Yet Another Perspective on TESLA Valuation

Mahmut Karayel
07 Jul 2020

Yet Another Perspective on TESLA Valuation

It is safe to say that data gain meaning only with comparisons and benchmarks.

TESLA's market valuation surpassed $254 Billion as of July 7, 2020 which makes it the 15th largest US Company in terms of market cap. OK, I already offered one benchmark.

TESLA is now more valuable (to shareholders) than Mercedes, BMW, Volkswagen, GM, Ford, Honda and Renault/Nissan combined.

Keeping up with the sprit of benchmarks, the following figure gives the valuation per car sold.

Tesla enjoys the cost advantage of not having a dealer network, basically selling on the internet. This is a good thing until it has to sell a lot of cars and have to service them once in a while. If you don't think service is needed, consider this. Someone broke the window of my Model S, and it took me four weeks and hours on the phone to get it fixed.

TESLA also manufactures batteries, that's good. It has a simple internet based business model. It is leading in self-driving technology, but the roadblock to self driving will not be technology, it will be legal norms.

I have a lot of faith in the market, but I am wondering what people are thinking. I think three major but yet-to-be-proven assumptions go into TESLA's valuation

  1. TESLA can maintain service levels and customer satisfaction when it starts to sell cars in volume (without dealers?).
  2. TESLA is so far ahead of others in technology that it will become a monopoly in EV and self driving (...and the Chinese government and the European regulators will allow TESLA to take all.)
  3. TESLA is like a diamond. A diomond is nothing but a hard rock, but people pay a lot for its esteem value also assuming that it can be traded.

We rationalize every purchase with three compenents of value: Use value, resale value, and esteem value. TESLA's resale value is unproven. It has similar use value to a regular luxury car (unless gas prices increase fivefold or more). In terms of torque, it is great, but otherwise the driving satisfaction is comparable (and in a few apects lower) than the Lexus that I drove before TESLA. The question is, how much esteem value does TESLA ownership bring? I suspect the esteem value will diminish as TESLA cars become more common. Do you see the quandary here?

Comparison valuation would go something like this. Assume:

  1. Daimler (Mercedes) is a comparable luxury brand. The body of Daimler is better in quality but it is still propelled by gasoline.
  2. Let's pretend that all factories of TESLA including the one in Berlin are already operating at full capacity. Assume, as the market does, that TESLA is producing 1 million cars already at no extra cost.
  3. In the long run, TESLA can make 2x as much profit per car as Daimler.
  4. TESLA in steady state operates its sales and maintenece twice as efficiently. (If you think these assumptions are wild take a look at the stock price.)
  5. It will take Daimler and others a long time to catch up to EV and self driving technology. (If you want to follow this more closely see https://www.truckinginfo.com/351276/daimler-trucks-and-torc-robotics-expand-autonomous-testing-program-on-public-roa)
  6. All of this would mean that TESLA would be about eight (8) times as valuable as Daimler on a per car sold basis.

This brings us to:

Market CAP (mil)
TESLA 254,000 254,000 per car
Daimler 42,000 17,500 per car

Which would make:

  • the "Optimistic TESLA Advantage 8x17,5000 = 140,000 / car
  • the "Optimistic TESLA market cap at 140 billion. (See assumption 2)

Interestingly, the resulting stock price of $757 is close to what the last share issue was priced at in February.

Disclosure:

  • I drive a TESLA
  • I have short position on TESLA stock

Please share your thoughts in the comments section.

Suggested Articled and Data References in This Article (ALTADATA Marketplace)

Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and education purposes and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities.