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Is Tesla REALLY the World’s Most Valuable Carmaker?

Joel Anderson
·11 mins read

Tesla and its CEO Elon Musk have hit a few bumps in the road in the last month. On Sept. 8, the company lost over one-fifth of its total value after news came that it wouldn’t be added to the venerable S&P 500. Yesterday, stock prices fell 10% to $380 due to an announcement that battery costs would be cut in half and, consequently, an affordable Tesla model — in the $25,000 range — could be available to the public in the next three years. It might seem like a good thing, but the over-hyped “Battery Day,” disappointed investors who were expecting something bigger to happen sooner.

“The challenge with the stock is that everything they are talking about is three years away,” Gene Munster, managing director of Loup Ventures told Bloomberg. “I think traditional auto is in an even tighter spot, but Tesla investors want this tomorrow.”

Speaking of traditional automakers, despite any hiccups, Tesla’s market cap (the total value of the company on the open market) has nearly doubled that of Toyota — the former most valuable automaker in the world — and the innovative company has quickly overshadowed trusted names like Ford and Honda with its promises of a brighter future. Plenty of market watchers have been left scratching their heads at how a company that has sold so few actual cars can be worth so much in the eyes of its investors. And its posed a perhaps more important question: Can Tesla’s new technology possibly justify it being valued so differently from the rest of the car industry?

To help you get a sense of whether Tesla’s stock price makes any sense, here’s a closer look at how Tesla’s current valuation stacks up to its biggest competitors.

Last updated: Sept. 23, 2020

What Is a Company 'Worth,' Really?

Before diving into whether or not Tesla’s really worth hundreds of billions of dollars, it’s important to look at what people generally think of when it comes to a company’s “worth.”

One way to gauge this is by looking at a company’s market capitalization — commonly referred to as “market cap” — which is simply the collective value of all of its stock. For example, shares of Tesla stock are selling for over $1,350 apiece as of the end of June. A single share represents ownership of 1/185.48 millionth of the company. Multiply the current share price by the shares outstanding and you get Tesla’s market capitalization, which, to keep with the numbers of this example, equates to around $250.40 billion.

While the price of a single share can vary widely depending on how much stock is out there, market cap allows you to compare the market value of one company vs. another — a handy tool for people analyzing various options on the stock market.

However, assuming the inherent wisdom of the markets is unimpeachable can get you into a lot of trouble. Think of the Nasdaq in 1999 — sometimes people’s excitement for the future can run away with them. A common method in determining whether or not a certain market cap holds water is to compare that company’s basic stats to other major companies in the industry.

So, here’s a look at how the ratio of Tesla’s market value to some of its basic stats looks when compared to some of the world’s biggest car companies.

Units Sold

When it comes to determining a carmaker’s value, there’s probably no simpler factor to consider than just how many cars it sells. Or at least, that was the general logic dictating until Tesla came along.

Consider this: If every car company had the same ratio of its market cap to the number of cars it produces, what would that mean to the markets?

Tesla, for example, had a market cap of $346.01 billion as of market close on Sept. 10 — though, by the time you read this that will have likely changed, give the stock’s volatility — and put out 367,500 cars in 2019, a record year of production for the company. If you take its market cap and divide it by the number of cars produced, that means the company’s market value represents $941,546.46 for each car it made in 2019.

Now, how would that look on the other major carmakers?

Toyota

  • Market cap: $182.25 billion

  • Cars produced in 2019: 8,977,000

  • Market cap at Tesla’s ratio of cars produced: $8.45 trillion

Volkswagen

  • Current market cap: $94.09 billion

  • Cars produced in 2019: 10,975,000

  • Market cap with Tesla’s ratio of cars produced: $10.33 trillion

Honda

  • Current market cap: $46.16 billion

  • Cars produced in 2019: 5,323,000

  • Market cap with Tesla’s ratio of cars produced: $5.01 trillion

General Motors

  • Current market cap: $43.14 billion

  • Cars produced in 2019: 7,718,000

  • Market cap with Tesla’s ratio of cars produced: $7.27 trillion

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Ford

  • Current market cap: $27.20 billion

  • Cars produced in 2019: 5,386,000

  • Market cap with Tesla’s ratio of cars produced: $5.07 trillion

Revenue

Unit sales alone do not tell the whole story. If you sell fewer units for more money, you can make just as much money — if not more. That’s always been the plan for Tesla, a company that has catered primarily to the high-end, luxury market. Tesla is also more than just a car company, producing high-tech batteries and home solar systems, which is something that Toyota does not do.

So, if you’re only focused on the cars sold, you’re not getting a complete picture of the company. Whereas if you focused on, say, total revenue, you’re more likely to capture any and all of the business activity at the company.

In Tesla’s case, the company’s price-to-sales ratio — or P/S ratio — as of Sept. 10 is 13.61. The P/S ratio is simply the company’s market cap divided by its last 12 months of revenue; it gives you a clear sense of how many dollars of share price you pay for each dollar of annual revenue your share represents.

So, if other car companies had a P/S ratio of 13.61 with their current revenue, what would they be worth?

