Musk Needs Apple’s Margins, VW Sales to Justify Tesla Value


(Bloomberg) -- Tesla Inc. has always had one foot in the automotive world and the other in technology. But when it comes to the company’s valuation, neither truly fits.

The stock’s stunning ascent -- doubling in just the first 23 sessions of the year on record vehicle deliveries, the opening of a China plant and an earlier-than-expected profit at a jointly operated battery factory -- has cooled off as exuberance gives way to caution. But the still-meteoric advance of the last five weeks has prompted more comparisons with high-growth technology names, and even has tech-focused market watchers looking more closely at the stock’s fundamentals.

“With Tesla’s extraordinary rise from $180 last year to nearly $1,000 this past Tuesday, we are receiving an increasing volume of calls from tech PMs and analysts who have begun to pick up coverage of Tesla from the traditional industrials/autos cohort,” Morgan Stanley analyst Adam Jonas wrote in a report, referring to portfolio managers.

The stock was volatile again Thursday, reversing early declines after two Democrats in the U.S. House of Representatives introduced legislation to create a nationwide network of electric-vehicle charging stations. The measure is unlikely to pass in an election year with Republicans controlling the Senate.

On Friday, Tesla shares dropped as much 2.5% before recovering.

Auto Comparisons

Tesla’s valuation, which hovered around $132 billion after Wednesday’s plunge, reflects a price-to-sales multiple around 5, compared with 0.4 for General Motors Co. and 0.2 for Ford Motor Co. Toyota Motor Corp. and Volkswagen AG also trade at a multiple of less than 1. Tesla bulls, however, say it’s unfair to compare it with legacy automakers, pointing instead to technology companies as its true peers.

“It appears Tesla, in the market’s view, has gone far past the point of comparison vs traditional auto companies,” Jonas said. While Tesla’s valuation is an order of magnitude higher than autos peers, he said, “we think this is largely deserved -- Tesla is a significantly faster-growing auto company, and it is also more than an auto company.”

Yet the current share price doesn’t stand up to scrutiny when comparing Tesla with the more diversified Nasdaq 100 Index. Members of the gauge trade at an average of 6.28 times their sales and 36.5 times their earnings, which implies that Tesla would need an annual profit of $4.6 billion to justify its market value. Members of the technology-focused NYSE FANG+ Index trade at 50 times their earnings.

Tesla can’t yet be measured on a comparable price-to-earnings basis since it hasn’t had four straight profitable quarters on a GAAP basis. It was in the black in the past two periods on an adjusted basis.

“Tesla could be at $900, but it would need revenues like Volkswagen, margins like Apple, and reinvest like no other manufacturing company in history has ever done,” said Aswath Damodaran, a professor at New York University’s Stern School of Business who specializes in valuation. It’s possible Tesla succeeds in doing one of those things, but “connect them together and that’s when the story implodes. This is a Grimm fairy tale with manic swings.”

Using a valuation model available on Damodaran’s website, with all else staying equal, Tesla would need to expand its revenue at an annual compounded growth rate of 35% over the next five years to justify a share value of just over $776. That would imply a revenue of $220 billion in 2030, the model shows. The model also assumes that operating margin climbs to 12% from 1.6% over the next five years, and a tax rate of 25%.

Tesla’s adjusted revenue grew 14.5% in 2019 over last year, to $24.6 billion, according to data compiled by Bloomberg, and in 2020 it is estimated to rise 31%.

RBC Capital Markets analyst Joseph Spak used a two stage model, in which Tesla has a high growth rate in the first stage with free cash flow rising at 30% compounded annual growth rate (CAGR) for 10 years and normalized growth in the second stage, and arrived at $630 a share.

Spak said there were only three companies in the S&P 500 Index -- Apple, Amazon and Alphabet -- that started with at least $1 billion in free cash flow in the base period and achieved at least 30% free cash flow CAGR for a 10-year period. Those three companies “have fundamentally different profitability and cash flow profiles making Tesla’s likelihood of achieving that mark more difficult.,” Spak said.

Little Sense

Tesla reported an annual loss on a GAAP basis of about $862 million for 2019. Wall Street analysts, on average, expect it to reach $4.9 billion in net income in 2023.

“Tesla is trading at well over two times the enterprise value of Daimler, and three times of BMW,” Roth Capital analyst Craig Irwin, said in an interview. “That doesn’t seem to make so much sense to me.”

The debate comes down to whether Tesla has a years- or some day even a decade-long lead over other automakers in the electric-car race. It “seems the market has decided it’s a much longer lead than a one or two years,” Irwin said.

“Not to sound like an ‘OK, boomer’ to the younger investors rushing into Tesla shares, but the recent price action brings to mind Nasdaq circa 1999,” Barclays auto analyst Brian Johnson said. The recent price surge opened up the possibility of raising capital cheaply, reducing any chance of a stalled business, yet Tesla remains fundamentally overvalued, he said.

Tesla’s volatile swings over the past few days called to mind a similar performance from Qualcomm Inc. almost exactly 20 years ago, when the stock soared 360% over five months. After touching a high of $100 in early January 2000, the stock started paring the gains. Only now, roughly two decades later, has it re-approached those levels. Qualcomm traded around $88 Thursday after issuing a disappointing forecast for second-quarter chip shipments.

Read more: Tesla’s Surge Has Yet to Supplant Qualcomm’s 20 Years Ago: Chart

“The whole thing seems preposterous, it is the craziest thing since 1999,” said Williams Trading’s Brad Meikle, who is one of the most bearish Tesla analysts on Wall Street. “It is absolutely a bubble.”

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.