At some point, Tesla doubters have to stop doubting. The company’s performance in the third quarter was outstanding. As if to reward investors for its Q3 performance, the company reached $1 trillion in valuation this week with a +$1,000 stock price after striking a deal to sell 100,000 vehicles to Hertz.
ONE TRILLION DOLLARS!
At a $1 trillion valuation, the only U.S. companies more valuable than Tesla are Apple, Microsoft, Google and Amazon.
Many investors believe Tesla is overvalued. The company’s valuation is higher than the combined valuation of most legacy automakers. For those measuring Tesla using traditional legacy automotive financial metrics, the company seems overvalued. Consider, however, that every automaker today is striving to catchup to a future automotive landscape primarily driven by Tesla. Automakers have announced a total of $330 billion in electric vehicle and battery investment over the next five years, according AlixPartners. Clearly, legacy automakers are investing to go where Tesla has already traveled and to hopefully arrive first where Tesla seems to be going. Similarly, Tesla investors are valuing the company based on where the automotive puck is headed, not where the automotive puck is today.
I’ve been sucked into the “Tesla is overvalued” camp as well. I reduced my position in the company in January as it grew to represent over 60% of my TaaSMaster-7 portfolio. Thankfully, a Charlie Munger answer in response to a question about Elon Musk has always stuck in my mind. “Never underestimate the man who overestimates himself,” Munger said. This is what prevented me from completely liquidating my Tesla position after amazing growth since 2018.
The Third Quarter
Tesla delivered slightly over 241,000 vehicles globally in Q3, 73% higher than the previous year.
SEVENTY THREE PERCENT HIGHER!
Tesla is experiencing exponential sales growth. This is the very definition of a company that is scaling. Tesla’s financial performance was impressive in Q3 as well. Automotive revenue was $12.1 billion in the quarter, a 58% increase over the prior year. Automotive gross margin for the company increased to 30.5% in the quarter from 27.7% last year.
THIRTY PERCENT GROSS MARGIN!
In 2020, automotive gross margin for the VW Group was only 17.4%. The Gross margin for Toyota was 17.6%. And for General Motors, gross margin was 15.3% in 2020. How is Tesla able to operate at a 30% gross margin level? Some of this margin performance is found in the design of Tesla vehicles versus the designs of legacy automakers. Compare the interior content (and cost) of two similarly priced sedans in the image below. The image on the left is a 2021 Cadillac CT5-V. The photo on the right is a 2021 Tesla Model 3 Performance.
The Cadillac contains two screens - the gage cluster screen behind the steering wheel as well as the center screen used for infotainment. Tesla uses just one larger 15 inch touch screen centrally located in the vehicle. This is probably cheaper than the combined cost of the two Cadillac screens. It is also potentially easier and more efficient to install in the manufacturing process for Tesla versus the two integrated Cadillac screens. Notice the many buttons and knobs on the center dashboard as well as on the steering wheel of the Cadillac. Observe the joystick for the transmission, and the click wheel used for engaging with the center screen in the Cadillac (the center screen in the CT5 is also a touch screen so there’s redundancy with using the click wheel). Most of the Tesla interior and infotainment controls are contained within that one touch screen, eliminating much of the need (and cost, and manufacturing process time) for button, knob and click wheel components. While many (including me) might prefer the Cadillac interior, sales of the Model 3 tell a different story. Through the end of the third quarter, Cadillac has sold only 7,636 CT5 sedans in the U.S. Tesla has sold 94,900 Model 3 sedans in the U.S. this year - an amount just 1,000 vehicles less than the combined sales of all Cadillacs in the U.S. though the third quarter.
Tesla is winning. But I do not believe the future automotive landscape will be a zero-sum-game, with Tesla winning and all others losing like many Tesla fans and investors think. Markets are never dominated by just one company. Automotive will be no different. But it’s becoming clear that Tesla’s business is rapidly growing into its lofty valuation. The company will remain a leader in a rapidly developing EV world of tomorrow.
Here’s how an automotive analyst, Adam Jonas of Morgan Stanley, described his recent new $1200 Tesla price target. "The Tesla you see today is the product of pre-COVID, sub $100 billion Tesla. The Tesla you'll likely see over the next 12 to 18 months would demonstrate the capabilities of the trillion dollar Tesla, emphasizing step-changes in manufacturing, cost reduction ... expansion in capacity, model lineup and services offerings."
My advice for the Tesla doubter: Be critical. Refrain from becoming part any group-think. However, recognize the accelerating performance at the company that has driven the entire auto sector to use Tesla as a model for the future.
What I’m Reading, Watching, and Hearing
Disclaimer
TaaSMaster, LLC is not a registered investment advisor or broker/dealer. All investment opinions expressed by TaaSMaster, LLC are from personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors may occur.