from Tesla right now (I’m using $89 billion to go high), then we are at $59 billion.
While I’m at it, let’s carve off the home solar business right here, too. Sunrun’s market cap is at $1.74 billion. Let’s assume that Tesla Solar is only worth 57% of that to make my number round, even though I think the solar shingles give this a lot of upside. We can take another $1 billion off Tesla’s valuation, and we’re at $58 billion.
I touched on this in my article yesterday, but in short, Tesla’s autonomy business should be valued at something, and that value should be placed to the side of the automotive industry. Instead of pricing it against Waymo which it seems “experts” think is the furthest along, let’s look at Cruise Automation, which as of May 7th was valued at $19 billion.
I’ll simply say I haven’t seen anything that Cruise can do that Tesla can’t, and their data difference, which I believe is Tesla’s largest competitive moat, is massive.
So, let’s say Tesla is only equal to Cruise right now. Another $19 billion off and we’re down to a $39 billion valuation.
The Supercharger network is currently the only capable, nationwide (and European-wide, and beyond that) electric vehicle “refueling” standard. Sure, there might be another, but it’s pretty clear that automakers aren’t going to do it, and neither are current oil companies, at least not on a viable, nationwide basis. Putting a fast charger at a Porsche dealership or a Level 2 charger at Nissan isn’t significantly valuable.
Because Tesla can generate its own electricity to fuel its vehicles (although, in most cases it doesn’t do so yet), let’s compare this to the oil industry. Looking at Chevron, Shell, BP, and ExxonMobil, the smallest market cap is BP at “only” $131 billion as I type this. The combination of just these five (not including Saudi Aramco, or ConocoPhillips, or a bunch of others) is over $880 billion. If I was to add in the others, I could easily work this up to $1 trillion.
Let’s say that in the future 10% of charging is done out in the real world (because you can charge at home). Let’s say that Tesla captures 10% of those traveling. If we assume that the Supercharger network will only be worth 1% of just those five companies, that’s another nearly $9 billion of value.
Now we have Tesla as a $30 billion automaker.
At $30 billion, Tesla is currently the smallest US-based automaker.
But here’s the thing — stranded assets are already a massive risk for legacy auto and the oil industry. By controlling the entire vertical stack of energy for its vehicles, Tesla can offer lower-priced energy with higher margins for its cars than anyone else will be able to do. By controlling the entire vertical stack of auto industry parts, Tesla can keep prices lower for things other companies will have to outsource for their vehicles, or as they attempt full autonomy.
If I was slightly more aggressive in my valuations of the above industries that Tesla is poised to take over and be the leader in, I can pretty easily come up with a scenario where the auto division of Tesla is completely unaccounted for, even with the current stock price.
My point is simply this — if you’re out there parading around the fact that Tesla is the most valuable US automaker ever, you’re missing the bigger point. The market is starting to value the rest of Tesla’s business, and what I think we’re seeing is the beginning of the largest vertically integrated energy and transportation company.
I am a Tesla shareholder who has purchased shares within the preceding 12 months. Research I do for articles, including this article, may compel me to increase or decrease stock positions. However, I will not do so within 48 hours after any article in which I discuss matters that I feel may materially affect stock price is published. I do not believe that my voice could or should influence stock price by itself, and I strongly caution anyone against using my work as your sole data point to choose to invest or divest in any company. My articles are my opinion, which was formulated using research based on publicly available data. However, my research or conclusions may be incorrect.