At $932 per share (12/17/21) and a valuation $937 billion, many believe Tesla is massively over-valued. After all, it’s the fifth most valuable U.S. company behind Apple, Microsoft, Alphabet (Google) and Amazon with much less financial heft than these companies. Tesla’s valuation today is one-third the value of Apple. Yet the company will only generate 13% the level of Apple’s revenue this year. Apple has a vast portfolio of revenue sources, from consumer hardware products like iPhone and AirPod to recurring revenue sources like iCloud and Apple Music. The vast majority of Tesla’s revenue comes from just the four electric vehicles.
Apple’s price-to-sales ratio (2021 sales) is 7.6. Tesla’s price to sales ratio is a whopping 18.4. Surely Tesla is overvalued, right?
Mayby not. So why might Tesla’s valuation make sense?
One - Tesla is scaling dramatically
When a business scales, it means the business is experiencing exponential growth in sales. Tesla is scaling. Scaling drives a swift reduction in variable costs and a massive growth in revenue. Scaling for Tesla began with the introduction of the Model 3 in 2017. This growth accelerated more when the company introduced the Model Y in 2019. Tesla will sell around 850,000 vehicles this year, up from nearly 500,000 in 2020. During a period when supply chain problems have impacted every automaker in the world, Tesla will sell over 70% more vehicles this year.
Adam Jonas of Morgan Stanley projects that Tesla will sell 8 million vehicles in 2030. According to Jonas, each million vehicles Tesla sells is worth about $175 for the stock price. 8 million vehicles would represent a $1400 stock price according to Jonas.
Growth to 8 million vehicles by 2030 represents an annual vehicle growth rate of 26%. Tesla, however, believes its vehicles sales will grow 50% annually. While that level of growth seems unreasonable, 26% growth might be too conservative given the company’s investment in new manufacturing capacity and new model introductions.
Two - Revenue from other businesses could grow dramatically
Tesla is actively developing its Full Self-Driving (FSD) technology. While FSD is controversial because of the company’s decision to forego the usage of radar and LiDar hardware (only relying on camera hardware), there is a possibility Tesla will completely develop full self-driving capability. Tesla currently charges an incremental $10,000 or $200 per month for the still incomplete FSD feature on its vehicles. What might the incremental revenue be if FSD is completely developed and deployed? More importantly, what other robo-taxi business revenue could Tesla capture utilizing fully-functioning FSD technology?
In addition to selling EVs, Tesla has launched businesses in energy storage, solar panels and auto insurance. The company also is developing a commercial electric Semi Truck. None of these ventures are included in the current revenue and valuation projections. One or more could provide significant incremental revenue as well as substantial margin gains.
Three - Declining market share does not matter
Many believe Tesla’s business will suffer as other automakers introduce new EVs. Some point to competition eating into its market share, believing as competitors introduce new EVs, the company’s market share will surely decline. Market share is irrelevant, however, for growing markets like electric vehicles. The ability to scale production and sales is most critical. Vehicle volume growth is the key metric, not market share. There’s no evidence competitors will impact Tesla’s ability to continue scaling. Many believe in order for Tesla to thrive, most other automaker must lose. In fact, Tesla can win while other competitors win as well. The rapidly growing EV segment will be big enough for more than one winner.
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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.