I love looking at auto sales charts — and creating them — and we do so somewhat obsessively as it concerns electric vehicles and Tesla. From a static point of view today, looking at Tesla’s global sales versus the global sales of Audi, BMW, or Mercedes-Benz (let alone Volkswagen Group or Toyota) and then looking at Tesla’s [TSLA] market cap compared to those companies can leave you scratching your head. [Full disclosure: I own stock in Tesla. And I don’t expect to sell it for a long time.]
One way of trying to reconcile the equation is by assuming that “the market” (Wall Street) expects sales of the other automakers to drop while Tesla’s sales rise. Still, there’s a lot of ground to cover to go from 367,200 annual sales to 10,974,600 annual sales. Visualizing big numbers can help, so here’s a chart:
Note: The chart above is interactive. It may not show well on some devices. If it doesn’t show well for you, I advise viewing it on a different computer (preferably one that doesn’t fit in your pocket). Alternatively, you can see the static chart here.
Keep in mind that Volkswagen Group itself wants to be selling 3 million 100% electric vehicles a year by 2025.
I presume that you can genuinely conclude that large automakers are going to collapse under their own weight while Tesla rises in a sharp transition to electric vehicles. The Osborne effect is a real thing and Capital One has already acknowledged that the resale value of Germany luxury cars are getting slammed by the Tesla Model 3’s competitiveness. However, I think the market still sees widespread collapse of traditional auto companies as an unlikely fringe case. I don’t think this alone explains Tesla’s $100 billion market cap.
As our writer Frugal Moogal elegantly explained a couple of weeks ago when Tesla’s market cap was surprisingly already at a (now lowly) $88.6 billion, Tesla is more than an automaker. It has an energy division selling and renting solar panels, rooftop solar tiles, and battery storage systems. It has a massive network of EV charging infrastructure in the US, Canada, Europe, China, Japan, Australia, and elsewhere. And it has its autonomy R&D, which Moogal felt could conservatively be valued at $19 billion since that’s what Cruise Automation was valued at last year. All of these things start to add up, and as one very popular article pointed out 11 days ago, Tesla’s full-stack approach is unmatched in the auto industry.
I do think much of Tesla’s valuation is a combination of all of these things, and much of this is basically ignored by people who can’t understand why Tesla is worth more than GM and Ford combined. However, my thoughts as to why there’s the vast difference come down to three things in addition to the “full stack” argument.
Who's leading on autonomy?
— CleanTechnica (@cleantechnica) January 23, 2020
1. First of all, perhaps Tesla’s autonomous driving tech is being valued much more highly than $19 billion across all the investors. Morgan Stanley last year put Waymo’s valuation at $105 billion, and that was after a 40% valuation cut from $175 billion. If you think Tesla’s autonomy work is better than Waymo’s — and many people do — then you could consider that part of its business alone has been massively undervalued. I’ve personally long expected that to be the case, but I’m not sure the big money on Wall Street is thinking along the same lines, so let’s move on to another factor.
2. Tesla is a tech company. At its heart, Tesla is a tech company. Let’s say it one more time — Tesla is a tech company. While this has always been a core part of Tesla’s brand and its cars, I think what that really means is just starting to peek out at us from underneath the sheets. In the past year, aside from some large improvements to Autopilot, Tesla has rolled out a lot of in-car infotainment features and software improvements. As an owner, with a big update, you feel like you just got a brand new car, a huge Christmas present. This is not hyperbole. That by itself makes Teslas stand apart and attracts a lot of buyers and wannabe buyers (many of whom will buy a Tesla eventually). What it also does, though, is it creates potential revenue streams that no other automaker has at its fingertips — because no other automaker is a tech company.
There’s now an option to pay $10/month for some infotainment features. Tesla’s about to add a bunch more apps to its Tesla Theater and Tesla Arcade arenas. This is probably going to be a continuous process. If it wants to do so (and I think Wall Street is starting to expect it will), Tesla can roll out monthly fees for a few more items and can increase the monthly rate at any time. Perhaps this will all be simply at cost for years, but the potential is there no less in 3 years, 4 years, or 5 years. And if you can afford a $50,000 Tesla, there’s a decent chance you can rationalize $20 or $30 a month for features in a car that no other automaker can offer.
Perhaps even more than autonomy, I think Wall Street fat cats are looking at Tesla’s infotainment and software leadership and seeing dollar signs in their eyes. Combine those features with potential robotaxi service and you get some crazy multipliers. And who will have a competing product? (A good way to have a crazy high valuation is to have a nasty little monopoly in a major industry.)
3. Investing is about the future, not about simple spreadsheets and market rules. Many stock market people like to talk about spreadsheets and common assumptions regarding valuation calculations. I don’t think those are as big a deal as they’re made out to be. At any given moment, the question every investor has is, “will this company improve more or less than everyone expects?” As long as you think a company has a brighter future ahead than you think other people think, you’re going to be inclined to invest in said company. This applies on the BlackRock and SoftBank level as much as the poor lowly Zach level. They can move assumptions around to change a spreadsheet at any time. The question is just whether they think they should be more optimistic than they have been about company ABC. The question is just whether they think the market is going to get more into ABC as time goes on.
Tesla has been smeared in the media for ages. After defying those smears repeatedly, it seems Tesla has turned a corner and the market is flipping its viewpoint on the company and now thinks the future of TSLA looks brighter than expected. The steep rise in the stock price has surprised probably every TSLA bull I know. I think we mostly expected this to happen a year ago, and then got thrown off by seeing the market go in the opposite direction for months due to misleading pessimism. However, negative media coverage of Tesla kept the company’s stock down just until the market decided that most of that negativity was bunk.
So, now, the big question with regards to Tesla’s “crazy valuation” is whether the market will be negatively surprised or positively surprised by what Tesla does in the coming years. We’ll see.