When disruption is occurring in industries, old metrics of business success often become irrelevant. There should no longer be any doubt that the automotive industry today is in the early stages of a major disruptive period. Determining winners in the future auto sector will not be as simple as measuring which companies amass the highest automotive revenue, sell the most vehicles, or produce the best automotive margins. As the automotive category transitions toward electric vehicle (EV) and mobility solution businesses, new metrics are required to completely understand future industry winners.
Which car company is winning the automotive game today?
Determining which automaker is winning now is rather easy. It is Tesla! The company is the best performing automaker in the world - today at least. Its revenue and vehicle sales continue to grow at an incredible pace, which should be alarming for the legacy competition. The company’s profit margins are much better than all volume automakers.
Toyota has “grudging admiration for Tesla.” - Automotive News
Even competitors now are publicly admitting what has been obvious for at least two years. For example, Toyota, the top-selling automaker in the world, is now targeting Tesla in its quest to transition to an EV future. Automotive News reported recently that Toyota’s “grudging admiration for Tesla” has reinforced a stark reality internally that the company needs “a great leap forward.”
The EV consumer is not much different than ICE car buyers
Tesla has learned to win the traditional automotive game, however. This game is one of being the best at automotive design, engineering, manufacturing, and retail. The ICE to EV transition fundamentally does not change the rules of this legacy game. In fact, EV consumers are motivated primarily by the same purchase considerations as those of their ICE vehicle buyer counterparts.
While automakers will continue to need old core competencies, future business will require new capabilities around transportation solutions and vehicle services. These capabilities are very dependent on the development of new advanced technologies like artificial intelligence, machine learning, and neural networks. Much of this technology has been in development for years. While there still is an uncertain timeframe for its completion, the future is no longer a question about if these technologies will be developed. In fact, the business opportunity and total addressable market is so substantial, that several non-automotive tech companies have entered this development race as well.
So what are these future business opportunities that will change the automotive landscape that has existed for over one hundred years? And which companies are positioned to capitalize on these opportunities? Make sure to SUBSCRIBE to this newsletter for future updates specifically addressing this question.
Until then, the following is a useful view of how to think about the company that is winning the business of automotive today (Tesla). This is particularly useful to understand if you are an automotive consultant, analyst, or investor.
Is Tesla really a trillion dollar company?
The exponential growth of Tesla in the automotive space can no longer be ignored. There should be a recognition, however, that Tesla primarily is just an automaker. The company’s valuation today not only is based on its automotive business, but also on the mistaken belief that Tesla is a technology company. In reality, there is very little Tesla-technology that does not exist at other automakers as well. Many Tesla supporters point to its energy generation businesses as significant technology sources of future revenue and profit. I view these businesses as side-hustles for Tesla. They are very immaterial to the company’s overall financial performance today and into the future.
Why should Tesla be more valuable than Toyota?
Tesla’s current valuation is a very substantial $625 billion, down from a high of $1.3 trillion in October 2021. At those levels, the company was valued between three and six times more than Toyota. Tesla sold 1.3 million vehicles last year. Toyota sold nearly ten times that amount at 10 million automobiles. Many Tesla investors insist the company one day will sell 10 million automobiles as well. They may be correct. But what makes a 10-million-EV-selling Tesla 3X to 6X more valuable than a 10-million-ICE-vehicles-selling Toyota? Nothing!
All should recognize there is a massive social media driven, Tesla-stock-valuation hype machine that exists. Of course, some of this is driven by Elon Musk. Recently, however, investors have begun to ignore the hype and are focusing on the company’s business fundamentals and future automotive growth potential. While $625 billion still seems like a massive valuation for the company today, those Apple and Microsoft-like, plus-trillion-dollar valuation levels appear to be a thing of the past.
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.