This is a question which investors and analysts alike have
been wrestling with for several years.
Some think Tesla will collapse, others that it is at the build-up stage of
a brilliant future. Its founder just twitted
that $420 per share was a price he would “pay” to take it private. So we’ll take a shot at the question.
At the current stock price of $320, Tesla is worth over $54 billion. Its enterprise value (market cap. + debt –
cash) is around $60 billion, depending on the accounting treatment of certain operating
leases. By comparison, General Motors
has a market value of under $51 billion.
Is Tesla really more valuable than GM? There is no question that Tesla, under the
guidance of its CEO and founder Elon Musk, has become synonymous with advanced,
stylish and expensive electric cars. Half a century ago, an environmentally
driven buyer, wanting to make a small dent into our national thirst for oil, would
have bought a small and thrifty Honda Civic.
Today, his wealthier counterpart will buy a Tesla S, park it next to a
Mercedes S class, and feel that his car looks and performs better and is more
socially responsible.
That Tesla has gained unique brand status, recognized
globally, is undisputable. What’s more,
this was achieved by developing new technologies which are often years ahead of
competitors like BMW and Chevrolet according to a recent report by UBS. There is both style and substance behind
Tesla’s success.
The problem is that Tesla has not been able to make such
technology cheap enough to make a $35,000 car (Tesla 3) profitable; and according
to the same UBS analysts, progress towards bringing unit costs further down has
been very slow. Another observer noted
that the battery components were expensive, limiting further cost savings,
while production volume was much too low to reduce powertrain production costs.
So, what if Tesla were to limit itself to the production of
luxury electric cars like its S and X models, selling anywhere between $70,000
and $130,000 a piece?
There is one comparable car company with unique brand name,
Ferrari. Ferrari sells 10,000 cars a
year at an average price (to it) of $300,000+.
Its current market value is over $24 billion (and enterprise value
around $25 billion). Today, Tesla sells
around 90,000 models S and X per year. A
spectacular Roadster is in the works which will retail at a starting price of
$200,000.
I would think that the luxury car business of Tesla could be
worth as much as Ferrari, $24 billion, because both share three unique characteristics:
exclusivity, style and performance.
That’s great except that it leaves a $30 billion gap in
valuation. Can this gap be filled?
One logical place where to look would be businesses whose technology
is complementary or close to that of the cars.
Actually, Tesla has such businesses: its energy storage and solar energy.
The solar generation offers integrated generation and storage
systems for both residential and commercial customers. The energy of the sun is captured via low
profile panels or roof tiles which look like regular ones. Batteries are used to store the energy and release
it later. To commercial buyers, Tesla offers
batteries to manage loads or turnkey solar panels and batteries to meet
communities’ energy needs.
Those businesses generated revenues of $370 million in 2Q18
with a modest gross margin of 11.8%. How
much can they be worth? The Solar City
company which developed most of this technology and which was founded by Musk,
was bought by Tesla for $2.6 billion in 2016.
First Solar (FSLR:NASDAQ) sells at 2.5 times revenues. The energy businesses of Tesla are growing at
close to 30% p.a. Based on that and the
Solar City and First Solar valuations, they could be worth $3.5[1]-$4.5
billion.
If Tesla focuses on luxury cars (which is not the case at
present) and its energy business grows healthily, Tesla could be worth $28
billion or $164/share.
That still leaves us a gap of some $26 billion. How can it be filled? Will Elon Musk suddenly find a way to
massively expand his energy business or discover yet another need that Tesla
technology can fill? Call it the Musk
factor. He could add another $4-$5
billion, particularly if the country gets back on the clean energy path. That would get us in the region of $190/share.In sum, Tesla seems to be overvalued at current levels by a significant margin. Then again, nobody expected an individual to start a car company from nothing and build it into the epitome of great electric cars. It will be a dizzying but fascinating ride.
