In the last month, the market cap of Tesla raced past that of Ford and has nudged up against the value of GM. All while producing only a fraction as many cars and being nowhere close to making a profit. How exactly is this possible?
At first glance, it doesn’t make any sense. Ford sold 2.6 million vehicles in 2016 and earned $4.6 billion for the year. Tesla shipped a comparatively tiny 76,000 vehicles and recorded a loss of $675 million.
The valuation of Tesla shares is a result of several things that converge on one central theme…Tesla, and its visionary founder, Elon Musk, are using disruptive technology to upset not only the car industry, but the way we live.
When comparing Tesla with Ford, its obvious that Wall Street envisions very different trajectories for the two companies. Tesla CEO Elon Musk has set aggressive growth goals for his company, aiming to produce 500,000 vehicles in 2018 and close to 1 million vehicles by 2020. But even if Musk meets these targets, that still wouldn’t justify valuing Tesla more highly than Ford, which already sells more than 2 million vehicles a year.
No, when looking at the car market it is readily apparent that Tesla’s valuation comes not from an apples to apples comparison of production and margins. Instead, the valuation of Tesla is driven by the presumed future domination of the automotive industry by electric cars, estimates for which increase on a weekly basis (see below chart).
As electric cars take over, which they will, investors foresee problems for the existing car companies, which are gas-centric and will need to not only invest billions to develop electric cars, but deal with eventual overcapacity in their traditional model lines. This is part of the valuation premium in Tesla; but it doesn’t account for all of it.
The second reason for the elevated valuation of Tesla has nothing to do with cars, but has everything to do with how Tesla powers them. Tesla, through its acquisition of Solar City, and the building of the Giga-Factory is not only disrupting the car industry, it is on the verge of leading a disruption of the whole energy grid!
It might sound stupid right now to say that it is significant since they bought the company for $2 billion, which means that it represents less than 5% of its valuation, but the Solar City acquisition totally changed Tesla’s approach to the automotive industry.
Tesla is trying to own the entire energy process from generation to consumption. It wants its customers to not only buy its vehicles, but to also power them with energy generated through its own products (solar arrays), stored in its Powerpacks and Powerwalls, and charged through its level 2 chargers and Superchargers.
Therefore, if you want to make a comparison, it’s closer to an automaker who also owns an oil company and everything in between, like the refineries and gas stations. In this sense, Tesla is creating a vertical monopoly.
What valuation would you put on the first oil company, with the advance knowledge that oil would power the world for generations? Quite high, I’m assuming. Well, Tesla is tapping into this as we know that electric cars are the future, and that people would rather power them for free from solar, than paying for the grid to do so.
As the above chart shows, the cost of PV (photo-voltaic, or solar) power has dropped 64% since 2008. That cost is going to continue to decline, making it more affordable for the consumer…to the point where it makes little sense not to install solar on every new home.
The result of all this is that every home will eventually have solar panels built into the roof, and Tesla, through its Solar City acquisition, is in a prime position to deliver this. Add in the battery component, costs of which are falling more dramatically than solar, and you have a distributed energy grid powering your house during the day and storing up to charge your car at night. It’s a completely new paradigm and Tesla is leading this charge.
There are more, but the final reason I’m going to touch on today for the valuation of Tesla is the intangible that is Elon Musk. This man is a genius and has thoughts and plans for the future that you and I can only begin to understand. His logic and reasoning is basically a step or three ahead of the rest of us and the rest of the world is running fast just to try to keep up with his initiatives.
Imagine being a business owner in an industry in which Elon Musk has just decided he wants to get involved. I would sell…immediately. The man is a disruptive whirlwind. He has deep pockets and (like Amazon) doesn’t need to worry about profits today or even in this decade. He’s shaking traditional businesses to the core.
On the other hand, by doing it in a public vehicle called Tesla, Elon is giving us all the opportunity to invest in his visions alongside him. And, this is the primary reason for the high valuation of Tesla. The man is a disruptive force and, if you want to enjoy this ride, you need to get on board…regardless of valuation.