Equity Commentary (TSLA)

As Tesla stock continues its meteoric rise, we thought it would be prudent to provide some context around the automotive industry and Tesla’s current valuation.

The following comments in quotations were excerpted from a recent BBC article about Tesla (full article here):

….”Toyota, however, remains a far larger business in terms of sales.”

“The Japanese company (Toyota) sold 10.46 million vehicles in the year to March and posted revenues of 30.2 trillion yen ($281.20bn).”

“Tesla ended 2019 with sales of just $24.6bn, having delivered 367,200 vehicles last year.”

“Mr. Musk (Elon Musk, Tesla’s founder and CEO), has said Tesla will deliver at least 500,000 vehicles in 2020, a forecast the company has not changed despite the coronavirus pandemic.

Toyota, by itself, sold 20 times more cars in 12 months than Tesla expects to sell in calendar year 2020. Tesla’s market cap (the valuation the market places on a company, at any given point in time) at mid-day, August 31, 2020 is $456 Billion.

Is Tesla a great company? The market seems to think so. With an excellent product? We’re not consumers, yet, but the reviews are outstanding. Are their recent sales numbers good, vs other traditional car companies? Yes, absolutely.

But….does Tesla have smart, aggressive, and experienced competitors? Again, yes.

The electric vehicle movement isn’t happening in a vacuum where Tesla is the only producer. Other auto manufacturers - companies with a longer history, far more capacity, and a local dealer presence for sales and service - are introducing new, innovative electric cars as well. It’s unlikely the largest auto manufacturers in the world are going to let Tesla come in and take the entire automotive industry without a serious fight.

If you add up today’s market cap of many of the world’s most well-known auto manufacturers (plus a famous motorcycle brand, just for fun), here’s what you get:

The total of those 11 companies is $364 billion, remember Tesla is valued at $456 billion. If you were to be given a check for $456 billion, you could buy Tesla, not just a car, the whole company. Or you could buy the 11 companies listed in their entirety and still have $92 billion left over – which, at today’s market cap of $182 billion - will buy you one-half of Toyota (the world’s largest automaker, by vehicles sold), plus a billion $ leftover in “pocket money”…you know, for snacks or something.

Here are some questions that investors need to ask - and answer - themselves:

Are any of the above (or other) companies developing and building electric automobiles?

Are they all going to just “roll over” and let Tesla take over the automobile industry?

Do you have a difficult time imagining that Tesla, by itself, is worth more than the above list of 12 very large, global companies?

Based on your own answers, do you feel that Tesla is currently trading at a rational price?

Stock market history tells us this isn’t the first time an innovative company has been priced well into the future, possibly leaving current shareholders very little upside for a while.

An excellent example is Cisco Systems (CSCO), who’s price peaked in March 2000, during the height of the late 1990’s tech bubble. CSCO “checked all the boxes” as well, at that time in history. Growing fast, with innovative technology, and a bright, dynamic CEO, determined to change the future. Yet here we are, over 20 years later, and CSCO is still trading ~50% below its high reached then.

Markets and stocks go through cycles and can at times disconnect from reality, but eventually, price matters, valuation matters, and reality sets in. So far, these truths are basically without exception. But who knows? Maybe Tesla will be our ‘unicorn.'

This is what Tesla buyers today need to ponder.

Caveat emptor.

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