Toyota

  • Current market cap: $182.25 billion

  • Current P/S ratio: 0.73

  • Market cap with Tesla’s P/S ratio: $3.40 trillion

Volkswagen

  • Current market cap: $94.09 billion

  • Current P/S ratio: 0.29

  • Market cap with Tesla’s P/S ratio: $4.42 trillion

Honda

  • Current market cap: $46.16 billion

  • Current P/S ratio: 0.36

  • Market cap with Tesla’s P/S ratio: $1.63 trillion

 

General Motors

  • Current market cap: $43.14 billion

  • Current P/S ratio: 0.40

  • Market cap with Tesla’s P/S ratio: $1.47 trillion

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Ford

  • Current market cap: $27.20 billion

  • Current P/S ratio: 0.21

  • Market cap with Tesla’s P/S ratio: $1.75 trillion

Profit

Revenue is great, but it’s the profits that really matter. And this is one area where even Tesla’s biggest proponents have to admit the company comes up lacking. This early in its long-term plan, Tesla is focused on growing sales, carving out its place in the market and building infrastructure, all of which leave relatively little left over for profit.

Tesla’s P/E ratio — price-to-earnings ratio, which is the same thing as P/S ratio but based on profits instead of sales — is currently 884.73. That’s high. Very, very high. But it’s also a huge step forward as the company has only recently had the 12-month stretch of profitability necessary to calculate its P/E ratio.

So how would that P/E ratio look if you put it on some of the other largest car companies in the world?

Toyota

  • Current market cap: $182.52 billion

  • Current P/E ratio: 12.23

  • Market cap with Tesla’s P/E ratio: $13.18 trillion

Volkswagen

  • Current market cap: $94.09 billion

  • Current P/E ratio: 15.36

  • Market cap with Tesla’s P/E ratio: $5.42 trillion

Honda

  • Current market cap: $46.16 billion

  • Current P/E ratio: 14.51

  • Market cap with Tesla’s P/E ratio: $2.63 trillion

General Motors

  • Current market cap: $43.14 billion

  • Current P/E ratio: 30.43

  • Market cap with Tesla’s P/E ratio: $1.25 trillion

Ford

  • Current market cap: $27.20 billion

  • Current P/E ratio: N/A

  • Market cap with Tesla’s P/E ratio: $41.58 billion

Editor’s note: Ford has not been profitable over the last 12 months, but it did make $47 million for 2019. GOBankingRates used this figure to determine its comparison to Tesla.

Revenue Growth

Plenty of investors know darn well Tesla is years — or decades — from being in the same category as Toyota in terms of cars sold, revenue and profits. However, investing is about the future, and it’s that future that has so many people shelling out for Tesla’s pricey stock.

As such, the key figure growth investors like to focus on is revenue growth. Early on, fast revenue growth (usually) shows that a company’s product is gaining traction in the marketplace and winning over customers. And that has always been the plan at Tesla.

Right now, the company is trying to expand to take the largest piece of the market it possibly can. The profits will come later, after the return on reinvesting them into the business starts to produce diminishing returns. Really, it’s the exact approach Amazon and Facebook used to enormous success in recent years.

So, how do the last three years of revenue growth stack up for Tesla against the rest of the crowd?

Tesla

  • 2017 revenue growth: 40.47%

  • 2018 revenue growth: 45.21%

  • 2019 revenue growth: 12.68%

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Toyota

  • 2017 revenue growth: 6.46%

  • 2018 revenue growth: 2.88%

  • 2019 revenue growth: -0.99%

Volkswagen

  • 2017 revenue growth: 6.17%

  • 2018 revenue growth: 2.24%

  • 2019 revenue growth: 7.12%

Honda

  • 2017 revenue growth: 9.73%

  • 2018 revenue growth: 3.43%

  • 2019 revenue growth: -6.41%

General Motors

  • 2017 revenue growth: -12.50%

  • 2018 revenue growth: 1.00%

  • 2019 revenue growth: -6.67%

Ford

  • 2017 revenue growth: 3.28%

  • 2018 revenue growth: 2.27%

  • 2019 revenue growth: -2.77%

Reasons Why All of This Might Not Matter

Of course, questions of “value” are also not the most relevant to some investors. Tesla has been surrounded by skeptics since its early days, and the investors who ignored them and bought anyway have seen the value of their shares soar.

Even if Tesla is due for a big fall, investors are already up a lot — and things can stay that way for them if they sell before that fall. It’s part of what’s known as the “Law of the Greater Fool.” Namely, as long as you sell your shares for more than you bought them at, it doesn’t really matter what price you paid in the beginning. As long as a greater fool comes along to buy your “bad” investment for more than you paid, it’s not a bad investment at all.

So, whether or not you think Tesla is overvalued because it’s not making the sort of money that a $250 billion car company should, you might still think buying shares will work out since the stock continues to rise. It’s a dangerous game to play, for sure, but one that has yet to cost anyone who’s speculated on Tesla to this point.

A Classic Growth vs. Value Showdown

The debate of Tesla is part of a classic give and take among growth and value investors. Growth investors stay focused on the long-term potential for growth, while value investors pay more attention to how much they’re getting for their dollar now.

This dynamic has played out in stock markets for almost as long as there have been stock markets, and there’s no one side that’s always right or wrong. Sometimes budding companies with nightmare balance sheets just keep growing until they’ve justified their old valuation. Just as often, though, the desire to get a piece of the next big thing leads people to pour money into a company even though the underlying reality is one of a flawed business model.

So which side is right about Tesla? Time will tell, but for now, the whole world is watching to see whether it soars to new heights or falls flat on its face.

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This article originally appeared on GOBankingRates.com: Is Tesla REALLY the World’s Most Valuable Carmaker?